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| Monday, 17 May 2004 |
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HNB Stockbroker's weekly market : Peace initiatives and healthy corporate earnings boost investor confidence The market regained its months long lost momentum, following the clear and positive indications shown by both LTTE and the Government underscoring the resumption of the stalled peace talks. The healthy corporate profits reported for the quarter and for the year ended March 2004, came as an additional incentive for retail investors to actively involve in share purchasing, while institutions too entered the market in a smaller way. During the week ASPI and MPI appreciated substantially by 92.4 points (7.83%) and 165.6points (8.91%) to close for the week at 1,319.3 and 2,024.1 respectively. The total daily turnover for the week was an encouraging Rs. 1.51 billion which resulted in an average daily turnover of Rs. 310.5 million. The rising share prices lured the foreign investors to book the profits or minimize the losses, in which the outcome was a net foreign inflow of Rs.310.6 million. SLT, Vanik, Blue Diamonds(non voting) and JKH were the heavily traded stocks during the week. Peace initiatives lift investor enthusiasm The government and the LTTE agreed towards some of the fundamental issues associated with the resumption of the peace talks, as the dates for the next round of talks is expected to be announced soon. Market sentiment supports Strong Corporate results The overall positive market sentiment helped the counters to appreciate amid the healthy corporate results published during the week. As expected by us the Banking sector earnings were affected by increasing interest rates, increase in VAT rate from 10% - 15% and additional taxes payable on off shore profits. However we expect the other sectors to continue the strong performance, thus adding fundamental value to the counters. Over the last 9 trading days market has continuously appreciated 117.8 points or 9.8%, as the ASPI closed at 1321.2 points on Friday. Furthermore activity levels have improved considerably, as some of the High Net Worth Individuals (HNWI) and institutions returned after a long absence. While most Blue Chips moved up with the market, some of the comparatively smaller counters such as Asian Cotton Mills, ACME, Walker and Grieg, Ceylon Leather Products etc. appreciated significantly. The market players are re looking at the market, retailers are playing an active role, while taking trading positions. Profit taking coupled with bargain hunting While placing a short-term positive out look on the market, we believe that the medium-term fundamentals would continue to depend on the progress of the peace talks, fiscal management and successful utilization of the donor funds. Furthermore the market is 60 points or 5% away from our target ASPI of 1381 points, thus we advise the investors to take a mixed strategy of profit taking coupled with bargain hunting. Trade deficit slows down in February 2004 The latest external sector numbers released by Central Bank for February 2004 records the trade deficit at USD 89.3 million, which was lower than USD 121.6 million in February 2003. February exports remain flat compared with last year The export earnings in February stayed mainly flat with only a 0.5% growth to USD 390 million. The cumulative exports at the end of February was USD 850 million which was 10% above the cumulative last year of USD 772 million. February being the lean period for industrial exports, it saw a 4% decline for the month compared to last year. Within this the textile and garment exports were down 5% to USD 193 million from USD 201 million last year, machinery, mechanical and electrical equipment were down 22%, leather, travel goods and foot wear were down 39% and plastics were down by 4%. Nevertheless rubber based exports were up 23%, chemicals by 38%, diamond and jewellery by 0.3%, food and beverages up by 3% and petroleum products by 16%. Agricultural exports were up by 20% from last February. Within this tea exports were up 19% mainly due to export volume increase of 3.6 million kg over February 2003. Rubber exports were up by 45% due to strong price growth coupled with increased volumes. Earnings from coconut exports were also up significantly driven almost by increased volumes. Minor agricultural product exports declined by 8%. Imports drop by 5%. February imports fell by 5% to USD 480 million compared to USD 507 million in February 2003. The cumulative imports at the end of February were up 5% to USD 1,091 million compared to USD 1,038 million last year. The decline was mainly seen in the areas of consumer and intermediate goods. Intermediate goods imports were down by 5% mainly in the categories of textiles, petroleum products, fertilizer and diamonds. Food imports were down by 30% due to the lower importation of wheat, sugar and fish products. Also