Market correction short-lived

The market remained volatile for the week, with both indices falling substantially on Wednesday. The ASPI dropped below the 1900-point mark to 1893.5 points, while the MPI dropped to 2627 points. However the market picked up, with the ASPI closing at 1923.6 points on Friday, up by 1.9 points or 0.1% compared to the previous week's closing levels.

While the ASPI was marginally up compared to the earlier week, the MPI closed at 2672 points showing a notable decline of 36.3 points or 1.34%. The main reason for ASPI to rise had been the price appreciation seen in Carsons share, which has a high market capitalisation. (Rs. 20.88 billion, 4th highest in the market) Carsons counters saw its price shoot up by 47.5% amid a 5 for 1 bonus announcement on Tuesday. The counter traded at a high of Rs. 22,000 and a low of Rs. 6,600, to close at Rs. 20,500 per share. However only 800 shares of Carsons traded.

Asiri Medical Services (AMS) counters became the highest traded stock in the back of a share split, which saw Rs. 10 par value shares being split to Rs. 1.00 par value shares. The counter traded at a high of

Rs. 3.50 and a low of Rs. 3 per share.. Approximately 4 million of AMS counters traded contributing Rs.14.1 million towards weekly turnover.

Commercial Bank traded ex-bonus on Tuesday, closing the day at Rs. 132 per share. The counter managed to contribute Rs.33.1 million towards the week'sturnover. Approximately 197,000 counters traded for the week to close at Rs. 130 per share.

The total turnover for the week stood at Rs.1.3 billion. While the average daily turnover stood at Rs.260.5 million, showing a marginal improvement from earlier week's level of Rs.251.6 million. Foreign investors remained net buyers amounting to Rs.63 million.

Foreign purchases stood at Rs.198 million, while the foreign sales stood at Rs.135 million. Foreign participation was 12.8% of total activity. Among the most heavily traded stocks were Asiri Medical Services, Blue Diamonds, SLT, Nawaloka and Ceylinco Securities.

Corporate Earnings mixed

Market went through a correction during the early part of the week but recovered during the latter part, despite activity levels remaining moderate. Many investors were expecting some positive developments in the peace front once the President returns from India. Thus some preferred a wait and see approach.

Meanwhile, the corporate earnings released over the last few weeks were mixed, with hotel and related companies posting a severe slowdown in earnings during the quarter ended March 31, 2005, in the back of the impact from the Tsunami devastation.

These included the Leisure sector of JKH, Nuwara Eliya Hotels (Grand Hotel Nuwara Eliya), Mahaweli Reach Hotel, Sigiriya Village, Lihiniya Surf Hotel - Bentota, Ceylon Hotels Corporation, Tangerine Beach Hotels, Marawila Resorts and Kandy Hotels. We believe that the resort hotels would continue to suffer a slowdown in earnings over the next few quarters, until the Tourism Industry makes a recovery towards the latter part of the year.

Meanwhile, the net exporters also suffered a slowdown during the quarter ended March 2005 due to the rupee appreciation and these included the above hotels, Hayleys etc. However, the net importing companies such as Lanka Milk Foods, Caltex and Hospital sector benefited from the appreciation in the rupee, as exchange gains enabled to boost their bottom line.

Medium term prospects still remain positive

With more corporate results to be released in the coming weeks, we believe that the overall market earnings growth would settle down around 10% during the first quarter of 2005, as against our original target of 15%. However, we expect most corporates to recover from the initial shocks of the Tsunami and meet our full year target earnings growth of 15.7%. Overall we expect the market activity to improve this week but the indices will continue to swing in a wide range amid prevailing macro uncertainty and mixed corporate results. However, we place our optimism that some positive developments would take place in the peace process in the coming weeks, thus advise the investors to carefully monitor such developments.

JKH results for FY2005

John Keells Holdings (JKH) recorded a 20.6% increase in net profits during the year ended March 31, 2005, supported by Rs.185 million surplus insurance claims and in the absence of an Rs. 756 million Voluntary Retirement Scheme (VRS).

The growth momentum showed a sizeable slow down during the last two quarters, as a result of sluggish performance in Food and Beverages, Information Technology, Financial Services and other minor areas. The fourth quarter earnings were hampered by the slowdown in Leisure Sector due to the Tsunami impact.

The transportation was the key contributor towards groups operating profit with Rs. 1.8 billion, up by an impressive 63% from FY2004. However prominence of the Transportation sector is likely to reduce in

FY2006, if the auditors allow JKH to recognise the contributions from the new luxury apartment project (Monarch). We expect the Real Estate sector to contribute Rs. 862 million in FY2006 (if contributions are recognised), representing 18% of the group PBT.

We project the net profits to grow by 48.4% to Rs. 3.38 billion during FY2006, with increased contributions from the Real estate sector. Based on increased capital structure the fully diluted EPS for FY2006 is at Rs.8.49, resulting in a PER of 15.4x.

The recent share issues have added more liquidity to the stock, increasing the free float market capitalisation to Rs. 33.9 billion (US$340 million). Forward earnings multiples are expected to decline from 15.4x in FY2006 to 10.8x by FY2008. We maintain our recommendation, a Buy.

NDB results for 1Q FY2005

National Development Bank (NDB) registered a 4.3% increase in profit during the three months to March 31, 2005, compared to the corresponding period of the previous financial year. Total interest income jumped by 22% to Rs. 1.18 billion, resulting the net interest income to increase by 20%. However this was mainly due to a massive 56% YoY loan growth due to the consolidation of NDB Banks loan book. A sharp increase of the operating expenses by 45%, was mainly due to the jumps in other operating expenses and personnel costs resulted the cost to income ratio (including VAT) to rise to 70.8% in 1Q 2005 compared to 58.5% in the corresponding period last year. The NDB announced the details about the swap arrangement for the merger (likely in August) with NDB Bank. The shareholders of NDB Bank (excluding NDB) will be entitled for one share of NDB for every 5.6 shares they hold in NDB Bank.

We forecast an 6.3% growth in the bottom line to Rs. 747 million during FY2005, with forward earnings multiples of 11.7x and an EPS of Rs.13.90. Furthermore we project a steady growth of 10.3% and 27.3% in earnings over the next two financial years.

The forward EPSs for financial years 2006 and

2007 will stand at Rs. 15.30 and Rs. 19.50 respectively. Forward earnings multiples are expected to decline from 11.7x to 8.3x over the next 3 years.

We therefore maintain our recommendation on NDB, a Long Term Buy.

Durdans results FY 2005

The full year results for FY2005 were recently released showing a 27.6% Year on Year (YoY) growth in net profits. The bottom line profits for the year were benefited by a 30.9% growth in turnover to stand at Rs. 910.5 million, compared to last financial year's turnover level. The finance cost for the full year of FY2005 stood at Rs. 13.62 million showing a decrease of 28.5% compared to last financial year.

According to the hospital they expect the first phase of their expansion program to come to an end by August this year. With the 1st phase, 35,000 square feet would be added on to the existing building, resulting in the inclusion of an 8 bedded cardiac surgical intensive care unit and the expansion of room capacity by 27 rooms.

Our forecast for FY2006 stands at Rs. 107.8 million, resulting in an EPS of Rs. 4.16 and a PER of 7.9x based on current prices. We retain our rating for Durdans as a Long Term Buy.