Momentum maintained for another week

MARKET REPORT: While the market started off on a sluggish note on Monday, it managed to gather momentum setting a new high of 2692.9 points on Thursday.

Similar to what was witnessed last week indices fell on Friday mainly driven by profit taking. The Budget for 2007 was read out on Thursday afternoon.

However the budget proposals did not capture any drastic implications towards given sectors, while in effect the proposals that influence the capital markets, seemed positive.

Thus while the market fell modestly on Friday we do not consider the fall as being a reaction to the new budget. Overall during the week the market witnessed a positive movement with the ASPI (All share Price Index) rising by 121.2 points compared to last week closing at 2564.8 points.

Meanwhile the more sensitive MPI (Milanka Price Index) observed a more steeper increase moving up by a sizable 229.8 points, closing the week on Friday at 3563.9 points.

Interest on Telecom giant SLT picked up this week with the counter becoming both the highest contributor towards turnover and the highest traded stock for the week. Foreign participation was high on the counter throughout the week, while the most part of 68.7 million shares were traded on Wednesday alone.

SLT contributed Rs.1.9 billion towards the day's turnover on Wednesday. For the week a total of 84.4 million shares traded contributing Rs.2.4 billion towards weekly turnover.

The counter traded within a range of Rs.29.75 per share and Rs.25 per share for the week while showing a 13% increase in share price to close at Rs.28.25 per share.

Investor appetite on JKH shares remained unfaltering with 11.2 million shares trading for the week. The counter was the second highest contributor towards weekly turnover, contributing Rs.2.2 billion. During the week the counter saw its share price rise by 9.8% WoW to close the week at Rs.196.50 per share.

The counter was seen hitting a peak of Rs.200 per share while trading at a low of Rs.176.50 per share for the week.

A significant price appreciation was seen in Distilleries shares rising by 20.3% compared to last week's close of Rs.70.25 per share, to close the week at Rs.84.50 per share on Friday.

The highest traded price for the week was Rs.92 per share while the lowest price was Rs.70 per share. Contribution towards weekly turnover amounted to Rs.388.8 million, while 4.8 million shares traded for the week.

While SLT stole the lime light this week, Dialog seemed to take the back seat with quantities traded falling notably compared to last week. Last week saw 32.9 million of Dialog shares trading compared to 19.8 million shares traded this week.

However the share price did pick up by 6.7% this week closing at Rs.24 per share. The counter contributed Rs.469.7 million towards weekly turnover, while touching a high of Rs.24 per share for the week.

Dockyard shares showed renewed interest this week with its share price appreciating and notable quantities of the counter trading.

The share price rose by 13.7% WoW, to close at Rs.35.25 per share on Friday, while 3.4 million shares traded for the week. During the week the counter was seen trading within a range of Rs.37 and Rs.30 per share.

Turnover for the week summed up to a significant Rs.7.5 billion, showing a significant 50% growth compared to last week, with Wednesday contributing the highest daily turnover of Rs.3.1 billion. Average daily turnover for the week amounted to Rs.1.5 billion.

Foreign investors remained net buyer amounting to Rs.1.5 billion this week, while foreign participation remained more or less stable compared to last week at 40% of total activity. Foreign purchases stood at Rs.3.7 billion an 18.3% rise compared to last week, while foreign sales observed a significant 144% increase to total Rs.2.3 billion.

Among the heavily traded stocks for the week were SLT, Dialog, JKH, Tokyo Cement (Non Voting) and Distilleries.

Market appreciated sharply during the week with investors looking to collect fundamentally sound blue chips. The activity levels also reach record high levels as foreigners dominated the week's trading. Overall during the week market gained by 4.7% compared to previous weeks closing levels.

The budget 2007 in an attempt add value to minority shareholders, imposed a new tax on companies that maintain a payout ratio of below 25%.

According to the budget proposal any company that pays dividends below 25% will be taxed 15% on the difference between 1/3 of the distributable profits for that year and the actual dividends paid during that year. Whilst this would provide a higher tax to shareholders, there has been mixed reactions from the market.

The new tax on retained earning will also have a major impact on companies that do not generate cash profits to maintain a minimum payout ratio as stipulated in the budget.

It is not stated in the budget whether a bonus issue could be used as an alternative to dividend payment in distributing profits to shareholders. In our opinion bonus issues should also be considered in arriving at the profits that have been distributed to the shareholders.

We believe that the budget will have a positive impact on the overall stock market operations. Budget proposals have identified certain key infrastructure development projects such as the expansion of the Colombo port, Construction of the second international airport in the country, setting up of new power plants and developing highways to sustain a high level of GDP growth.

We believe that if these proposed projects are implemented properly it would provide a further boost to the country's capital markets.

However, various infrastructure projects were identified in previous budgets as well but very few were actually implemented.

Therefore we stress the importance of implementing the projects identified in this year's budget without limiting those to mere statements in the budget proposal.

The market is likely to be volatile during the coming week with most investors eying for profit taking after last few weeks' attractive gains.

However we expect the foreign participation to remain high with some of the investors looking to pick up quantities of counters such as JKH, Dialog and SLT. We advise investors to look for trading opportunities in the marketplace and to look for regular profit taking opportunities.

"HNB Stockbrokers (Private) Limited has the sole copyright for this report and the informationand views contained cannot be reproduced or quoted in part or whole in any form whatsoeverwithout the written permission from HNB Stockbrokers (Private) Limited.