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| Monday, 29 March 2004 |
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HNB Stockbrokers weekly market review Market continues upward momentum The Colombo Stock Exchange continued its upward momentum that started previous Friday, largely due to the unusual price movements in Bukit Darah and Carson's Cumberbatch. The ASPI rose 16% during the first three days and ended at 1,408.8 points on Wednesday, thereby getting close to the all time high 1,423.5 points. However the more sensitive Milanka Index remained flat during the same period as Bukit Darah and Carson Cumberbatch are not included in the MPI. The ASPI and MPI ended the week at 1,320.1 points and 1,982.8 points and on week on week basis both ASPI and MPI appreciated by 104 points (8.55%) and 32.4 points (1.66%) respectively. The market recorded a relatively low turnover of Rs.483.2 million during the week with an average daily turnover of Rs.96.64 million. However on the brighter side, the market recorded a net foreign inflow of Rs.32.2 million. SLT, NDB Bank, Blue Diamonds, Colombo Land and Vanik Incorporation were noted as the actively traded stocks during the week. UPFA or UNF insight of forming a minority government We believe that next week's market behavior would largely depend on the last minute changes in the political environment. However we do not envisage a stable government in power after 2nd April, but would expect a political battle towards forming a minority government. The latest developments in the political front indicates that neither of the two main political parties would win a clear majority at the up coming General Election 2004, while slipping from its position maintained in the previous parliament. We believe that newly formed Jathika Hela Urumaya (JHU) and Tamil National Alliance (TNA) would be the direct beneficiaries of the elections, creating a strong third force. A strong third force In our last strategy update "Political Climate Reaching a Crucial Stage", published on 20th January 2004, we highlighted that an election by no means is the solution to political uncertainty, as TNA was expected to secure 22 seats in North and East. However JHU was not in existence at the time of publishing the report, thus its impact was not analyzed earlier. According to the latest developments JHU has emerged as a strong force and is expected to compete closely with the TNA, to be the third force that could be a part of forming the next government. We feel that JHU would secure around 10-15 seats, while the TNA would capture 20 out of 31 seats in the North/East. With these two parties aggregating approximately 30-35 seats (or 12% to 16%) the two major parties were left with around 180-185 seats, making it a must for a further coalition to form a government after 2nd April. As highlighted in "Political Climate Reaching a Crucial Stage", we feel that the winner of following districts would secure a nominal margin, as the results of these districts are based on the floating vote, thus leaving the Bonus seat on the balance. Among the critical districts are, Anuradhapura, Badulla, Galle, Gampaha, Kurunegala, Kaluthara, Ratnapura and Matara. Carson's and Bukit Darah drive dull market Carson's Cumberbatch Ltd and Bukit Darah Ltd put an end to the 6 day long downward trend in the ASPI causing the index to improve by 212.8 points or 17.8% over 4 trading days from March 19th to 24th. Due to the significant changes in the market capitalization of these two stocks the ASPI has shown improvement but the Milanka Price Index (MPI) has declined during the same period. A brief description of these two companies follows. Carson Cumberbatch and company Ltd (CCL) CCL is a diversified conglomerate based in Sri Lanka with business interests spanning across South East Asia. Its core business interests are brewing, oil palm plantations, investment holdings and financial services with business interest in the real and leisure sectors Accumulated reserves cause bonus rumours As at 31st December 2003 CCL had accumulated reserves of Rs. 4.25 billion which is 18.1x of its share capital, of Rs. 235.2 million. This accumulation of reserves has caused strong rumours in the market of a possible bonus issue, which has led to the sudden increase in its share price from Rs.2000 levels to its current price of Rs. 10,000. This has caused CCL's market capitalisation to improve to approximately Rs.10.2 billion which accounts to around 3.46% of the total market capitalisation. This sharp rise in market capitalisation by approximately 5x has led CCL to be ranked 4th in terms of market capitalisation. Strong 3Q results During first 3Q of FY2004 CCL has shown a 27% improvement in turnover to Rs. 3.69 billion from Rs. 2.91 billion during the corresponding period last year. This has caused earnings to jump to Rs. 370.9 million from Rs. 261.9 million up by 42%. Based on 3Q earnings annualized EPS stands at Rs. 455.04 while at a price of Rs. 10,050.00 as at 26/03/2004 the share is trading at PE multiples of 22.09x. CCL'S book value of Rs.4187.9 yields a PBV of 