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| Monday, 2 August 2004 |
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HNB Stockbrokers' weekly market review Positive momentum continues to hold The ASPI continued its positive momentum during the first three trading days before going through a slight technical correction on Thursday. But with the support of strong activity in mid and small caps the ASPI closed the week on 1454.4 points which was 13.7 points or 0.95 per cent up from last weeks close. Fort Land, Vanik Incorporation, Blue Diamonds, Colombo Land, CIT, CFI were among the small and mid caps that drove the market. In addition to market witnessed renewed buying interest towards SLT, with strong interim results expected to be released in the coming weeks. Meanwhile, the Milanka Price Index (MPI) gained 26.9 points (1.24 per cent) to end the week at 2192.4 points. Bourse continued its strong activity level as the weekly turnover was at a high of Rs. 2.26 billion at a daily average of Rs. 452.5million. Foreign purchases for the week amounted to Rs. 245.7 million while the sales totalled to Rs. 330.9 million resulting in a net outflow of Rs. 85.2 million for the week. Foreign participation during the week was 12.74 per cent of total activity, which was down from last weeks 21.9 per cent. Corporate Earnings still remains strong The corporate results released for the quarter ended June 30th remains strong, as such growth was influenced by the healthy economic growth witnessed during 2003 and 1st quarter of 2004. We expect the economy to grow at 5.4 per cent during 2004, still offering enough for the corporates to improve their earnings. Based on our estimated earnings of the stocks in our universe, we project a 14.9 per cent growth in earnings during 2004. After taking into account such growth, the market is trading 10.1x of its forward earnings. This still remains below most of the regional markets such as India (12.7x), China (13.9x), Singapore (13.5x), Malaysia (14.6x) etc. Meanwhile South Korean market trades (8.1x), below Sri Lankan market while Thailand and Indonesian markets trade at 10.6x and 10.7 of the forward earnings respectively. Most of the regional equity markets have shown improvements in the recent past, thus in our opinion Sri Lankan market could hold its prospective PER at 10.3x. Upcoming IPO's may boost investor enthusiasm Lanka IOC (Pvt) Ltd, Nawaloka Hospital and Housing Development Finance Corporation of Sri Lanka are set to make island's first share sales later this year. The three plan to sell stock worth Rs. 1.8 billion. We expect these upcoming IPO' s to further improve the investor enthusiasm, while adding momentum to the market. Selected counters still offer value We believe that further profit taking is still on the cards but a sharp decline in indices cannot be expected, since the bargain hunters would continue to step in once the fundamentally sound counters reach attractive price levels. Furthermore we continue to advise the investors to follow a bottom up approach, while focusing on selected counters that trade below their fair values. Hemas Holdings Ltd. 1Q FY 2005 results Hemas Holdings (Pvt) Ltd. (HHL) released the results for 1Q FY2005, posting a 31 per cent growth in revenue and an 11 per cent drop in earnings compared to 1Q FY2004 mainly due to the absence of Capital and exchange gains. Turnover up, backed by Personal Care, Healthcare and Strategic Investments HHL saw a turnover of Rs. 1.83 billion for 1Q FY2005 which was up 31 per cent over 1Q FY2004. The main contributors towards the revenue were Personal Care Sector with Rs. 792 million (43 per cent of total revenue) up 15 per cent over 1Q last year, Healthcare Sector with Rs. 541 million (29 per cent of total revenue) up 37 per cent over 1Q last year, Strategic investments with Rs. 358 million (19 per cent of total revenue) up 91 per cent over 1Q last year and Leisure with Rs. 90 million (5 per cent of total revenue) up 31 per cent over 1Q last year. The noticeable growth in the Healthcare Sector was mainly due to the new additions to Hemas' own branded product range as well as the inclusion of the Astra Zenica agency, which was not there during 1Q last year. In the Personal care category the growth was slower at 15 per cent after the 74 per cent growth achieved during the FY2004 since additional growth from a higher market share is at a slower pace. The Strategic investment segment top line grew mainly driven by the apparel sector volumes (Apparel constitutes bulk of the segment's turnover). The leisure segment grew 31 per cent mainly due to the fact that Serandib Hotel returned to operations, after being closed during 1Q FY2004. Since this is the off-season the contribution from this segment is traditionally at a low. We expect the Leisure segment to bring in Rs. 570 million for the full year based on our projections for the upcoming winter season (18 per cent growth over FY2004). Profits down by 11 per cent The operating profit for the year was Rs. 163 million down 2 per cent over 1Q last year. This was largely due to the absence of Capital gains (from sale of Apollo shares) as well as the exchange gains that were booked by Hemtours during 1Q last year. Furthermore the Strategic investments had a loss of Rs. 2.3 million due to power sector expenses being included, while the revenue generation from power would only be coming in late 2004. Meanwhile the apparel sector is still not yielding sufficient bottom-lines. The administration costs were up 23 per cent to Rs. 259 million and the distribution expenses increased by 24 per cent to end up at Rs. 226 million. This is relatively lower compared to the revenue growth of 31 per cent achieved for the quarter. Based on a market price of Rs. 96.50 and an annualized EPS (fully diluted) of Rs. 5.56 the PER stood at 17.36x. The Net Assets per share was at Rs. 33.91 yielding a PBV 2.85x. We maintain our earnings forecast for the group at Rs. 698 million for FY2005, up by 13.9 per cent compared to Rs. 613 million recorded during FY2004. This results in an EPS of Rs. 8.91 and yields a PER of 10.83x. With the power sector contributing for the whole of FY2006, the earnings are expected to grow by a further 29 per cent to Rs. 900 million yielding a forward PER of 8.4 at an EPS of Rs. 11.49. Further the company's return on assets and equity still remain the best among the conglomerates. Hemas ROE for FY2004 was 28 per cent in comparison to 14 per cent for JKH and 20 per cent for Spence. Our long-term fundamental outlook We feel that the long-term earnings growth would be sustained with the power sector also kicking in late 2004. According to the company the progress of work on the power plant has been steady and ahead of schedule. They are looking at commissioning the plant by November 2004, thus the FY2005 will be impacted with one quarter's earnings from power. Subsequently from FY2006 onwards we see the full impact of the power sector earnings coming in. On the Leisure end, there would be some expansions and refurbishments coming up during the summer of current financial year at Hotel Sigiriya and Dolphin and the capital outlay would be around Rs. 200 m. These would be ready for the upcoming winter season and a positive impact on earnings can be expected commencing FY 2005. Due to the healthy growth prospects, especially through the contributions from the power sector our projected the forward earnings multiples are coming down to 8.4x within the next two years. Thus we maintain the stock as a Long-Term Buy. The views based herein are expressed with no malafied 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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