Market opinion
Rumours and market investment
K.A.S. Perera
During the past few months, Environmental Resources Investment (ERI)
has recorded dramatic upward movements of prices and was a favourite
among retail and high net-worth investors.
This also contributed to very high sentiment in the stock market and
the turnover as well. It should be mentioned that many retail investors
who burnt their fingers the previous year were fortunate to recover the
losses fully and become net gainers.
The Colombo stock market has performed well during recent
times |
However in the absence of necessary information, investor public and
many stock brokers are unable to ascertain the potential value of the
company. Consequently this has unfortunately led to adverse news not
based on facts and also malicious rumours deliberately spread by certain
persons.
This Group consists of those who do not like the company ranked as
one of the highest capitalized companies, those who failed to buy the
stock at a earlier stage and due to other factors such as sheer
jealously in a stock market where cut throat competition among stock
brokering companies is well-known.
It is also rumoured that financial institutions, due to the proposed
massive cash infusion mainly for rehabilitation of sick companies are
very concerned of erosion of profits and stiff business rivalry.
The company presently has three subsidiaries in Ceylon Leather
Products, D.N.H. Financial and Environmental Resources Ltd., a virgin
based company holding assets and debentures including an undisclosed
percentage of shares of Eastern Platinum, a quoted company in the
Toronto Stock Market.
This has been purchased for a consideration of Canadian dollar 76
payable in eight tranches. It is reported 52 percent investment is in
Eastern Platinum Company.
Contrary to misconceptions that it is only an investment company such
as Namal and other unit trusts, the main objective of the company is to
purchase inefficient quoted and unquoted companies or those with
constraints such as lack of funds.
Substantial value additions effected by rehabilitation of such units
could be finally sold with a good margin.
For instance substantial improvements introduced to Ceylon Leather
Products PLC resulted in an ultra modern factory and would give at least
100 percent gain if sold in the near term. Generally the company
anticipates value addition and price growth of 200 percent to 300
percent prior to sale.
Eastern Platinum which has several platinum mines in South Africa was
appr. Can dollar .92 (Rs 101) in the Toronto Stock Market at the time of
purchase and this has risen to Can dollar 1.29 (Rs 130) on February 11.
This has risen from a low of Can dollar .25 (Rs 25) in 2009. On March
8, 2008 the share recorded highest price of Can dollar 3.60 (Rs 364).
The auto industry, a major user of platinum is expected to be fully
revived by the year end and it is possible from the share to rise to
high of Can dollars 3.60 and accordingly market value of Eastern
Platinum would increase by almost 400 percent.
Consequently the net asset value of Environmental Resources PLC will
rise dramatically.
Eastern Platinum has earned a net profit of Rs 187 million (Can
dollar 1.85 million) for the quarter ended September 30, 2009 despite
the downturn in the auto industry and low production mainly due to a
strike in mines. During the quarter ending December 31, 2009 production
has increased by 13 percent compared to the previous quarter and 17
percent compared to corresponding period ending December 31, 2008.
Consequently net profits are expected to record appreciable growth in
the quarterly report to be released on March 31, 2010.
The company with a present paid up capital of Rs. 2469 million
proposed one for two rights including many warrants and expects to
mobilize Rs 4380 million during the current year and the total amount to
be mobilized, a staggering Rs 44435 million up to 2015. The company has
a unique advantage of purchasing ideal investment due to substantial
cash position.
If we are to consider the company's minimum target of 200 percent
increase in values the proposed value addition from above future
investment amounts to Rs 88870 million in the long-term.
Similarly unlike other quoted companies, traditional use of
historical and forecast EPS, PE and net assets value on a quarterly
basis would be of little value for the financial analysts and investors
due to practical difficulties and the objective of the company. However
the company would be in a position to value its assets on a yearly
basis.
The company is said to have evaluated over 35 companies in
hydropower, tourism, manufacturing, plantation and IT and we understand
this has been narrowed to eight to ten companies including interestingly
four quoted companies which are at an advanced stage of negotiations for
purchase. It is hoped most of the doubts raised has been explained.
The Board of ERI consists of persons with good track record and some
have occupied highest positions in the country. The Chairman is one time
Ministry Secretary and another has risen to the highest in the
Administrative Service and served as Central Bank Governor.
Another was a career diplomat and former Ambassador to South Africa.
The youngest is a computer expert having a rare Doctorate in Information
Technology from a prestigious American University.
The only foreigner is a specialist in investments and conversant with
financial markets in USA.
Some have doubts whether this has features of a pyramid scheme and it
is strongly stressed these schemes have been introduced to attract
maximum funds with the ulterior motive of defrauding.
