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The ASPI and MPI closed the week at 1,313.5 points and 2,076.9 points and on a week on week basis the ASPI dipped by 6.6 points (0.5%) and MPI gained by 94.1 points (4.75%). During the week, a turnover of Rs. 1.1 billion was posted on the Colombo Bourse with an average daily turnover of Rs. 220.2 million, thereby advancing from previous week's Rs. 96.64 million.

It was seen that domestic investors were entering the market when the foreigners became net sellers, where a net foreign outflow of Rs. 313.4 million was posted. Among the heavily traded stocks were SLT, Distilleries, Colombo Land, Vanik Incorporation and Mercantile Leasing.

Point of View:

Resumption of peace talks should be the first in the agenda. We believe that the new government should place high priority towards resuming the stalled peace process with the LTTE.

According to the manifesto of the United People's Freedom Alliance (UPFA), they pledged to resume talks under reasonable conditions, thus making way to continue the peaceful environment in the country.

However, the latest developments in the East, suggest that the situation has been further complicated as the Karuna faction seeks a separate representation at the negotiating table.

Therefore we believe that the government should carefully consider the interests of the two factions of the LTTE, before rushing into talks, since any miscalculation of the situation could disturb the peace process.

Development projects should kick off

Development projects in all parts of the country should get under way, creating employment opportunities and continuous growth in the economic activity. The UPFA in their manifesto, recognises the urgency and the importance of reconstructing the war torn areas in the North and East. If such developments take place more donor funds (foreign currency) could flow into the country, thereby enabling the rupee to hold its ground.

Fiscal discipline should be maintained

A stable rupee is essential towards keeping the inflation at low levels and this would allow the interest rates to be continued at lower levels. We expect that the government would be mindful when managing such economic indicators, specially when providing subsidies and creating employment.

Southern parties should work together on national issues with a minority government in power, it is important that the two major parties would work together at least on the key national issues such as the peace process and economic development. Even though such an agreement seems distant, we believe that it is essential towards creating some stability into the political environment.

Investors should focus on the medium term

Despite initial panic selling we expect the market to hold ground, with the expectation of implementing the policies of the new government.

However we believe that the market should correct itself from present levels, as the indices have appreciated almost 5% during the last five trading days. (excluding the impact from movements in Bukit Darah and Carsons).

We place our optimism towards some national consensus between the two major parties. This we believe could drive the market in the positive direction, as it would improve the political stability in the country.

Distilleries 3Q results FY 2004

Turnover grows 16% - SLIC not yet consolidated

The nine months results of Distilleries recorded a top line growth of 16% to Rs. 5.16 billion compared to Rs. 4.45 billion during the nine months last year. However, this excludes the turnover of SLIC since the company is yet to consolidate the financials of SLIC in to the group (due to SLIC accounts not yet being finalised).

The major part of the turnover growth in DIST was accounted by the Food and Beverages segment, which grew by 19% to Rs. 3.32 billion from Rs. 2.79 billion.

Approximately 70% of this growth was driven by the increased prices while the balance was volume growth. Increase in volumes in this saturated market could only come through capturing the market share away from illicit manufacturers. However the high excise duty structure that drives the legal manufacturers' prices up remains a main barrier in this regard, since the illicit products are sold at significantly low prices.

The plantation sector represented by Balangoda and Madulsima plantations recorded a turnover of Rs. 1.52 billion, up by 8%, compared to the corresponding period of the previous financial year. Growth in volumes was the main cause for such increase in revenue in the plantation sector.

The textile sector, represented by Timpex showed a growth of 28% to Rs. 320 million over the nine months of FY 2003, which was Rs.250 million. Here too increased volumes mainly drove the growth.

Sale of shares boosts earnings

The gain on disposal of investment amounting to Rs. 410 million is mainly the gains from the sale of shares of JKH and Sampath Bank. This pushed the operating profits up to Rs. 1.12 billion, which was 87% higher than the corresponding period last year of Rs. 598 million.