due to the decline in products such as pharmaceuticals etc, the non-food consumer goods category was down by 4% compared to corresponding month of the previous year. Nevertheless the investment goods category grew by 26%. This was mainly driven by machinery imports that grew 16%, building material that was up by 27% and transport equipment imports that were up by 64%. The cumulative deficit at the end of February 2004 stands at USD 241 million in comparison to USD 266 million last year. Commercial Bank results for 1Q FY2004 Earnings down 16%, after preference dividend Commercial Bank released its results for the 1Q FY2004 recording a 16% decline in profit attributable to ordinary shareholders, after consolidating the Bangladeshi operations. Total interest income showed an increase of 4.5% to Rs. 2 billion, on the back of an impressive 42% growth (YoY) in the loan book. However this growth could be mainly attributed to the inclusion of loans from Bangladeshi operations, which the management attributed approximately 10% of the total loan book size. Meanwhile the loan book grew by 7% compared to December 31, 2003. The Bank benefited from the low interest rate regime as the net interest income jumped up by 14.8% to Rs.1.05 billion, as a result of a 5% reduction in the interest expense. Foreign Exchange profit jump Foreign exchange profit jumped up 84% to Rs.170 million, as a result of strong volume growth and marginal appreciation in the rupee, compared to the same period of last year. Other income, which comprises of fee based income from trade finance, income from investments, gain on realized capital gains and recovery of bad debts, increased by 47% to Rs. 341 million compared to corresponding quarter of FY2003. As a result of such growth, the Group recorded a 25% increase in total revenue to Rs. 1.56 billion. Cost to income ratio; a noteworthy increase Operating expenses grew by 48% to Rs.969 million, largely due to a 54% increase in other overheads, a 59% increase in personnel costs and the inclusion of the expenses in Bangladeshi operations. The increase in personnel cost was largely due to a Voluntary Retirement Scheme (VRS) amounting to Rs. 25 million and wage increases as for the collective agreement with the employees and performance based rewards. However management emphasized that these increases are normally visible during the first quarter of the year. Furthermore the increase in the VAT rate from 10% to 15% too had an impact on the increase in costs. The considerable increase in expenses, resulted in a sudden jump in cost to income ratio to 62%, almost 10% higher than 1Q FY2003 ratio. Commercial is a bank renowned in maintaining a low cost to income ratio, as the ratio stood at 55% during FY2003, lowest among the listed commercial banks in our coverage. Provisions drop by 21% The Bank provisioned Rs.102.6 million during the period under review, 21% less than what it provisioned during 1Q of FY2003. Commercial Bank wrote off Rs. 623 million during FY2003, which was described as a measure of prudence and a preparation to the implementation of the "Hair Cut" rule, by the management. We project the provisions for FY2004 to be Rs. 618 million. Bottom line dips due to higher tax provision and increased preference dividend Profit before tax was up by 11% during the period under review, while the income taxes were up 63% and preference divided increased by Rs. 26 million. As expected by us, effective tax rate increased significantly to 37%, as the profits from off shore operations taxed at 0% earlier, are now taxed at 20%. As highlighted in our Economy Report, "The Budget 2004: the impact", we expect the effective tax rate of the commercial banks to jump up consequent to this move. However Seylan, HNB and Sampath may not feel the impact in the same manner as for Commercial, since they have better organized their tax planning. Therefore the net profit attributable to ordinary shareholders was down by 16% to Rs. 318.9 million. The fully diluted EPS based on annualized earnings stood at Rs. 15.10 resulting in a PER of 11.2x. We project a 9.9% growth in earnings to Rs. 1.48 billion during FY2004, with a diluted EPS of Rs. 21.20, resulting in forward multiples of 9.9x. The earnings for FY2005 are expected to grow by 9.6% to Rs. 1.62 billion, reducing the PER to 8.8x. Bangladeshi operations to boost the bottom line immediately Commercial Bank's recent acquisition of Credit Agricole Indosuez's operations in Bangladesh is expected to further boost Commercial's bottom line in FY2004. We believe Commercial's clean loan book will grow at 18% during FY2004 and the debenture and preference share issues would provide additional funds for such growth. Therefore we maintain our Buy recommendation at the current price levels. The views based herein are expressed with no malafede 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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