In the case of ERI almost 94 percent is held by the Lion heart and in
future too similar percentages would be brought to the country by the
company by way of foreign exchange which is beneficial to the country.
ERI has a high skilled staff in finance and are competent in the
evaluation of companies for ultimate purchase.
Since substantial portion of funds are owned by the major shareholder
they would be extremely careful in their investments.
It is therefore obvious that such suspicion is due to either thorough
ignorance or ulterior motives. It is sad most of the stock brokers and
investors are ignorant of the comparative value of the normal share and
the warrants. For instance warrant 2010 would be converted to a normal
share and the investors would be able to trade it on June 13 after
payment of Rs 22 per warrant.
Accordingly theoretically the price difference should be Rs 22.
Unfortunately for instance comparative price difference is Rs 87.25 on
February 12, 2010 which means warrant 2010 is under priced by a huge Rs
65.25.
It is observed there are valid reasons for most of the shares at
present price despite negative assets and very high PE. For instance
hotels shares in fact under priced due huge prospects where star hotels
would not cope up with the demand during the year end winter season and
major rally in this sector is long overdue. In fact results for the last
quarter is only a tip of the iceberg. For instance above mentioned
Keells hotel recorded a net profit of Rs 82 m for the last quarter.
There is a school of thought that forces opposing the Government
attempted to bring down the market on February 9 day after the arrest of
the defeated opposition candidate but failed mainly due to the fact
Environmental Resources PLC price increased by Rs 43.
The price increase of the company impacted heavily since it is one of
the highly capitalized companies. It is said due to various unfounded
rumours they were successful in bringing down the prices for next three
days and similarly indices plummeted.
Net result was that local/foreign newsprint and electronic media
screamed political instability due to the arrest. This is very damaging
to the country's image.
Such anti-national forces should realize the President had crushed
terrorism after 30 years and undertaken simultaneously massive economic
development in infrastructure such as Ports in Hambantota, Colombo,
Power Projects in Norochcholai, Kerawalapitiya, Upper Kotmale and
Trincomalee that would provide 1910 MW. It should be understood that
power is the foundation for any development. Massive road and irrigation
projects completed and under construction are other significant
achievements. Achievements as above simultaneously is very remarkable in
the midst of unprecedented world recession with a satisfactory GDP
growth of around 4 percent in 2009 and above 6 percent growth year
according to Central Bank estimates.
The writer is of the view country has potential for growth of 7
percent to 8 percent next few years.
The Government had drastically reduced inflation to 3.5 percent last
year with a foreign reserves of US 5200m enough for 6 1/2 import
requirements.
The stock market is very vibrant and State banks have reduced lending
rates to unbelievable level with Treasury Bills (TB) rates in single
digits.
Above achievements easily make the President not only the best leader
since Independence but also for the past 500 to 600 years.
It is the experience of the writer with industrial credit of a State
bank and as a member of think tank at macro level on industrial
development of the country that since 1977 despite attempts made to
rehabilitate sick companies, there have been many failures.
The banks after evaluation of sick companies may provide additional
funds, some advice and monitoring but diversion of funds, high
lifestyles, personal character and deficiency in management quality
where banks had in some instances no control. Appointment of bank
directors is also always not possible due to many reasons.
As a solution after obtaining approval of the then Industries
Minister, the writer was involved in the preparation of a proposal for
Cabinet approval through normal channel to set up a bank with private
sector participation to buy sick companies and rehabilitate and sell
through public tender. This was a very complicated proposal requiring
massive funding and unfortunately abandoned.
It gives personal satisfaction to see a company with identical
objectives ready to full this vacuum which could contribute to the
national economy immensely considering their achievement in Ceylon
Leather Products PLC (former Leather Corporation). It should be
mentioned that this is an area private sector and commercial/development
banks are reluctant to enter due to many factors and the entry of ERI to
fill this vacuum without Government participation is commendable.
It is important that all Sri Lankan should realise above and unite
for the development of the Colombo Stock Market.
The huge amount of funds in the region of Rs 44000 million be
mobilized and invested upto 2015 and expected minimum return of 200
percent would make the company largest in terms of capital and the
minimum growth of Rs 88,000 million would also result as the highest net
assets company in the stock market. The prospect for the future based on
fundaments is unprecedented and may justify a price far in excess of the
highest price of Rs 270 recorded todate.
This is strongly recommended for retail, high net-worth and
institutions and it would dominate the stock market for number of years
and will be most attractive to investors.
(The writer is a retired Assistant General Manager of the Bank of
Ceylon and a senior consultant in Banking, Finance, Industrial Projects,
Restructuring and Investments) |