The finance cost has increased from a net finance income of Rs. 32 million in FY 2003 to a net cost of Rs. 208 million. This is mainly on account of the additional borrowings for the acquisition of SLIC. The share of profits from the associate company (Aitken Spence) saw an increase of 110% to Rs. 221 million from Rs. 105 million last year.

This was mainly driven by the tourism and power sector earnings, as reported in our 3rd quarter earnings review on Aitken Spence.

The nine-month cumulative earnings of the plantation and textile sectors are still in the negative territory and are hurting the group earnings (Balangoda plantations made a marginal profit). The plantation sector was affected by the higher operating costs and the overall decline in the industry.

The net earnings to shareholders stood at Rs. 961 million, up 89% from last year's Rs. 510 million. The nine-month EPS stands at Rs. 3.20 and at a share price of Rs.22.00 (assuming an annualised EPS of Rs. 4.27) the PER was at 5.15x.

The NAPS was at Rs. 15.87 giving a PBV of 1.39x. Forward Outlook Our forward earnings forecast for DIST for the FY 2004 stands at Rs. 1.014 billion (excluding SLIC consolidation). Our SLIC earnings forecast for 2003/2004 is at Rs. 823 million (after VRS) and DIST share of this would be approx. Rs. 580 million.

The management of SLIC is at present in the process of cleaning up the accounts through provisions for bad debts etc. These provisions would wear down the shareholders funds of SLIC, thus the net asset value of the company would reduce and consequently result in a higher goodwill figure in the books of Distilleries. Nevertheless the impact of this on DIST would be smoothened since the goodwill figure is to be amortized over the next five years.

The counter remains a Long Term Buy.

Company update: Durdans hospitals

Durdans Hospitals is a leading healthcare provider in the country with 60 years experience in the industry. The hospital mainly caters to the urban population.

Long established image, service and the strong relationships with local medical consultants are among the reasons for Durdans to maintain high occupancy levels. We believe that Durdans have maintained a pricing strategy that suits the segment it caters to.

Hospital now in full operation

During a major part of FY 2003, the hospital went through a remodelling and modernisation program, such that some rooms and operating theatres were not fully operational throughout the year. However, the refurbishment has now been fully completed and the management envisages a 14%-15% improvement in the top line during FY 2004 in a recent company visit.

Over the last two to three years the hospital has maintained its average occupancy level above 95%, thus restricting the potential for further growth. The proceeds of the recent Initial Public Offer (IPO) were partly used to address this issue as the hospital envisages the construction of 27 additional rooms over the next 12-15 months.

3Q Earnings up, in line with our forecasts

During the first 3Q for FY 2004 Durdans has recorded net earnings of Rs. 52 million which is an improvement of 13.23% compared to the corresponding period in FY2003. This can be largely attributed to a 14.96% increase in turnover, to Rs. 504.1 million from Rs. 438.5 million recorded during the previous year.

Durdan's 3Q earnings of Rs. 52 million is in line with our projected earnings of Rs. 68.7 million for FY 2004. Our forecasted profit growth during FY 2004 is 11.64%, compared to Rs. 62.7 million in FY 2003.

Based on FY 2004 earnings EPS stands at Rs. 2.70 and based on market price of Rs. 20.00 the voting counter is trading at PE multiples of 7.40x. With earnings projected to improve to Rs.81.6 million in FY 2005 PE multiples would decline further to 6.25x.

Long-term expansion on the cards

Durdans is currently drawing plans for a further expansion (the second expansion program), which would increase the room capacity and improve the parking facilities.

At present poor parking facilities have been viewed as a concern but the expansion program will address this issue through the construction of a car park.

However, we feel that this expansion is more of a long-term nature, thus the real impact on the bottom line would be seen at least after 3 -5 years.

We are of the opinion that this expansion is essential towards considerable growth in the business, as the Hospital has reached almost its full capacity in terms of indoor treatment.

A further detailed analysis of the Durdans Hospitals would be made available soon, in our upcoming report on health care sector.

The views based herein are expressed with no mala fide intention 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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