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| Monday, 12 July 2004 |
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HNB Stockbrokers' weekly market review: Market holds despite bomb explosion The bomb explosion in Colombo did little damage to an already active market, as the investors continued to maintain the confidence on the future progress of the peace process. Speculative interests in small and medium caps continued during the week and the retailers were the major contributors to positive movement in the Colombo bourse. The ASPI gained 2.4 points (0.18%) but the MPI lost 17.4 points (-0.84%) to end the week at 1,368.7 points and 2091.5 points respectively. Weekly turnover was Rs.1.4 billion at a daily average of Rs. 282.7 million was a drop compared to Rs.510 million in the previous week. Foreigner's ended week as net buyers with a net foreign inflow of Rs. 60.8 million. Vanik Incorporation,Ceylinco Seylan, Colombo Land, Ceylinco securities were among the counters in heavy demand. Urgent steps required towards reviewing peace process. Wednesday's bomb explosion looked an isolated event, even though it send mixed signals to a market that's future fundamentals heavy depend on a peace process between the government and the LTTE. While the LTTE denied the responsibility to the incident, other reports indicated that they would not remain silent forever, as the government was busy attending to Saturday's provincial elections. While we acknowledge that such incidents are part and parcel of a peace process, we insist that the government and the LTTE should take immediate steps towards revamping the peace process and to continue its strong commitment towards the Ceasefire Agreements (CFA). Furthermore if such incidents could be ironed out in a negotiation table, we believe that it would add more value, strength and understanding to the overall position of the peace process. It should be clearly noted that this is not the first incident of this nature since the commencement of the truce agreement in February 2002, as many killings, arms smuggling and sea battles have taken place in the North and East over the last two and a half years. Market warrants a technical correction When observing the steady 5% appreciation in the ASPI over the last month, we feel that a technical correction is still on the cards. However we do not expect a sharp fall in the immediate term, as the bargain hunters would start accumulating once the prices reach attractive levels. Furthermore we advise investors to stick to fundamentally sound counters and avoid some of the small retail stocks, which trade on sentiment without any sound fundamental support. Apollo Results for FY2004 Earnings in positive territory for the first time Apollo Hospitals turned profitable for the first time since inception, posting a net profit of Rs.5.6 million during the quarter ended March 31. However the marginal profit recorded during the last quarter failed to off set the cumulative loss of the first 9 months as the Hospital concluded its first 12 month financial year, recording a net loss of Rs.206.5 million. Furthermore it should be clearly noted that this loss has been arrived at after writing off a Rs. 211.8 million depreciation charge, whereas the same figure for 10 months to March 31, 2003, was a nominal Rs. 0.99 million. Steady improvement in revenue A quarter-on-quarter comparison indicates that revenue grew by 6.3% to Rs. 407 million during the 3 months ended March 31, 2004. This is largely due to the increased occupancy levels during the last quarter, as opposed to the 3rd quarter of FY2004. Apollo presently maintains an occupancy rate of approximately 75%, on the total operational rooms of 230. The Gross Profit before deducting the personnel cost, grew by 9.8% to Rs. 290.4 million during the last quarter compared to Rs. 264.3 million recorded during the previous quarter. Meanwhile the full year gross profit before personnel cost jumped 95.7% to Rs. 992.2 million, growing at a faster rate compared to 84.5% growth in revenue, backed by improved cost management. The wages and salaries dominated the cost structure as it represented almost 49% of the reported cost of sales of Rs.963.5 million. Apollo shows its wages and salaries under cost of services, as prescribed by the auditors. The gross profit after personnel costs increased to Rs.171.3 million, up by 23% compared to the quarter third of FY2004. As expected by us, the gross margins improved from 36% to 42% during the period, as a result of extra contributions generated through the employment of additional consultants during the last quarter of FY2004. The gross margin for FY2004 stood at 35.2%, a considerable