Miscellany

Investment in Ceylon Leather Products - A gold mine

V.I. Perera

Ceylon Leather Products PLC, the former Government owned Ceylon Leather Corporation is a leading company in the country manufacturing real leather for the past 70 years.

A modern shoe factory was built at Mattakkuliya in 1962 and a fully equipped tannery, the largest in Sri Lanka was built in 1970. The company was privatised in 1991 and quoted in the Colombo Stock Exchange in 2003.

The Company has been earning net profits for the past ten years except in 2005 and 2007 and the company faced liquidity problems in the recent past mainly due to the delay in receiving payment from major government buyers.

Financial implication

The company which is rich in assets relocated the office and factory to Ballummahara and the 3.7 acres land at Mattakkuliya was sold for Rs. 307 million. Consequently the debt position improved and recorded a net profit of Rs. 93.2 million by way of capital gain. Similarly the net assets value shot up to Rs. 59.45 from Rs. 27.11.

An abandoned factory at Ballummahara was refurbished and redesigned as a modern factory by Footwear Design and Development Institute Nodia and operations commenced June 2, 2008. The factory has been revalued at Rs. 357 million and consequently the net assets value shot up to Rs. 81.

The company is in the process of relocating the tannery in a land extent of 4.7 acres at Mattakkuliya preferably outside the Colombo district and the financial implication from this exercise would make it perhaps comparatively the strongest financially, among companies in the Colombo Stock Market.

The land value in Mattakkuliya is expected to appreciate considerably during the year due to the economic boom after the conflict ends shortly, completion of the modern highway from Fort to Negombo via Mattakkuliya and construction of the ultra modern fisheries harbour next to the Pegasus Hotel within a radius of 2 km and the Orix Research Report has estimated that the land would fetch Rs. 1 million per perch.

On this basis the company would receive Rs. 752 million and after meeting the cost of relocation of approximately Rs. 130m and total debts the company would have approximately Rs. 487 million excess cash. It is estimated that this would generate a net interest income of Rs. 107 million.

The company would additionally save nearly Rs. 36 million as interest cost from a debt free position. The company would also benefit from the 5 per cent subsidy on exports and removal of 15 per cent surcharge on electricity under the recent stimulus package.

On this basis the company would be in a position to earn a net profit of Rs. 70 million from normal operations for a 12 month period. After the sale of property along with interest income it would record a total profit of Rs. 177 million and net assets value per share of Rs. 102.28.

Mandatory offer

The resulting earnings per share of Rs. 14.16 on a conservative basis of PE of 12 due to the bullish trends in the stock market during the current year would justify a theoretical price of Rs. 169.2.

At present two major foreign funds Galleon and Lionheart Hedge Fund have controlling interests and together S.A. Perera and Sons owned by the Chairman (21.97 per cent) and other strategic investors account for nearly 89 per cent. Considering the fact only 1,375,000 shares are held by others it is likely for the share to be traded in a price range of Rs. 150-175 even after relocation of the tannery but prior to the sale of land.

Consequent to the sale of land CLPL would rank as the company with the highest ratio of cash to paid up capital of almost 4:1 with a major portion of the net income derived as a matter of routine.

It is expected that the company would be available for sale within a price range of Rs. 100-120 which would trigger a mandatory offer and this may take place even prior to relocation of the tannery.

It is unfortunate that no comprehensive research paper has been published so far on the real value of CLPL and the financial implications arising from the relocation of the tannery.

The CLPL with the highest price of 94 during the 12 month period may give even 200 per cent return at the present price of Rs. 54 for the investors and easily the best investment in the Colombo Stock Market.

IMF sees world economy at near standstill in 2009

The global economy is slowing to a virtual standstill and it is critical that policy-makers cleanse the banking system of toxic assets to help restore growth, the IMF said on Wednesday.

In a grim assessment of the world economy, the IMF slashed its 2009 forecast to a slight 0.5 percent, the weakest year since World War Two, from a November estimate of 2.2 percent.

IMF chief economist Olivier Blanchard said the world economy had taken a turn for the worse over the past three months, with global output and trade falling dramatically.

He urged countries to work more closely and to take decisive policy actions to restore the collapse in confidence and revive the global financial system.

"Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy," the IMF said. "A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged."

While central banks have already aggressively cut interest rates, Blanchard said there was still room for lower rates as inflation pressures have subsided. On the other hand, deflation has become an increasing risk, he added.

Meanwhile, countries implementing sizable stimulus packages should aim for maximum impact on demand, which argues for measures to increase spending, Blanchard added.

The IMF's outlook was especially bleak for advanced nations such as the United States and in the euro area, whose economies are seen contracting by 1.6 percent and 2 percent.

The sharpest decline will be in Britain, whose economy is likely to contract by 2.8 percent this year, the IMF said. Japan's economy is expected to shrink by 2.6 percent in 2009.

Jaime Caruana, the IMF's financial counselor, said it was critical to clean bank balance sheets of damaged assets to revive lending activity, but acknowledged it will be hard to put a value on the bad assets held by global banks.

"It is easier said than done," Caruana told a news conference. "This crisis is more complex, we recognize that ... but at the end, this assessment needs to be done, the losses need to be recognized." Reuters

Investments in Dubai's real estate top Dh58b

Total investments in Dubai's real estate sector exceeded Dh58 billion during the last quarter of 2008, representing a drop in comparison to the previous quarter of 2008, according to REIDIN.com, an online property tracker.

"The statistics reflect the current economic downturn, which has affected the property and real estate market in the region," a statement said.

"However, this has also created opportunities for regional and global investors to benefit from."

Amidst the implications of the global financial meltdown, Dubai is still regarded as one of the fastest-developing economies in the world and as a gateway to other regional and international markets.

The emirate, in addition to the rest of the UAE, provides a diversified business climate that offers vast opportunities for growth of international investors, facilitating easy access to three billion consumers situated in the greater Middle East, North Africa and South-east Asia regions.

Dubai is expected to leverage the UAE's strategic geographic and economic position to provide high net-worth individuals, global and regional developers and other players within the global property market an effective venue for high-impact networking and transactional activities amidst the challenges posed by the present the economic turmoil.

"The trust of the international real estate community in the Dubai market is underlined by the exceptional interest of developers as well as investors to venture into the emirate, despite the current challenges brought about by the global credit crisis," said Dawood Al Shezawi, the managing director of Strategic Marketing and Exhibitions - organisers of the International Property Show slated for next month.

Gulfnews