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| Monday, 2 February 2004 |
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HNB Stockbrokers Weekly Stock market review: Market to remain sensitive towards political developments The market observed mixed sentiment during the week with the indices fluctuating in a relatively broad range. Heightened market activities were seen at the start of the week due to expectation of a breakthrough on the cohabitation between the major political parties. However, investors raised concerns in the absence of a breakthrough from the political front. Some remained buoyant about a settlement to the current political deadlock. The ASPI and MPI closed for the week at 1211.1 and 2169.7 points and on week on week basis the indices appreciated 94.2 points (8.43%) and 151.4 points (7.5%). For the week, the turnover of Rs.1.4 billion was recorded at the Bourse with an average daily turnover of Rs.279.62 million. SLT, Nations Trust bank, Asia Capital, Colombo Land, Asian Hotels and Seylan Bank were among the actively traded stocks during the week. Point of View: Continuous postponement delays a breakthrough The cohabitation talks between the President and the Prime Minister has yet to provide a breakthrough to the present political deadlock, as the two parties continued to postpone their meetings. However the expectation of a breakthrough from such talks drove the indices into positive territory and remained volatile during the week. We still maintain that chances of a snap poll would be below 50%, as both leaders have acknowledged that an election at this point of time would not solve the present political crisis. We believe that the market would remain volatile in the coming weeks, while being sensitive towards developments in the political front. JKH results for 9 m to Dec 2003 Sri Lanka's largest conglomerate, John Keells Holdings (JKH) recorded a 19% increase in net profits during the first 9 months of FY2003, even after setting off a Rs.755 million Voluntary Retirement Scheme (VRS) in Ceylon Cold Stores and Lanka Marine services. Turnover up 26%; boosted by Transportation and Leisure sectors All six sectors recorded a growth in the top line, but this was dominated by financial services, transportation and leisure sectors. A full year consolidation of Lanka Marine Services (LMS), was the primary reason behind the 37% growth in transportation sector turnover, compared to the first half of FY2003, to Rs. 3.92 billion. The Leisure sector experienced dramatic growth supported by increased tourist arrivals due to the on-going peace process and consolidation of Asian Hotel Corporation (AHOT). Sector turnover jumped 58% to Rs.2.53 billion compared to the corresponding period of FY2003. Operating margins on an improving trend. The operating profit grew by 81% to Rs.1.91 billion, with an operating margin of 12.5%, a moderate improvement from 10%, recorded during FY2003. The main reason for such margins was the high costs associated with the plantation and food & beverages sectors. We expect the EBIT margins to improve to 13.9% during FY2004, with the cost savings of VRS coming into effect. New issues improve liquidity by 60% After the new issues, JKH's total shares in issue has reached a mammoth 299 million, an increase of 60% since 31st March 2003. Based on such capital structure the fully diluted EPS for FY2004 is at Rs.5.64, resulting in a PER of 21.1x. The forward multiples are expected to decline to 13.0x based on an EPS of Rs.9.14 during FY2005, and to 10.8x during FY2006 making the stock attractive. Still foresee a high potential for growth JKH has just completed a restructuring study conducted by the Boston Consultancy Group (BCG) and we believe that the successful implementation of the suggestions would enable the group to exploit greater synergys, improving operating margins. The recent share issues have added more liquidity to the stock, increasing the free float market capitalization to Rs.23.15 billion (US$235 million). Forward earnings multiples are expected to decline from 21.1x to 10.8x over the next 3 years. We maintain our recommendation, Buy. DFCC: Gradually progress into commercial banking activities Development banking giant DFCC Bank is gradually entering into commercial banking after its acquisition of Merc Bank last year. At a recent company visit to DFCC, management expressed their satisfaction on the progress of its commercial banking arm, DFCC Vardana, which presently operates in 4 DFCC branches. IT system to be upgraded DFCC is to complete the upgrading of its existing IT system by March 2004, to accommodate the commercial banking requirements, thus enabling customizing its product base. According to management they have placed around 3-4 additional staff members at each of the DFCC branches (at 4 braches) to handle the commercial banking activities. We believe that it is important to have separate staff to handle the commercial banking activities, and continuous training is essential to keep them in tact to meet customer requirements. Management expressed their intention to gradually increase the branch network, specially in the metropolitan areas. Strong demand for credit, but held up by the political turmoil The Bank has experienced a sizeable loan growth during the last quarter of calendar year 2003, with over Rs.7 billion credit being approved. Up to 6 months ended 30th September 2003, Bank had credit approvals totaling to Rs.9.5 billion, thus showing clear signs of increase in credit approvals. Over the last 5 years DFCC has maintained a credit disbursement ratio of around 75% - 80%, with exception in FY2002. However due to the present political crisis, most clients have taken a "wait and see" approach, thus delaying the implementation of such business and threatening a comparatively lower disbursement ratio. However we feel that Rs.7 billion is a considerable credit proportion, thus envisaging credit growth in FY2004 and FY2005. Increased contribution from Commercial Bank to boost the bottom line As a result of Commercial Bank's Bangladeshi operations, we forecast COMB to make an increased contribution of Rs.539 million towards DFCC, thus boosting the bottom line of FY2004 to Rs.1.2 billion, up by 10.3% from our original forecasts. However the counter is currently trading above the Banking sector forward PE of 7.3x (stocks covered in our universe) and further it trades at a 47% premium to its forward book value of Rs.173.09. We therefore maintain our recommendation, Hold. AHOT see growth potential in tourism sector but emphasize the economy and peace should move forward During our recent company visit to AHOT, management expressed that they were up beat towards the sector for the coming year but emphasized on the need for continued peace and economic activity. The performance during Q3 has been significantly better for Asian Hotels Corporation (AHOT) as well as Trans Asia (TRANS) compared to last year. The management is planning to refurbish the old wing of Colombo Plaza's at the cost of around Rs. 1 billion to utilize 250 unused rooms idling in the wing. Trans Asia would undergo a soft refurbishment at a cost of around Rs. 350 million, again with the use of internal cash of the group and is scheduled to commence in April 2004. The new apartments of Crescat developments are currently being put up. In a strategic move AHOT and Crescat Developments are to be merged to take advantage of Crescat Developments BOI status. Based on the AHOT group's plans and re-structuring we feel that it is well positioned to take advantage of the future growth in the tourism sector. The views based herein are expressed with no mala fide 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
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