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| Monday, 12 January 2004 |
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HNB Stockbrokers Weekly stockmarket review : Market up despite uncertainty The first full trading week of the New Year started on a positive note on Monday with the ASPI and MPI gaining 41.3 points and 85.4 points. The investor optimism seen on Monday remained throughout the week mainly because of the positive speech by the President at SAARC Summit. It was encouraging to see that trading activities on the Bourse picking up after more than a month's dull market. The average daily turnover once again for the week advanced from Rs. 224 million to Rs. 246 million, which was achieved through consistent trading on daily basis. During the week, the ASPI and MPI perked up 91 (8.2%) points and 100.0 (9.8%) points to end the week at 1164.8 points and 2112.1 points. The net foreign inflow advanced from Rs. 30 million in the last week to Rs. 106 million for this week. The heavily traded stocks during the week consist of Distilleries, SLT, Asian Hotels, Hemas and Vanik. Point of View: No solution to the deadlock yet No improvements were seen to the month long political crisis in the country, as both leaders remained firm on their position. The Prime Minister called the President to take over the peace process and re-negotiate the Ceasefire Agreement, if she's not willing to hand over all 3 ministries back to him. We believe this statement was designed to further pressurize the President, but she remained calm and refrained from making any counter statement. Meanwhile the pressure was mounting from all corners to find a way out to the political crisis. The business leaders, international community and public at large continued to oppose an election and called the political leaders to work towards continuing their cohabitation. We still believe that an election would worsen the present political crisis, as it would dilute the number of parliament seats of both major parties namely, United National Front (UNF) and Peoples Alliance (PA). Trading opportunities Despite growing uncertainties the market maintained its upward momentum and gained 102 points since the beginning of the new year. We therefore continue to advise investors to gradually accumulate these stocks at present price levels preferably, at varying prices for different blocks of shares. Further, investors should look for trading opportunities amid the indifferent flow of information, and make use of the volatile Nature of the market. Commercial Bank; Bangladeshi Operations to boost the bottom line starting FY2003 Commercial Bank of Ceylon Ltd, is expecting to consolidate the financial statements of its newly acquired business in Bangladesh, thus recording strong growth. A recent company visit indicates that the Bank would consolidate earnings during the Year ended 31st December 2003, resulting in considerable growth in nett profits compared to the last year. Commercial Bank finalized the acquisition of Credit Agricole Indosuez's operations in Bangladesh, in early November 2003. Commercial recorded a marginal 3.2% growth in Profit After Tax during the first 9 months of FY2003, but surpassed the Rs.1 billion mark, as the Bank posted net profit of Rs.1.015 billion (after Preference dividend) for the period. However once Bangladeshi operations are incorporated into the earnings model, revised net profit attributable to ordinary shareholders for FY2003 stand at Rs.1.542 billion, up by 29.3% compared to FY2002. Strong performance during the last quarter of FY2003. Apart from the profits from Bangladesh operations, we believe that Commercial has recorded a strong growth during the last quarter of FY2003, recording faster growth in both advances and deposits compared to the first three quarters. The management attributes the growth mainly to leasing, consumer credit and housing sectors. Further, for the first time the Bank's savings deposit base exceeded its fixed deposit base, largely due to the continuous decline in the deposit rates. However the management accepted that the growth in long term loan portfolio was below their expectations. Focus on non-interest income may improve While non interest income represented approximately 50% of the total revenue in most banks, Commercial's non interest income accounted for just 23% of its total revenue. We feel that this is largely due to Commercial's absence in Equity markets and reluctance to sell bonds to record capital gains. Management hinted that this scenario could change and we feel that Commercial may look for opportunities such as share trading, bond trading and more aggressive marketing on credit cards, in order to boost their non interest based income. We are of the view that it's essential for the banks to reduce their dependence on pure interest based income, specially when the interest margins are expected to be narrowed during FY 2004. It should be noted that Commercial posses a treasury bond portfolio of nearly Rs. 12 billion, of which most were purchased at reasonably high rates. However so far they have refrained from disposing the bonds to make capital gains. Therefore Commercial would be in a position to record considerable