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| Monday, 3 January 2005 |
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Emerging from the tidal waves - Update Banking Sector It is understood that none of the Commercial Banks have faced a sizeable loss in infrastructure, except for some issues in selected branches in the affected areas. However we believe that the banks with a sizeable exposure in their loan books to these areas would be under the threat of increased non-performing loans. Furthermore in the event of an interest rate hike, we believe that the banks with an exposure to bond trading portfolios being affected negatively. Overall the banking sector is faced with a mixed bag of goods resulting in a neutral impact. Hotel sector Most hotel properties in the southern coastal area (beyond Kaluthara) and the eastern coast have been damaged and are closed at this point of time. The tourists are redirected to the interior hotel resorts (which are anyway running at their full capacity and thus have limitations in accommodating additional numbers) and other safe locations or sent back to their countries. Furthermore an immediate impact on the arrival numbers would be felt since some operators have opted to limit the visitors to essential travelers and not bring in holiday makers for the moment since the industry may not be able to cope up with the numbers due to the sudden cut down in room capacity. Since this was the winter season most hotels were expecting a bumper season. The slowdown in earnings would be around 20% in a coastal hotel property while the general slowdown in the arrivals in to the country for about 2, 3 weeks will have an effect on the interior resorts and city hotels as well. To reconstruct these damaged hotel and resort properties and get them up and running again it would take around three to four weeks and afterwards we may see the arrival numbers recovering gradually. The cost of the reconstruction will be born by the hotels in the event that the insurance is not claimable (The insurance industry is awaiting a word from the international re-insurers as to whether the claims would be allowed or not since there are some discrepancies as to whether this incident qualifies for claims under the normal cover of natural disaster). The larger hotels or hotels connected to large groups would be better positioned to absorb the impact more comfortably. The spread of diseases as well as the low accessibility to most of the hotels due to the roads being damaged also add to the challenges faced by the industry. Construction Sector Since most of the hotel and other properties and public infrastructure facilities need to be reinstated immediately, there would be a sudden boost in the demand for construction activities. As a result companies that are in the building construction industry as well as the suppliers of raw material (cement manufacturers, sand suppliers etc.) may witness additional volumes of business activity. Health care sector The impact on the health care sector remains positive. With all major private hospitals operating satellite collection centers in many areas across the island we expect the hospitals to show better income in the areas of laboratory, surgical etc. Energy Sector The main concern in the minds of many investors was the impact the tsunami had on Lanka IOC, with the company possessing storage tanks in Trincomalee. According to the management the Trincomalee tank farm was unharmed and obtained minimal damages. The tank farm is situated such that the force of the waves would be broken due to a barrier, thereby, substantially reducing the force of the waves, which came inland. However we do expect some of the retail outlets situated within the effected areas to have been damaged. Around 5 free hold retail outlets have been identified as to being situated within the affected area. It is not certain whether all theses outlets were severely damaged. Apart from this the company also has exclusive agreements signed with dealer owned outlets, which may have got affected by the sudden flooding. Although numbers are not certain, we do not expect the damages to be quite substantial in monetary terms for Lanka IOC. Therefore any disruptions would be short lived and in our view would have minimal impact on the company's bottom line. Therefore we do not foresee any fundamental reason for a dip in stock price. |
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