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| Monday, 19 July 2004 |
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HNB Stockbrokers' weekly market review Market warrants a further correction The Colombo bourse continued its positive momentum during the first four trading days before going through a technical correction on Friday. Speculative interests into small and medium caps continued to the second week which remained to be the major contributor towards the positive activity. The ASPI and MPI gained 27.9 points (2.04%) and 42.8 points (2.06%) to end the week at 1,396.6 points and 2116.9 points respectively. Weekly turnover was at an encouraging Rs. 2.6 billion at a daily average of Rs. 519.9 million, which was an improvement compared to Rs. 282.7 recorded last week. During the week John Keells Holdings acquired a 50.3% stake in Mercantile Leasing Ltd (MLL) for Rs. 358.9 million. In addition to this large volumes of Distilleries, SLT and LMF were traded during the week. Meanwhile the plantation stocks picked amid the improved earnings expectations. The sector index rose by 24 points or 11.2%, as the increase in tea prices and depreciation in the rupee is expected to boost the sector earnings. The foreign investors cashed in more than they purchased, which gave a net foreign inflow of Rs. 45.7 million. Foreign purchases amounted to Rs. 547.4 million, while the sales were at Rs. 593.1 million. Foreign participation was at a high 21.9% of weekly turnover. The heavily transacted stocks during the week were Mercantile Leasing Limited (MLL), Distilleries, SLT, Fort Land, and Blue Diamonds. Market moves in the absence of bad news Both indices continued the upward momentum in the absence of negative news, while going through a minor correction towards the later part of the week. Macro economic position remained unchanged, with the Central Bank committing to continue the low interest rate scenario. Accordingly the Repo rates were maintained at 7% at the monthly review, despite the increase in the inflation. We believe that the interest rates would not come under pressure at least until mid September, but envisage a rate hike towards the last quarter of 2004 considering our full year inflation forecast of 6.8%. We expect the positive momentum to continue in the market, as long as the peace and the political front keep out of substantial negative developments. Furthermore, we still believe that the market warrants a further correction in the coming weeks and advise the investors to be cautious when committing fresh funds and to follow a bottom up approach whilst picking fundamentally sound counters. Durdans results FY 2004 Earnings up by 13.8% Durdans Hospital released its results for the FY2004, recording a 13.8% growth in net profits to Rs. 69.3 million. The turnover grew by 16.4% to Rs. 695.7 million, supported by increased occupancy rates through the remodeling and modernisation program done last year. Gross profit increased from Rs. 338.6 million to Rs. 392.2 million by 15.8% during the period under review. Although gross profit margin has been maintained at 56.5% operating profit margin has declined from 16.2% to 13.5% due to increase in administration costs. The group's administration cost has increased from Rs. 220.9 million to Rs. 253.9 million by 14.95%. This can be attributed to the increase in staff costs together with the jump in the depreciation cost. Durdans operating profit has shown a slight dip by 2.8% to Rs. 93.9 million from Rs. 96.6 million in FY 2003. Debt settlement reduces finance cost The Durdans group has used the recent IPO proceeds to settle a large part of its liabilities. Approximately Rs. 120 million has been settled during the last year, thus reducing the total liabilities to around Rs. 35 million as at March 31. As a result the finance cost has declined by 37.5% to Rs. 19 million from Rs. 30.4 million, reported during the previous year. Due to this drop, the net earnings grew by 13.79% to Rs. 69.3 million from Rs. 60.9 million in the previous year. This was in line with our earnings projections of Rs. 68.7 million for FY2004. Accordingly, EPS based on FY2004 earnings stands at Rs. 2.68 while at a price of Rs. 24.00 the share is trading at PE multiples of 8.96x. Durdan's book value of Rs. 28.31 yields a PBV of 0.85x. We expect the revenue to grow by 15% to Rs. 800 million during FY2005, and post a net profit of Rs. 80.8 million for the year. Based on such earnings EPS stands at Rs. 3.12 yielding earnings multiples of 7.69x. Furthermore earnings are expected to grow to Rs. 94.7 million during FY 2006 with PER declining further to 6.56x. Long-term expansion on the cards Durdans plans for a further expansion program which would increase the room capacity and improve the parking facilities. Presently, 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. Counter attractive in the long run Forward multiples are expected to decline from 8.96x to 6.56x over the next two years supported by increased earnings from the expansion project. Furthermore at a PBV of 0.85x based on a book value of Rs. 28.31 as at March 31, 2004, we rate the counter as a Long Term Buy. JKH results for 1Q FY2005 Sri Lanka's largest conglomerate, John Keells Holdings (JKH) recorded a 1088% increase in net profits to Rs. 537 million during the 1Q FY2005, in the absence of the Rs. 766 million Voluntary Retirement Scheme (VRS). While recording significant growth in almost all sectors, transportation and leisure sectors continued to contribute heavily towards group profitability. Meanwhile the food and beverages sector remained a concern, despite recording a marginal profit. We project the net profits to grow by 40% to Rs. 2.7 billion during FY2005, in the absence of a high VRS and full year consolidation of AHOT. Based on increased capital structure the fully diluted EPS for FY2005 is at Rs. 8.19, resulting in a PER of 13.2x. The forward multiples are expected to decline to 12.1x based on an EPS of Rs. 8.95 during FY2006. Recent share issues have increased JKH's share capital by almost 76%, improving its liquidity. We maintain our recommendation, Buy. Asian Hotels FY2004 results Asian Hotels and Properties (Pvt) Ltd. (AHPL) recorded a strong 374% growth in earnings to Rs. 576m during FY2004 Revenue grew by 105 % (excluding TransAsia 45% growth) to end up at a total group figure of Rs. 3.027 billion The total earnings after minority interest were up by 374% to Rs. 576 million resulting in EPS of Rs. 2.60. At a market price of Rs. 26.00 this gave a PER of 10.0x. The Net assets per share at the end of FY2004 were Rs. 35.95 giving a PBV of 0.72x. With the tax and concessions available under the BOI status for the AHPL we expect that the earnings contribution from the new apartment complex 'Monarch' would be significant in the coming years with better margins. We feel the stock is attractive as a Long-term buy. TransAsia FY2004 results TransAsia recorded an earnings growth of 52% to end up at Rs. 257 million for FY2004. The top line grew by 22% to Rs. 877 million driven mainly by the high occupancy levels, as well as a moderate increase in room rates The increased cash flow has enabled the company to settle part of the debt and thus the group finance cost has dropped by 47% to Rs. 40 million The net earnings of the company was up 52% to Rs. 257 million. At a market price of Rs 60.00 and an EPS of Rs. 5.15 this gave a PER of 11.65x. The Net assets per share stood at Rs. 65.72 giving a PBV of 0.91x. The refurbishment of the hotel would go ahead as planned with 200 rooms. Once the rooms are refurbished we believe that an increase in room rates would be justified, thereby increasing the hotel's earnings potential in the coming years. The views based herein are expressed with no malafide 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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