2.40x. Bukit Darah Company Limited (BDCL) The principal activities of BDSL are cultivation of oil palms and managing and holding of an investment portfolio. In addition to its primary business activities Bukit Darah has been able to generate revenue through its long and short-term investments Unusual movements in the stock price Following the announcement of the 24 for 1 bonus issue the share price of BDCL has fluctuated drastically largely due to rumours relating to the sale of one of its estates in Malaysia. According to a circular issued by the company, they have finalized to sell a land at Ringgit, Malaysia and the gross sales proceeds are expected to amount to approximately US $ 36 million. Due to certain legal formalities in Malaysia the deal is expected to take a few more months before completed. A significant jump in 3Q earnings Despite a dip in turnover BDCL's 3Q earnings have risen by 25% to Rs. 134.8 million from Rs. 107.7 million recorded during the corresponding period of the previous year. The growth in earnings could be attributed to the 54% rise in income from its associate company Carson Cumberbatch and company Ltd. This amounted to Rs.116.7 million compared to Rs. 75.7 million recorded during the corresponding period of the previous year, which is 86.6% of the group's earnings. Based on 3Q earnings the annualized EPS stands at Rs. 432.7 while at a market price of Rs.2400.00 as at 26/03/2004 the share is still trading at PE multiples of 5.55x. BDCL'S book value of Rs.4051.8 as at 31/12/2003 yields a PBV of 0.59x. However fully diluted EPS stands at Rs. 18.03 and at a market price of Rs. 2,400.00 yields a PE of 133.1x. Momentum to ease down The momentum in BDCL is expected to ease down and stock price is expected to adjust further, once the bonus shares start trading in the market. This we believe would settle the wild fluctuations in the ASPI and show a more realistic picture on the market performance. Hayleys consolidating as a global business Hayleys Group's wide presence in a number of countries has given the company much needed experience and market know-how in different geographical locations, which has in turn helped the company to look for further market development in the untapped geographical markets. More importantly, it is noteworthy to highlight that the company is not only looking for overseas markets to sell its products, but also seeking to expand its manufacturing bases in overseas countries with lower labour costs and cheap source of raw materials. The objective of setting up production plants overseas is to bring down on the overhead expenses of HAYL and to be more price competitive in its export product offerings. The vast experience gained in the overseas markets and company's technologically advanced manufacturing facilities have given HAYL an edge over others, when exploring overseas market opportunities to successfully expand its businesses. Diversified earnings base Hayleys enjoys an earnings stream from ten sectors: Six lines of business i.e. coir, rubber, environment, inland marketing, plantation and transportation accounted for over 80% of FY2004 turnover and operating profit forming the critical mass of the group. None of the segments contribute over 35% to revenue and to the operating profit of HAYL and we do not expect any segment to dominate the group's turnover in the short-medium term as a result of its broad exposure. Therefore, even if one or two sectors under-perform, the other well performing sectors can absorb the losses and HAYL Group can still record stellar profits. Earnings to dip in FY2003/04 and to improve thereafter. The environment business, the only major sector which has recorded a loss for the 9 months FY2003/04 is expected to contribute positively to the bottom-line of HAYL from the next financial year and with the rest of the sectors growing steadily over the next three years, we project the net profit to rise progressively by 35% to Rs. 756 million in FY2005 and by 17% to Rs. 882 million in FY2006. In terms of EPS, our fully diluted forecast EPS for FY2004, FY 2005 and FY2006 stand at Rs. 11.2, Rs. 15.1 and Rs. 17.6 respectively. A stable investment with high growth prospects Compared with the other diversified sector stocks, HAYL continues to be less liquid than JKH and Aitken Spence. However, according to historical performance trends, HAYL has been a defensive, stable stock relative to the performance of ASPI. Based on our earnings growth target of 35% in FY2005 and at the current market price of Rs.115, our forecast PE multiple of 7.6x for FY2005, the stock offers long-term value to the investors. Moreover the investments in low risk sectors such as rubber glove and coir fibre manufacturing, transportation etc. as opposed to JKH's and SPEN's investments in relatively high risky areas such as tourism, we recommend the counter as a Long-Term Buy. In depth analysis on Hayleys is made available in our latest research report, "Strategy of growth through overseas investments". 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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