HNB Stockbrokers' weekly market review: Positive corporate announcements boost investor confidence

The market remained bullish throughout the week, with the All share price Index (ASPI) and MPI, Milanka Price Index (MPI) showing considerable increases from last week's closing levels. Both indices declined notably on Monday but steadily regained thereafter.

The ASPI closed for the week at 1760.3 points showing an increase of 21.7 points or 1.25% above last week's closing level. While the MPI showed a 50-point hike or 2.23% increase to close the week at 2400.2 points.

Renewed interest was seen in Commercial bank shares, on the back of a 1 to 1 bonus announcement on Wednesday. The share peaked on Thursday to Rs. 265.00, nevertheless succumbed to profit taking to closing the day at Rs.235 per share.

The counter closed the week on Friday at Rs.235.50 per share, showing a 26% increase in share price compared to last week's closing price of Rs.187. Approximately 531,000 voting and 952,700 non-voting shares of commercial bank traded during the week.

Investor interest remained in Nawaloka counters with, approximately 13.8 million shares exchanging hands for the week. The stock traded at a high of Rs.8.00 and a low of Rs.7.00 for the week to close the week at Rs.7.50 per share.

The total turnover for the week stood at Rs.2.7 billion. While the average daily turnover stood at Rs.544.2 million, showing a 5.2% increase compared to levels seen last week.

Richard Pieris was the highest contributor towards turnover for the week, contributing approximately Rs.526.4 million. The counter traded at a high of Rs.180 a low of Rs.150 to close the week at Rs.165 per share, while approximately 3.4 million shares traded for the week.

Asia Capital also made a notable contribution towards turnover, contributing approximately Rs.269.8 million. Interest on Asia Capital shares rose amid the company selling off it's remaining 5% stake in Richard Peiris on Tuesday.

Approximately 12.8 million Asia Capital shares traded for the week, at a high of Rs.23.25 and a low of Rs.18.50 per share closing the week at Rs.21.25 per share.

Foreign purchases for the week stood at Rs.696.8 million, with the major portion of Rs.466.4 million coming on Tuesday alone, with the sale of Asia Capital's stake in Richard Peiris to a foreign entity.

Foreign sales stood at Rs.314.3 million, resulting in a net inflow of Rs.382.5 million for the week.

Foreign participation for the week stood at 18.7% of total activity, showing an improvement from participation levels seen last week of 11.3%. Nawaloka, Asia Capital, Tess Agro, Royal Ceramics and Ceylinco Seylan were the most heavily traded stock for the week.

A slow down in Q4 2004, economic growth

Economic growth continued the declining trend, as the 4Q 2004 managed only a 4.4% improvement, with Agriculture sub sector recording yet another contraction (3.2%). In fact the Agriculture sub sector ended in negative growth in all quarters of 2004, other than in the second quarter, thus showing its vulnerability to the uneven weather conditions. Services and construction sub sectors continued to dominate the economic activity as both sub sectors grew by 6.2% respectively.

According to the 4Q data, the Sri Lankan economy has posted a 5.2% growth in GDP during 2004. These results do not reflect the overall impact of the tsunami devastation, as only the last week of the quarter was affected by the Boxing Day tragedy.

We believe that the real impact of the tsunami, to be reflected for the first time in 1Q 2005 results. Our projections indicate a 3.6% growth in the economy during the 1Q 2005 but gradually improving during the rest of the year, thus enabling the GDP to post a 4.9% growth for 2005..

Point to point inflation slow down

Meanwhile, the point-to-point inflation for March stood at 15.5%, slightly below 15.9% recoded in February. However the annual average inflation measured by the CCPI, jumped up to 11.1% by the end of March, up by almost 1% compared to 10.1% recorded as at the 12 months ended in February.

We expect the point-to-point inflation to rise by 14.1% in April amid the festive season, thus pushing the annual average to 12.5% by mid year.

However if the oil prices take a breather towards the 2nd half of the year, we expect the inflationary conditions to be better controlled in the latter part of the year.

However the annual average inflation is still expected to stay in the range of 10% by the year-end.

Interest rates under pressure

With the average annual inflation expected to cross 12% within the next few months, we feel that the interest rates are currently facing upward pressure. The repo rates have been maintained at 7.5% since last November but we expect at least a 0.5% - 1.0% increase in policy rates over the next two monetary reviews.

This may be inevitable given the prevailing wide gap between the inflation and the interest rates, creating an unhealthy real negative return for the depositors. Furthermore such a rise in interest rates may control the credit growth thus enabling some control over the escalating inflationary conditions.

Rupee holds its ground

Sri Lankan rupee continued to hover around Rs.99.30 - Rs.100.00 range, as the traders remained optimistic on the likely dollar inflows to the country. According to a Central Bank Press release, a sum of Rs.11.2 billion has been received by the Government, non-Governmental Organizations and others in Sri Lanka, as private foreign and local donations through banking channels towards tsunami disaster relief. However with the foreign aid expected flow into the country, we envisage the exchange rate to hold its depreciation in the range of 3%.

Investors remain bullish

Despite concerns in the macro economy, the investor sentiment remained positive, backed by market friendly corporate announcements. Commercial Bank's bonus announcement added extra muscle to the market, as investors revisited fundamentally sound counters. The appetite for penny stocks continued but at a relatively lower pace, as the extraordinary price increases gradually disappeared.

We believe that the present market activity would continue for yet another week, with selected counters still moving in the positive direction. While we do not rule out the possibilities of profit taking in the coming weeks, the indices are likely to remain volatile in daily trading.

Commercial Bank announces 1 for 1 bonus issue

Commercial Bank announced a 1 for 1 bonus issue for both its voting and non-voting shares on Wednesday. Commercial has been continuously increasing the size of its share capital, as we observe a 26.86 million share or 62.8% increase over the last two years.

Market reacts to Bonus issue

Theoretically the share should drop to Rs.117.50 (the theoretical Ex-Bonus price) after the bonus issue based on current price level. The Commercial's shares started trading at Rs.250.00 yesterday.

During Commercial's bonus issue April 2003, the share traded at Rs.190.00 just before the bonus, and dropped to Rs.166 immediately after the bonus issue. The issue was 1 for 3 and therefore the theoretical ex-bonus price was Rs. 142.50 per share. The price picked up to Rs.217 within the course of a few weeks, backed by favourable market conditions. We believe that Commercial's growth in earnings coupled with its strong goodwill is likely to prevent the price dipping below the theoretical ex-bonus price.

Commercial remains a well managed bank, with some of the best operating metrics in the banking sector. Notably, it has a very clean loan portfolio owing to its policy of prudence and good cost controls..