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| Monday, 16 February 2004 |
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HNB Stock Brokers' weekly review: Investors waiting to see SLFP-JVP policy statement Colombo Bourse reacted on a mixed note following the dissolution of parliament, as the indices moved sideways on moderate volumes. Although the market experienced a sudden dip during the early part of the week, the situation turned opposite towards the latter part. The investor sentiment turned bullish with the positive developments in the political front, which were envisaged to favor the investor community. The ASPI and MPI closed for the week at 1119.34 points and 1921.15 pointsand on week on week basis the indices declined by 63.66 points (5.38%) and 180.75 points (8.6%) respectively. The week recorded a turnover of Rs.1.19 billion, at a daily average of Rs.237.42 million. As a result of the declaration of an election, the prices of most fundamentally strong stocks became attractive, and foreign investors were among the first to spot the opportunities. This helped to post a net foreign inflow of Rs.148.2 million for the week. SLT, JKH, Nations Trust, Colombo Land and Associated Hotels were among the most traded stocks. Point of View: While the market continued to be volatile amid the political developments, investors were making it a trading opportunity, as political romours drove the indices sideways. While maintaining that the volatility would continue in the short term, we stress the fact that the medium to long-term market outlook would depend on the key policies of the two major political parties. While the UNF has pledged to take forward their policy statement "Regaining Sri Lanka", the newly formed SLFP-JVP alliance is yet to make a firm announcement on their future policies. However newspapers reported that the Alliance is expected to give a preview of its economic policies at a forum scheduled for next week. Aitken Spence 3Q FY2004 Results Earnings up 228 % to 706m Aitken Spence 3Q results showed strong growth as their cumulative net revenues improved by 30% to Rs. 5.97 billion, while earnings jumped up by 228% to Rs. 706 million, compared to the corresponding period last year. Tourism, Power and Cargo contribute significantly The main contributions to the 9-month turnover came from Tourism sector (43% contribution) with Rs.2.58 billion (25% growth over 02/03), Infrastructure development sector (27% contribution) with Rs. 1.65 billion (62% growth over 02/03) and Cargo logistics (19% contribution) with Rs. 1.14 billion (16% growth over 02/03). The local operation of the total group maintained a growth of 34%. The overseas turnover (which is the Maldives operation) that showed a dip of around 7% by the end of the half-year mark has recovered to show a marginal growth of 5%. This was aided by the increased tourist arrivals in to Maldives that reached 563,000 for 2003. The local hotel operations of SPENCE and the inbound travel sector enjoyed high occupancy rates courtesy of the increased arrivals in to the country (SPENCE tourist volume increased by around 37% compared to the 27% increase seen by Sri Lanka as a whole). The cargo sector revenue grew significantly aided by the freight-forwarding segment. This was a direct result of the increased economic activity seen during the period as well as the sizable marketing efforts that were put in to this segment. The infrastructure development sector driven by the power plants at Horana and Matara saw a significant increase over last year with both the plants coming in to full operation. Company believes that the power sector would attract steady revenue, thus they are looking at possibilities of further growth in this sector. Recently Spence teamed up with Caterpillar Power ventures of USA, to construct another power plant in Embilipitiya with a capacity of 100MW. Construction has already begun on the plant and this is expected to make contributions to group earnings as early as FY2005. The manufacturing sector also did well with the turn around in the garment factories now under the full control of SPENCE. Profit on sale of UAL and ACW has helped to improve earnings. The operating profits at the end of 9 months stood at Rs. 1.13 billion, which was up 121% from previous year. Infrastructure development contributed with Rs. 447 million (40%), the Services & Other with Rs.315 million (28%), Tourism with Rs. 350 million (31%) and the Cargo sector with Rs. 133 million (12%). The services (& other) sector included a non-recurring item of Rs. 166 million, which was the profit on disposal of shares of Union Assurance and ACW Insurance. The total earnings for the 9 months grew 228% to Rs. 706 million. The net assets per share at end Dec 2003 is at Rs. 199 resulting in a PBV of 1.21x at a share price of Rs. 242. Based on our earnings forecast of Rs.851 million for FY2004, the PER stands at 7.65 x. Furthermore, as per the annualized EPS of Rs. 34.89 the forward PER is at 6.9x, thus showing clear signs of achieving our projections. Power and energy sector The power and energy sector is not too exposed to the circumstances. Thus our earnings forecasts for the company remains unchanged at this point of time. Forward earnings multiples based on FY2004 earnings are a low of 7.65x, thus making the counter attractive. Despite the company's fundamentally strong position we feel that the stock price would remain volatile in the coming weeks, largely due to the present election situation in the country. However we maintain our recommendation based on company's positive fundamental outlook, Buy. DFCC results for 9m FY2003/04 Earnings up 16% DFCC Bank posted a 16% growth in net profits during the first 9 months of FY2004, compared to the same period of FY2003. The Bank recorded a 4% growth in interest income, supported by a 10.1% growth in net loans and advances to Rs.23.4 billion. Interest expense declined by 13% due to the low deposit rates and this resulted in a 32% surge in net interest income to Rs.Rs.1,245 million. This we believe is encouraging, since DFCC's core activities have returned to positive territory after recording a 4% decline in net interest income during FY2003. Other income up by 17% Non-interest income recorded a 17% growth to Rs.589 million, compared to the corresponding period of FY2003, with the revenue form lending improving 33%. Furthermore income from investment in equities grew by 12% to Rs.225 million during the period under review. The provision charged to income for the current period was Rs.284 million, 21% more than what they provided during the first 9 months of last year. Like most other banks, DFCC too increased its provisions during the latter part of the FY2003 as it provided Rs.401 million for the full year. We expect the same level of provisioning during the current financial year, as we forecast a total provision of Rs.408 million for FY2004. Investment in Commercial Bank more of a strategic tool The bank recorded a 24% growth in profit after provisioning but before any share of profits from associates to Rs.992 million. DFCC's associate, Commercial Bank, continued to contribute immensely towards DFCC's profitability, as the share of profits from associates and subsidiaries amounted to Rs.319 million and accounted for 34% of net profits. The 29.91% stake in Commercial Bank is mainly a strategic asset to DFCC, but its contribution towards DFCC's profitability via its associate status is certainly significant. Gradually progress into commercial banking As reported in our last update on DFCC dated 29th January 2004, the Bank has already made progress in commercial banking activities through its newly acquired commercial banking arm, DFCC Vardana Bank. It is still a young enterprise among the commercial banks, thus real growth could be expected after the current financial year. We maintain our earnings estimates at Rs.1.21 billion for FY 2004, with forward multiples of 9.4x. We project a 11.6% growth in earnings for FY2005, with the PER of 8.5x. DFCC recently announced a 1 : 3 bonus issue, which increased its share capital to 56.4 million shares, thus improving the liquidity by 33%. Further the Bank has already taken steps to strategically re-model itself as a diversified financial institution. However the counter is currently trading above the Banking sector forward PE of 5.3x (stocks covered in our universe) and further it trades at a 17% premium to its forward book value of Rs.173.09 as at 31st March 2005. We therefore maintain our recommendation, Hold. While closely evaluating the developments in commercial banking activities and its returns to DFCC's bottom line, we would re look at our recommendation soon. The views based herein are expressed with no mala fidie 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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