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Colombo Bourse continued its upward momentum

The Colombo Bourse continued its upward momentum by reacting positively to the developments in the political front.

The ASPI and MPI closed for the week at 1,224.1 points and 2,087.7 points and on week on week basis the indices gained by 69.8 points (6.05%) and 95.6 points (4.8%).

The market recorded a turnover of Rs. 1.085 billion with an average daily turnover of Rs.217 million. However foreigners ended up as net sellers with a net foreign outflow of Rs. 2.1 million. SLT, Nations Trust, NDB Bank and Hemas Holdings were among the heavily traded stocks.

Strong Corporate Earnings; Upward momentum to continue

Most corporate earnings released during the last few weeks, showed promising performance and many companies have made dividend announcements based on their FY2003 results. We expect more such announcements and strong earnings to be released during the coming weeks, thus adding value to market.

However considering the continuous upward movement in indices over the last few days, we feel that the market would go through a correction, while gathering momentum in the back of political developments.

Tourist Numbers for 2004 Jan look strong

The tourist board released the latest arrival numbers for the month of January 2004. The arrivals were up 23% compared to January 2003, to end up at a sizeable 50, 000 for the month. Only two months in 2003 (Nov, Dec) was above this figure.

The main contribution for the month came from UK with 9,555 (up 48% YOY) while India was next with 7,677 (up 17% YOY).

China looks promising

A notable development was the increased number of arrivals from China. This was up by 177% to 1,428. Though the actual number is comparatively small, it would be in the direction of Sri Lanka's efforts to improve on the regional tourism market.

The Chinese market has been growing contributing to arrivals in the recent past. This is a result of several promotions carried out by Sri Lanka, in China and other regional countries.

In addition Sri Lanka being declared as an Approved Destination by China has further helped this cause. Further promotional campaigns are planned for March and SriLankan Airlines plans to start direct flights to Beijing.

Continued peace - the main driver of tourism volume

The main reason for the sustained increase in tourist numbers despite political instability is the prevailing peace initiative and the continued ceasefire.

With main parties pledging to uphold the ceasefire and most of the hotel chains looking at refurbishment and expansion, we expect the upward trend in the arrivals to hold.

During the period building up to the election (March) we may see a slight slowdown but the rest of the year should be positive provided that the ceasefire holds. Increased arrivals would bring about the opportunity to hike room rates increasing earnings margins of the sector.

NDB results for FY2003

Earnings up 21%

National Development Bank (NDB) recorded a 21% profit growth during the Year Ended 31st December 2003, compared to the previous financial year. The Group recorded a net profit of Rs. 1.123 billion for FY2003, perfectly in line with our forecasted earnings of Rs. 1.124 billion for the same period.

Total revenue up, despite a decline in the interest income

However total interest income declined by 7% to Rs.4.67 billion, largely due to the decline in lending rates and a 22% decline in NDB's (group) loan book.

However the Bank loan book declined by only 10%. The lower cost of funds reduced the interest expense by 27%, resulting in a 33% increase in net interest income.

NDB disposed some of its equity portfolio, generating capital gains of Rs.397 million, but still 11% lower than its capital gains of FY2002. This included the disposal of Mercantile Leasing Ltd (MLL).

Lease income declined by 41% to Rs. 70.4 million but other income jumped 157% to Rs. 937.1 million, resulted in significant growth of 61% in non-interest income. NDB has included Rs. 722 million as income from Insurance business under other income, as a result of its recent acquisition of Eagle Insurance. This we believe is the main reason for the 157% surge in other income.

Provisions still high

During the period NDB provisioned Rs. 656 million in bad loans, 44% more than what it provisioned in the corresponding period of 2002.

Operating expenses grew by 60%, as a result of consolidating expenses of Eagle, but the profit before tax improved by 18% Rs.1.53 billion. While 10% VAT surcharge of Rs. 123 million curtailed profit growth, the Bank's deferred tax reversal of Rs. 113 million managed to off set some part of the impact.

