Ceylon Investment continue stock picking to good advantage

Rs. 986 million profit earned under "exuberant market conditions"

Ceylon Investment PLC, owning a quoted share portfolio worth Rs. 4.6 billion and is a subsidiary of Ceylon Guardian Investment Trust PLC, the country’s biggest quoted portfolio holder, has posted a profit of Rs. 996.9 million in the year ended March 31, 2015, up from Rs. 889.5 million a year earlier according to Company’s Annual Report.

The Company’s Chairman, Mr. I, Paulraj, said that the year under review had been a memorable one with the Colombo Stock Exchange recording a strong positive growth of 14.28% after two years of subdued activity.

The Ceylon Investment’s portfolio has outperformed the market during the year posting 23% growth against the index appreciation of 14.28% with the discretionary portfolio outperforming the market by 7.68% in a three-year horizon and 5.86% on a five-year horizon.

"The Company recorded a profit after tax of Rs.986.8 million given exuberant market conditions," Paulraj said. "Our portfolio value increased to Rs. 13.35 billion from Rs. 11.86 billion, recording an appreciation of 12.52% without adjusting for the distribution of dividend an inclusive of the strategic portfolio."

He said that the company’s portfolio is built for long term sustainability and continuity. Rather than getting into risky but lucrative short-term positions, they believed in holding consistently good companies for continued value creation.

Paulraj admitted that this may mean that their cash resources can sometimes remain uninvested until good equity opportunities are found.

He said that Ceylon Investment remains confident on the long term potential of Sri Lankan equities and the sustainability of the economic development plans set in place. They believe that the long term development potential of the country will flow through to its equity markets if the country continues to adopt good policy frameworks providing a strong foundation for economic activity and good governance.

"Needless to say, serious investor confidence will improve when policy makers as well as corporates take action to demonstrate vibrancy with stability," he said.

However, Pauraj said that the depth of capital markets remain a challenge as investors need a variety of companies to invest in, particularly state-owned enterprises and other top private sector corporates so that the market is more representative of the economy.

Guardian Fund Management Ltd, managers of the Ceylon Investment portfolio, explained that their buy and sell decisions are influenced by whether share prices are above or below intrinsic value. The portfolio was divided into long term core holdings and a short term trading portfolio.

During the year, divestment of holdings generated sales proceeds of Rs.1.25 billion and they had made purchases worth Rs.1.67 billion which made Ceylon Investment a net buyer in the market.

The divestment of the long term segment of the portfolio had focused mainly on Commercial Bank of Ceylon, their largest holding in the banking sector. The stake was cut back "with the superlative share price performance" and the banking portfolio rebalanced by buying intp HNB which they identified as an undervalued stock both in fundamental and relative terms.

"HNB is one of the largest commercial banks in Sri Lanka with an asset base of Rs. 624 billion and is poised for better performance in its strongest segments," the managers said. "However, Commercial Bank yet continues to be one of our largest holdings as we believe that it could deliver consistent steady growth in the long term as the most efficient and highest return-generating private sector bank."

JKH, the largest market-cap company quoted on the CSE was traditionally given high weightage in the Ceylon Investment portfolio. They have now moderated exposure to this stock taking advantage of the spike in share prices during mid year and await the outcome of its new mega real estate development project They saw a stable performance in JKH’s diverse sectors going forward.

They had sold out their total holdings in Hemas Holdings during the period under review. This stock was one of the best performing on CSE and had reached valuation targets sooner than expected.

The managers said that they will continue to hold their stake in Sampath Bank where they see further value-creation opportunities and an upside to their banking model.

The Ceylon Investment portfolio had continued to lean heavily on the banking and finance sector with substantial holdings in HNB, Commercial Bank, Sampath and Central Finance. The managers said that they were very bullish on the banking and finance sector which they believe will yield good medium to long term results capturing the first economic tide of the country.

They were underweight in beverage, food and tobacco and diversified sectors due to their portfolio stance on the multi-national companies and large conglomerates represented in the sector as being perceived as over-valued and continue to be so on forward valuation.

Ceylon Investment has booked Rs. 538.29 million net realized gains from disposals from their long term portfolio during the year under review. The company had used cash of Rs. 58 million for its operations and its earnings per share had increased to Rs.10.02 from Rs. 9.03 a year earlier-an increase of 11%.

The company had paid an interim dividend of Rs.2.50 per share similar to the previous year and a scrip dividend of Rs.1 for the year under review maintaining consistent dividend policy matching shareholder expectations.

The managers also noted that the net asset value of the Ceylon Investment share amounted to Rs. 133 per share based on fair value of the portfolio. However, a share had been trading at a discount of CSE over the past few years with a market price of Rs. 91 as at March 31, 2015.

Ceylon Investment has a stated capital of Rs. 673.53 million, capital reserves of Rs.187.14 million and revenue reserves of Rs.12.24 billion. Total assets stand at Rs.13.38 billion and total liabilities at Rs.274.8 million.

Ceylon Guardian Investment Trust with 64.36% is the controlling shareholder of Ceylon Investment with all other individual shareholders holding less than 1.5%.

The Directors of the Company are Messrs: I. Paulraj (Chairman), D.C.R Gunawardene, A.P. Weeratunga, Mrs. Rose Cooray, V.M. Fernando, K. Selvanathan and T.C.N Chia. www.island.lk