capital gains if the Bank decides to trade in the bonds more actively. Management optimistic on improved foreign exchange profits Commercial which accounts for a market share of approximately 8% and 12% in import and export trade respectively, experienced a 51% negative growth in foreign exchange profits during the first 9 months of FY2003. This was largely due to the stability of the rupee during 2003. The depreciation in the rupee would be maintained in a range of +/-4% during 2004, thus limiting opportunities for the Bank to make a strong recovery. However the management believes that the growth in transaction volumes would enable them to record at least a marginal growth in exchange profits during FY 2004. NPL ratio: best among its peers As we have highlighted, Commercial boast of the cleanest loan book among the local banks, with almost 50% of the loan portfolio represented by a strong corporate client base. Banks Non Performing Loans (NPL's) to advance remain below 10%, well below most banks in the industry. The management expect to maintain the NPL ratio around 8%. Foreseeing the "Hair cut rule" Commercial has provided Rs.379 million during the first 9 months of FY 2003, but the management explain it as more of a cautious approach. Credit Agricole Indosuez's operations centered on Corporate Banking Credit Agricole Indosuez's was the 2nd largest foreign bank in Bangladesh with a strong corporate banking clientele. According to management more than 90% of its loan book is represented by the corporate clients, thus producing a clean and profitable track record in the past. The foreign bank's account for approximately 10% of the market share in Bangladesh's Banking industry, but possess 40% of the profits in the sector. While acknowledging the importance of the corporate client base, Commercial is planning to expand strongly into retail sector, where they see an opportunity to enter into new markets. The Bank believes its strong IT system and customer oriented service could become a competitive edge, to outsmart the local Banks in Bangladesh. However Commercial's expansion plans would be confronted by the strict legislation, which restrict foreign banks from opening of new branches. Upward revision in earnings. Commercial invested US$ 20.5 million (Rs. 1.98 billion) in the new venture, which was funded through a 1 for 4 rights issue. Based on the assumption that profits from Bangladesh operations would be consolidated from 1st July 2003 onwards, we project a profit contribution of Rs.280 million (after tax) towards Commercials bottom line during FY 2003. As a result of such developments, we forecast a net profit of Rs. 1.54 billion for FY 2003 as oppose to our original forecast of Rs.1.297 billion. Based on the revised earnings the fully diluted EPS for FY2003 is at Rs.22.10 resulting in a PER of 6.6x. We project a 22% growth in earnings during FY2004, to Rs. 1.88 billion with forward multiples declining to 5.4x. Maintain our optimism on Commercial. Commercial remains a well managed bank, with some of the best operating metrics in the banking sector. Notably, it has a very clean loan portfolio (owing to its policy of prudence), and good cost controls. The recent acquisition of operation in Bangladesh has strengthened Banks growth, proving access to new markets. Forward earning multiples are declining from 6.6x to 5.4x over the next two years and remain well below both banking sector and market PER. Therefore, we maintain our recommendation, Buy. Three Acre Farms buy into Hijra Farms Ceylon Grain Elevator's subsidiary company Three Acre Farms Ltd.(TAFL) has decided to acquire Hijra Farms Ltd, a company engaged in similar business as TAFL. The acquisition for a value of Rs.340.5 million includes purchase of the on-going poultry breeder farming, hatchery business carried out at the land and premises in Walthara, Pannila and Beruwala and all the moveable and immoveable assets connected with the business excluding the liabilities of the business. With this purchase, TAFL will also enjoy the ownership of trade names "Hijra Farms", "Hijra Chicks" and "Hijra Chicken", which are quite known in Sri Lanka according to the company sources. Acquisition is funded through a number of means An amount of Rs. 20.025 million will be recorded through an issue of new ordinary shares of TAFL to the vendors of Hijra Farms. According to the agreement, the vendors will accept 445,000 new ordinary shares of TAFL (par value of Rs.10 each) at Rs.45 per share, which is at a premium of Rs.35 per share. We feel that, a price of Rs.45 per TAFL share is on the high end, as the stock is currently trading only at Rs.20 and carries a book value of Rs. 21.67 per share. The views based herein are expressed with no malafied intension to any party whatsoever based on already published data and from the information obtained by the research team. No matter published as above creates any liability of any kind whatsoever on HNB Stock Brokers Pvt Ltd or its associates. The views cannot be reproduced in any form without the explicit (written or otherwise and photocopied) permission from HNB Stock Brokers (Pvt) Ltd. (Courtesy HNB Stock Brokers) |
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