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| Monday, 23 August 2004 |
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HNB Stockbrokers' weekly market review: Turnover level remains flat The ASPI showed a down ward trend, ending the week on 1378.3 points, down 63.6 points or 4.41% from last Friday's close. This can be mainly attributed to a technical correction. Meanwhile the Milanka Price Index (MPI) also dropped by 82.5 points or 3.84% to end the week at 2067.8 points. Foreign purchases for the week amounted to Rs. 251 million while the sales totalled to Rs. 57.4 million resulting in a net outflow of Rs. 193.6 million for the week. Foreign participation during the week was at 15.14% of total activity. Turnover levels mainly remained flat during the week showing slight fluctuations. On Wednesday and Friday there was a considerable increase in turnover due to Rs. 196.8 million and Rs. 159 million worth of DFCC shares being traded. The counters which were heavily traded during this week were Colombo Land, Vanik Incorporation, CT Land, Blue Diamonds and Ceylinco Seylan. Rising oil prices dampening economic growth Global oil prices reached an all time high of US$48 per barrel, causing serious concerns in cost of living. Last week government increased the diesel prices by Rs. 4 per liter. If the oil prices continue to show an upward momentum, it is likely that both petrol and diesel prices would be subjected to a further hike. The rising inflation will threaten the low interest rate scenario in the coming months, thus forcing the Central Bank to re-look at the repo rates at the next monitory review. We still maintain our view that a 0.5%- 0.7% minimum rate hike is on the cards towards the last quarter of the year. Market to remain mixed The indices have dropped almost 100 points or 7% during the last 3 weeks, as the buyers have been absent amid profit taking and macro uncertainty. We believe that some buying pressure can be expected once the counters return below their fundamental value. Considering our end year index target of 1381.7 points, we feel that market warrants a further correction but expect the indices to remain volatile with buying pressure returning towards selected counters. NDB results for 1H FY2004 Earnings down 21% National Development Bank (NDB) registered a 21% decline in profit during the 6 months to June 30th 2004, compared to the corresponding period of the previous financial year. The net profit for the 1H stood at Rs. 433 million after consolidating both NDB Bank and Eagle Insurance. Consolidation of NDB Bank signalled a significant turn in the Group's top line, as the net interest income jumped up 24% to Rs. 1.16 billion. However the Bank suffered a 25% dip in net interest income, in the back of a 29% drop in total interest income. This was mainly due to flat interest margins and the slower growth in Bank's loan book. However Group loan book increased by 39% to Rs. 31 billion as a result of consolidating NDB Bank's loan book. This is despite the absence of the leasing portfolio of Mercantile Leasing Ltd (MLL), which NDB disposed during mid 2003. NDB disposed some of its equity portfolio, generating capital gains of Rs. 188 million, 9% lower than its capital gains recorded during the 1H of FY2003. Lease income declined by 52% to Rs.21.4 million, due to the absence of income from MLL, compared to the corresponding period of last year. Other income jumped up 50% to Rs. 308 million with the inclusion of NDB Bank's and Eagles contributions. This resulted in an 8% growth in non-interest income to Rs. 524 million. NDB has included Rs. 22 million as income from Insurance business under other income, as a result of its recent acquisition of Eagle Insurance. We believe that the contribution from Eagle would improve towards the latter part of the year, as bulk of the insurance income would be recognised once the actuary valuations are conducted. During the period NDB provisioned Rs. 62 million worth of bad loans, 78% less than what it provisioned during the corresponding period of FY2003. The management attributed this as a positive consequence of, prudent provisioning carried out by the Bank over the last 2 years. Operating expenses grew by 129%, as a result of consolidating expenses of Eagle and NDB Bank, thus profit before tax remained almost flat at Rs. 735 million. While 10% VAT surcharge increased to 15%, the VAT liability shot up to Rs. 102.5 million curtailing the profit growth. Bank's deferred tax reversal of Rs. 48 million managed to off set some part of the impact, but we do not expect the deferred tax reversal to be large as what it was last year (Rs. 113 million), since the depreciation and capital allowances rates are now almost similar to each other. However NDB still carries a deferred tax liability of Rs. 102 million in the balance sheet. Earnings dip but expected to improve towards the latter part As a result, the net profit attributable to ordinary shareholders dipped to Rs. 433 million, down by 21% compared to 1H of FY2003. As expected by us, the profit growth in core banking activities slowed down during the quarter and comparatively lower contribution from Eagle during the early part of the year further dampened the profit growth. We forecast a 4% growth in the bottom line to Rs. 1.17 billion during FY2004, with forward earnings multiples of 7.1x. Furthermore we project a moderate growth of 7% and 11% in earnings over the next two financial years, with the Forward EPS for FY2006 reaching Rs. 25.80. NDB Bank consolidation already showing positive signs NDB acquired over 80% of NDB Bank, thus making it a subsidiary for consolidation purposes. However the merger is yet to receive parliamentary approval. Initially, NDB - NDB Bank merger was expected to receive parliamentary approval by late 2003, but according to the latest developments this may be further delayed to at least till the end of 2004. Management estimated that the merger would take place within 2 to 3 months from the date of parliamentary approval, as preliminary work on the valuation process has started. Therefore we feel that a more prudent time frame for the merger would be towards the first quarter of 2005. Furthermore we believe that NDB would show strong commitment towards diversifying into commercial banking, as this market remains heavily competitive. Therefore the two Banks should mainly focus on the synergies available, while riding towards its long term goal of becoming a strong financial power house. Maintain our optimism in the long run Forward earnings multiples are expected to decline from 7.1x to 6.0x over the next 3 years. The counter is trading 1.0x of its forward book value of Rs. 157.89 for FY2004. Despite the future of the merger and its outcome still being uncertain, we feel that NDB has already strategically positioning itself as a diversified financial institution. We therefore maintain our recommendation on NDB, a Long Term Buy. Recent currency depreciation to affect LMF A major portion of LMF's cost of sales constitute, CIF charges on imported milk powder. Which would be adversely affected by the recent rupee depreciation against the dollar. With the currency depreciation taken into account the revised forecast for cost of sales stands at Rs. 1781.6 million, an increase of 2.3% compared to our original forecast. We forecast a 2.8% increase in turnover, which is a 0.8% increase from the previously predicted turnover growth of 2%. Making the revised turnover estimate to stand at Rs. 2250.3 million. The net impact of the rupee depreciation, would be to reduce previously forecasted profits for 2005 by 11.84% to Rs. 91.6 million. Despite the downward revision in earnings, we maintain our optimism on LMF in the long term, as our recommendation was mainly based on the implementation of the "Danida" Project and its additional contributions to the bottom line. We retain our recommendation, a Long Term Buy. The views based herein are expressed with no malafede intentive 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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