recovery after dropping to 27.9% during the second quarter of the financial year. High depreciation charge to continue Apollo posted a Rs. 181 million, operating profit before depreciation during FY2004, after recording a loss of Rs. 74.5 million during FY2003. QoQ the same figure showed a 100% improvement to Rs. 96.8 million, backed by better-cost management that held the operating expenses almost flat compared to previous financial year. As expected the Hospital wrote off a depreciation charge of Rs. 211.8 million during the year, and this made a direct impact on the bottom line, which turned to a negative. This is the first year that Apollo wrote off a full year's depreciation and we expect the depreciation to be at the same levels during the coming years. The Hospital recorded an operating loss of Rs.30.2 million during FY2004, but reduced the cumulative loss as a result of a Rs. 42.5 million operating profit posted during the last quarter. Finance expense decline but working capital issues still remain. Apollo, which carries Rs.966 million of Long-term Debt and Rs. 292 million of short-term debt, had a total interest burden of Rs. 176 million during the year. This showed a 9% decline in finance expense largely due to a debt re-structuring program. The finance expense declined from Rs.42.1 million to Rs. 36.9 million during the last quarter of FY2004 as opposed to the third quarter, as its average long-term interest cost reduced from 16.5% to 15%. The bank overdrafts are costing the company 13% at present, but are expected to reduce fractionally after the completion of the debt restructuring. After charging the finance cost Apollo recorded a net loss of Rs.206.5 million for the FY2004. Meanwhile the hospital broke even during the last quarter of FY2004 to post a net profit of Rs.5.6 million, showing clear signs of improvements. However, the wages and administrative expenses are still above our original expectations, and the corresponding revenue growth has not been factored in our forecast. Earnings to grow starting 2nd Quarter FY2005 Despite failing to meet our original break-even target of mid FY2004, hospital has marginally broken even during the last quarter of FY2004. In our view, once surpassing the break-even point, earnings are expected to grow strongly, on the back of the revenue growth. However the past trends indicate that the first quarter has always performed poorly, thus we do not expect the on going quarter to record considerable growth. We expect the revenue to grow by 30% to Rs. 1.94 billion during FY2005, and post a net profit of Rs. 88.9 million for the year. Based on such earnings EPS stands at Rs. 0.57 yielding earnings multiples of 18.9x. However earnings are expected to show significant improvement during FY2006, with a 65.8% jump to Rs. 147 million. As a result the PER is expected to decline to 11.4x. Counter downgraded to a Long-Term Buy After almost two years of operation, the hospital has just reached the breaking even point and in the verge of entering the positive territory. However due to its high share capital of 157 million shares, the short to medium term earnings are insufficient to payout a substantial dividend. Forward earnings multiples are declining from 18.9x to 8.9x over the next three years. Our DCF-based fair valuation on the stock stands at Rs.20.90 per share. Therefore we recommend Apollo, as a Long Term Buy. A more detailed analysis on Apollo would be made available in our upcoming research report on Sri Lanka Healthcare Sector. Distilleries results FY 2004 The FY2004 results of Distilleries recorded a Net Turnover growth of 73% to Rs. 10.74 billion compared to Rs. 6.2 billion during last year. The Food and Beverage segment grew by 19% to Rs. 4.3 billion, SLI contributed with Rs. 3.6 billion to the top line, the plantation sector brought in Rs. 2.49 billion, the textile sector contributed with Rs. 350 million The net earnings to shareholders for FY2004 stood at Rs. 2.218 billion, up 152% from last year. At a share price of Rs.25.25 and an EPS of Rs.7.39 the PER stood at 3.42x. The NAPS was at Rs.20.28 giving a PBV of 1.24x. Our forward earnings forecast for DIST for the FY2005 stands at Rs. 1.826 billion. This results in an EPS of Rs. 6.09 and at a market price of Rs. 25.25 this gives a PER of 4.1x We still see the counter very attractive at 4.1x compared to the market. DIST diversifying in to insurance justifies it being ranked higher than the historical PER range of 1.9x - 4.2x that it has traded over the last five years. Thus we maintain our recommendation, a Long-Term Buy. 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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