Market mixed amid profit taking

The week started on a positive note with both indices rising substantially, but the market took a breather towards the latter part of the week as both indices fell on Wednesday retaining a downward trend for the rest of the week.

The ASPI rose to a peak of 1768.4 points on Tuesday, but however closed the week at 1754.6 points, down by 5.7 points or 0.32% compared to last week.

Meanwhile, the MPI peaked on Monday standing at 2428.2 points. The index closed the week at 2413.5 points up by 10.9 points or 0.45% compared to last Friday's closing level.

Nawaloka counter saw its share price depreciate by approximately 10% this week closing the week at Rs. 6.75 per share. Approximately 11 million Nawaloka shares traded for the week at high of Rs. 7.75 and a low of Rs. 6 per share.

Apart from Nawaloka, Ceylon glass saw its price depreciating by 21.7% closing the week at Rs. 37, compared to last Friday's close of Rs. 47.25 per share.

Approximately 8 million shares traded for the week, with the major part of around 7.85 million coming in on Friday alone.

Ceylon Glass's parent company Gujarat Glass is currently in the process of divesting a 30% stake to a range of buyers. The counter was the highest contributor towards the weekly turnover, contributing approximately Rs. 290.5 million.

The weekly total turnover declined by 33% compared to last week, to stand at Rs. 1.82 billion.

The average daily turnover for the week stood at Rs. 364.6 million. Apart from Ceylon Glass, JKH contributed approximately 201.9 million towards weekly turnover amid renewed foreign interest on the counter.

Approximately 1.4 million shares traded for the week, while the share appreciated by a marginal 1.8% to close the week at Rs. 140 per share.

PABC bank made its debut on the exchange this week (on the second board) trading at a high of Rs. 40 on the first day it self. However prices declined to settle at Rs. 20.50 by the close of the week. Approximately 825 million Pan Asia shares traded for the week.

Foreign investors remained net sellers for the week amounting to Rs. 141 million, mainly due to the sales in Ceylon Glass Ltd. Foreign purchases for the week stood at Rs. 329.3 million, while foreign sales stood at Rs. 470.4 million.

The heavily traded stocks for the week were Nawaloka, Ceylon Glass, Asia Capital, Royal Ceramics and Tess Agro.

Opportunities for bargain hunting amid holiday sentiment

Market moved sideways after an early upward movement, as the indices went through a correction towards the latter part of the week. With the Sinhala and Hindu new year expected to take the center stage next week, investors are likely to be in a holiday mood.

Thus we believe that the overall activity levels would show a decline in the coming week. Furthermore profit taking may continue for another week, and we advise the investors to keep a close eye to capitalise on opportunities for bargain hunting.

LMF results 9 months

FY 2005 Earnings decline by 192.6%. Turnover grows by 3.6%.

LMF recently released its results for the 9 months ending December 31, 2004 posting a net loss of Rs. 48.5 million, showing a decline of 192.6% compared to the same 9 month period of FY2004. Quarter on Quarter however there was a 37.6% reduction in losses incurred, where the 3rd quarter loss stood at Rs. 17.2 million compared to the second quarter loss of Rs. 27.6 million.

The reduction in losses was partly due to an increase in turnover for the 3 quarter, standing at Rs. 611.4 million, showing a quarter on quarter growth of 6.03%. The turnover for the 9 months showed an increase of 3.6% compared to the corresponding period of last financial year, standing at Rs. 1.68 billion. According to the company, the increase in turnover had been as a result of increased demand. Demand for their milk powder brand Lakspray, which contribute approximately 90% to company turnover, has increased amid other well-known milk powder brands going in for a price hike.

The price increase made by other milk powder brands, had not been approved by the government regulatory body; as such the parties concerned have sought legal proceedings. LMF on the other hand has abstained from going to such lengths but pursued the option of a consumer authority backed price increase, which has failed to come about so far. LMF holds a substantial stake, in the Distilleries Company, which announced a 50% final dividend in January 2005. Thus the 4th quarter is expected to benefit from this estimated Rs. 19 million inflow of dividend income. We took into account the benefit from dividend income in our last projection. Thus we retain our full year finance cost projection at Rs. 12.9 million.

The company for the 9 months has made a loss amounting to Rs. 48.5 million, while for the 3rd quarter alone the company posted a loss of Rs. 17.2 million. Considering the historical trends, we expected a better performance during the 2nd half, in particular the 4th quarter of FY2005.

With LMF not receiving approval for a price increase, short to medium term outlook for the company remain grim as the current selling price stand below the cost, thus the company making a loss for every unit sold. Global milk powder prices in recent times have risen substantially, mainly due to a reduction in milk production. The prolonged drought seasons and increase in feed prices and popularity of high-protein diets have encouraged dairy farmers to sell their herds to beef production. Thus we have drastically altered our projections, from an expected net profit of Rs. 65 million for FY2005.

Our revised forecast stands at a net loss for the year of Rs. 41.9 million, with Rs. 19 million expected to come in as dividend income during the 4th quarter, reducing the impact of the operational losses incurred.

Forecasts for FY2006 expect a marginal profit of Rs. 14.9 million, based on the assumption that LMF would receive an approval for at least a marginal price hike mid way through FY2006. The EPS based on such earnings stand at Rs. 0.50, with an expected PER based on current prices of 38.7x. With LMF under performing our expectations, and the time line as to when actually the company would receive approval for a price increase being under clear uncertainty, we downgrade our recommendation to a hold.

However, we are currently evaluating the developments of the company and monitoring our recommendation where appropriate.