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ASPI to test the 1000 point physiological barrier

The market continued its mixed momentum as the indices fluctuated in a relatively wide range causing uncertainty to investors. The ASPI and MPI closed the week at 1183 points and 2101.7 points, down by 28.1 points and 67.8 points.

With the market being depleted by holidays, the two trading days produced a weekly turnover of Rs.437.9 million at a daily average of Rs.218.95 million.

For the second week in a row, foreigner's ended net sellers with a net outflow of Rs.29.1 million. Among the foreign sales were a sale of approximately 600,000 shares of JKH at a price around 110-115. Shares of SLT, JKH, Asia Capital, Colombo Land, Marawila resorts and Talawakelle plantations were actively traded during the week.

Point of View:

Unhealthy solution to the deadlock

The 3-month-long political deadlock came to an end with the announcement of the dissolution of Parliament last Saturday.

The uncertainty of a 3rd general election within a short period of 3 1/2 years, broke off last November and since then market remained volatile as the investors preferred a "wait and see" approach. We still believe that a snap poll is not the solution to the political deadlock.

Election; Political parties should lay down their policies

It is important to analyze the policy statements of each major political party before projecting the market behaviour in the medium to long-term.

So far the PA - JVP alliance has not spelled out specifics in terms of their economic policies and solutions to the ethnic conflict. These factors would have a direct impact on the economic progress of the country, thus making an impact on corporate earnings.

We would take a closer look on the medium to long-term impact on the market, based on the outcomes of the post election era. Further it is important to look at the behaviour of the economic indicators such as foreign exchange, interest rates and inflation, since they would make a direct impact on the market.

Market to dip initially but opportunity for bargain hunting

Initial panic selling is expected to bring the ASPI below 1000 levels, thus creating an opportunity for bargain hunters. We expect the ASPI to settle down in the range of 900-1000 levels after the initial reaction and be highly sensitive towards the outcome analysis of the elections.

Hemas Holdings Ltd. (HHL) results for 3Q of FY 2004 Hemas Holdings Ltd. (HHL) released 3Q FY2004 results, surpassing the full year profits of FY2003, within the first 9 months.

Turnover up 20% YOY

HHL saw a turnover of Rs. 1,550m in Q3 to end at Rs. 4,742m for the 9 months of FY2004. The company mentioned that the top line growth over the same period last year was approximately 20%.

The main contributors towards the revenue were Personal Care Sector (Rs. 2,201m or 46% of total revenue), Healthcare Sector (Rs.1,260m or 26%of total revenue) and Strategic Investments (Rs. 858m or 18% of total revenue).

The Personal Care sector, which is mainly driven by the Baby Cheramy product range and Clogard, saw an overall volume increase of approximately 30% during the period in concern. The Cheramy market share has grown following the re launch of the brand. Clogard also has managed to achieve a growth of around 20%.

The Healthcare sector top lines were driven by a further consolidation of the market share to 16.6% and also by the addition of Astra Zeneca agency, which performed well.

The Leisure sector has grown by a notable 38% aided by the increase in tourist arrivals during 2003. The sector was affected somewhat by the closure of Serandib Hotel for refurbishments from May 2003 to September 2003.

Finance cost high

The borrowings taken for the power projects (Rs.1.4 billion approx.) have driven the finance cost up and the full year charge is likely to be higher than last. Though the revenue from the project has not yet started to flow in (since the plant is not yet operational) the group has managed to post healthy earnings due to the earnings from other sectors.

Strong profit growth

The operating profit growth for the 9 months was largely due to the increased turnover and the other income of Rs. 133.8 m (which included Rs 33.4m capital gains).

The total net profit of Rs. 419.3m for the 9 months was inline with our full year forecast of Rs. 531m. We feel that the company is in a position to achieve our target comfortably with winter contribution from hotels as well as the project "Igniting the propellant" likely to bring in cost and operational efficiencies.

Based on a market price of Rs. 84.50 and an EPS (fully diluted) of RS. 7.17, forward PER stands at 11.8x. The Net Assets per share was at Rs. 31.2 yielding PBV 2.71x.

Our long-term fundamental outlook remains unchanged

FY2004E PER of 12.4x makes it in line relative to forward market PER of approximately 13x. However, the multiples decline to 7.5x in FY2006E, due specifically to the strong increase in earnings contribution expected from the power segment, which according to the company is progressing as planned.

We maintain the stock as a Long-Term Buy due to its prospects in the future periods. Furthermore company's return on assets and equity still remain the best among the conglomerates.

Lanka Tiles 9 months results for 31st December 2003

According to the 9 months ended December 31, 2003 results of Lanka Tiles (TILE), gross sales increased by 15.8% to Rs. 840.9 million largely because of volume increases in the local tile market.

However, due to the increased pressure on gross margins, the gross profit had declined by 7.4% to 249.1 million, which in turn reduced the operating profits and net profits by 19.2% and 15% to Rs.138.7 million and Rs.92.9 million.

Nevertheless, other elements in the income statement have not recorded any significant variation.

Rupee depreciation and price cuts put margins under pressure

The cost of sales grew by 34% to Rs.481 million for the 9 months period when compared with the corresponding period of the previous year.

The company imports sizable portion of its key raw material Glaze from Italy, which constitute around 20% of its cost of production (COP).

Hence the rupee has appreciated against Euro by approximately 20% during the last year has amplified the raw material costs, on top of the ever-mounting energy cost, which also forms around 40% of COP.

The competition from Chinese and Indian imports still poses a serious threat to the sustainability of gross margins of TILE.

In order to face the increasing rivalry from these imported tiles, the company has been offering discounts on its tiles to customers, which has in effect reduced the average price of tile per square meter from Rs.670 to current Rs.600 level.

Moreover the company mentioned that the high cost of production at the commencement of the production of at the new plant (40% capacity increase) also has been a factor in raising the COP.

TILE to import some of its raw materials from China and India

The intense competition from Chinese and Indian tiles has compelled TILE to look for cheaper sources of raw materials from China and India.

We maintain our recommendation as a Long-Term Buy

Our forecast net profit for the current FY 2003/04 stands at Rs.120 million, which we believe is achievable particularly when considering the 9 months net profit of Rs.92 million.

Based on our projected EPS of Rs.6.8 for FY2004/05 and at the current market price of Rs.42, the forecast PE of 6.17 still justifies our recommendation of TILE as a Long-Term Buy.

Trans Asia

Earnings grow by 61% to 188m

Trans Asia recorded an earnings growth of 61% to end up at Rs. 189m at the end of 3Q of FY2004. The top line grew by 21% to 635m driven mainly by the high occupancy levels, which averaged around 60% for the period as well as a moderate increase in room rates.

The growth in operating profits by 61% was driven by this revenue growth.

There was also a notable reduction in finance cost due to two reasons; The employee share sales proceeds were used to reduce the loan given to the trust, the cost was further reduced by the cash generated from the operations bringing down the overdraft levels during the period.

Our provisional forecast for the hotel stood at Rs. 200 m, which we feel is quite comfortably achievable, and at a market price of Rs. 61.00 and an EPS (provisional forecast) of Rs. 4.00 this gives a forward PER of 15.25x. Based on an annualized EPS of Rs. 5.04 the forward PER is at 12.1x. The Net assets per share stood at Rs. 64.35 giving a PBV of 0.95x.

The Hotel is to undergo a soft refurbishment in the near future financed by internal cash.

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 (written or otherwise and photocopied) permission from HNB Stock Brokers (Pvt) Ltd.

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