NDB still carries a deferred tax liability of Rs. 145 million in the balance sheet.

Net earnings perfectly in line with our projections

The net profit attributable to ordinary shareholders increased to Rs. 1.123 billion, up by 21% compared to FY2002.

NDB's performance is perfectly in line with our earnings forecast of Rs. 1.124 billion for FY2003, resulting in a PER of 7.5x. We forecast a 9.5% growth in the bottom line to Rs. 1.23 billion during FY2004, with forward earnings multiples declining to 7.1x. Furthermore we project a moderate growth of 9% and 11% in earnings over the next two financial years, with the Forward EPS for FY2006 reaching Rs.27.70.

Maintain our optimism in the long run

Forward earnings multiples are expected to decline from 6.9x to 5.7x over the next 3 years. The counter is trading 1.0x of its forward book value of Rs.157.89 for FY2004. Although the future of the merger and its outcome are as yet uncertain, we feel that NDB has already strategically positioned itself as a diversified financial institution. We therefore maintain our recommendation on NDB, a Long Term Buy.

CIC results for the 9 months to Dec 2003

Chemical Industries (Colombo) Ltd. posted an impressive 32% growth in revenue to Rs.7.63 billion in comparison to its corresponding period in 2002.

Despite the substantial improvement in revenue, net profit slipped marginally by 0.55% to Rs.262 million due to an increase in finance cost and the dip in profit from the agricultural sector.

Revenue from agricultural sector rises, but operating profits dip considerably

During the 9 months period under review virtually all the companies under the CIC group contributed to the growth of the overall revenue figure. It is important to highlight that, although revenue from agricultural sector increased by 23% to Rs.2.5 billion, the operating profit from this segment declined 51% to Rs.98 million. This drastic decline in operating profit from agricultural sector has seriously affected the profit growth of CIC group as this sector generally contributes around 35% to the group's operating profits.

The drop in operating profit can be directly attributed to the loss of subsidy following the government's decision to reduce the subsidy on fertilizer. This reduction in the subsidy caused the cost of sales to increase as the company had to bear 2/3 cost of the fertilizer since last October, while 1/3 of the cost has been passed on to the consumers. The government has again increased the subsidy with the budget 2004 with effect from January 2004, but the heavy fluctuations of the Urea prices in the world market during the last two months have caused indifferent results for the company.

A notable improvement can be seen in the consumer and pharmaceuticals sector, where the revenue and operating profit from this sector have surged by a significant 86% and 56% to Rs.2.09 billion and to Rs.106 million largely supported by increase in sales volumes.

The rise in short-term loans is a temporary issue

The short-term loans of CIC group have jumped from Rs. 280 million to Rs.1.4 billion as at the end of December 2003 when compared to corresponding period of the previous year. According to company sources, this was mainly due to the fact that the company had to borrow to buy fertilizer, as the loss of subsidy had created working capital issues. However, some of these debts have also been used to fund the 49.5% purchase of Link Natural and 93% acquisition of Nutrena (now renamed as CIC Feed Mills). Consequently the debt to equity ratio has increased from 35% in the previous year to 97% for the current financial year. Nevertheless, the rise in short-term debts is temporary, as the proceeds from the sale of fertilizer will be used to settle the short-term debts.

Chemanex records a commendable growth in earnings

The 43.2% owned subsidiary of CIC Group, Chemanex Ltd. has recorded a 54% growth in earnings to Rs.83 million. This has been largely from the chemical sector, which has recorded a 180% growth in operating profits. Further the share of profits from associated companies has gone up by 68% to Rs.48 million, where major part of the share of profits has come from Commercial Leasing. When taking into account the 9 months results of CIC group, the annualized EPS stands at Rs.37.3.

Based on this annualized EPS and at the current price of Rs.133, an annualized P/E of 3.56x compares well to the current market P/E of 12.2x. However the 9 months results of CIC show that EPS has not gone up, largely due to the reduction in subsidy, but the increase in the fertilizer subsidy again would have a positive impact on CIC group's earnings.

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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