Sri Lankan shares fall for fourth straight session

Reuters: Sri Lankan shares extended their losses to a fourth straight session on Thursday as foreign investors sold blue-chip stocks such as John Keells Holdings Plc and Hemas Holdings Plc.

The Colombo stock index ended 0.14 percent weaker at 6,153.99, its lowest close since July 16.

The index dropped 0.47 percent this week, its first weekly fall in three, bringing its year-to-date losses to 3.4 percent.

Turnover stood at 430.8 million rupees ($2.7 million), half of this year’s daily average of 864.5 million rupees.

“The market is slowly coming down on blue-chip selling and is back to its support level of 6,100 again,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

Foreign investors sold equities net worth 169.6 million rupees on Thursday, extending the year-to-date net foreign outflows to 2.5 billion rupees.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares of conglomerate John Keels Holdings Plc fell 1.9 percent, while Hemas Holding Plc ended 3.1 percent lower. Biggest listed lender Commercial Bank of Ceylon closed 1.5 percent down and Sri Lanka Telecom Plc lost 2.9 percent.

The stocks, bond and foreign exchange markets are closed on Friday for a public holiday and will resume trading on Monday. 

($1 = 159.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Amrutha Gayathri)

Sri Lanka's Union Bank June net up 7-pct, weighed down by new tax rules

ECONOMYNEXT - Sri Lanka's listed Union Bank of Colombo said profits grew 7 percent from a year earlier to 134.3 million rupees in the June 2018 quarter on improving interest margins despite a sharp rise in tax costs.

"Profits were adversely impacted due to the changes in the tax regulations subsequent to the New Inland Revenue Act enforcement," the bank said in a statement filed with the stock exchange.

The bank reported earnings of 12 cents a share. Earnings were 25 cents a share for the six months to end June 2018 with net interest income growing 17 percent from a year earlier to 2.2 billion rupees in the six month period, interim results filed with the Colombo Stock Exchange showed.

Union Bank closed 10 cents lower to 12.30 rupees on Tuesday.

Income tax expenses grew 131 percent to 103.6 million rupees.

"The effective tax rate for the June quarter increased significantly in comparison to the previous quarter. This is mainly due to the withdrawal of tax exemptions on profits made out of Sri Lanka Development Bonds and corporate debt instruments invested prior to the tax changes and withdrawal in the notional tax credits," the bank said in a statement accompanying the interim results.

The bank saw interest income grow 17 percent from a year earlier to 3.4 billion rupees in the June quarter with interest expenses growing a slower 14 percent to 2.3 billion rupees, leading to a 22 percent growth in net interest income to 1.1 billion rupees.

"Both net interest margins and spreads depicted an improvement. This was despite the withdrawal of the notional tax credit which bears a direct impact on the interest income earned on the government securities portfolio carried prior to the change in the tax regulations," the bank said.

The bank's interest margin improved to 3.06 percent at end June 2018, up from 2.87 percent at end December.

Net fee and commission income grew 16 percent from a year earlier to 217.9 million rupees in the June 2018 quarter.

Provisioning for bad loans increased 84.5 percent to 109.4 million rupees.

Personnel expenses grew 11 percent to 522.6 million rupees and depreciation charges fell 1 percent to 103.8 million rupees.

Other expenses grew 17 percent to 459.6 million rupees.

The bank reported a loss of 80.9 million rupees from revaluating financial assets, compared to a 350.4 million gain a year earlier.

The bank's loan book expanded 3 percent from a year earlier to 81.2 billion rupees as at end June 2018.

Public deposits fell a marginal 0.18 percent to 76.6 billion rupees.

The bank reported a Basel III Tier 1 Capital Ratio of 18.93 percent at end June 2018, higher than the 7.875 percent minimum regulatory requirement.

Total capital adequacy was 18.93 percent, above the 11.875 percent Basel III minimum requirement.

Gross non-performing loans increased to 3.18 percent of total loans at end June 2018, compared to 2.69 percent at end December 2017.

Sri Lanka's Ceylon Cold Stores June quarter net falls 65-pct

ECONOMYNEXT - Profits of Sri Lanka's listed Ceylon Cold Stores fell 65 percent to 238.9 million rupees in the June 2018 quarter from a year earlier, with a sugar-tax hurting manufacturing sales and falling margins and soaring finance costs hitting profits at its Keells supermarket chain, interim results showed.

The company, which makes fizzy drinks, juices and ice creams under the popular Elephant House and other brands, and operates the Keells supermarket chain of about 80 outlets, reported earnings of 2.51 rupees a share in the quarter, a Colombo Stock Exchange filing showed.

The stock was trading 1 rupee lower at 925 rupees on Wednesday. Ceylon Cold Stores is a unit of listed John Keells Holdings.

In the June quarter, revenue grew 13 percent from a year earlier to 13.9 billion rupees, with cost of sales growing at faster 19 percent to 12.7 billion rupees, resulting in a 25 percent contraction of gross profits to 1.2 billion rupees.

Selling and distribution costs rose 16 percent to 549 million rupees, and administration expenses increased 17 percent to 426 million rupees.

Other operating expenses rose 30 percent to 227.9 million rupees.

Net finance costs rose 236 percent to 40.2 million rupees, as finance income fell 26 percent to 23.4 million rupees and finance costs soared to 63.6 million rupees in the June 2018 quarter, up from 2 million rupees a year earlier.

Outstanding bank overdrafts amounted to 4.97 billion rupees at end June 2018, up 61 percent from the previous March quarter.

Revenue from manufacturing fizzy drinks and ice creams fell 7.8 percent from a year earlier to 3.1 billion rupees. Net finance costs rose 104 percent from a year earlier 742 thousand rupees.

Profits of the manufacturing segment declined 38 percent to 434.3 million rupees.

The Keells supermarket chain saw revenue grow 21 percent from a year earlier to 10.9 billion rupees in the June 2018 quarter. Net Finance costs increased 412 percent from a year earlier to 39.5 million rupees.

Profits of the retail business declined 60 percent to 95.6 million rupees.

The company has been reducing the sugar content of most of its drinks and cold-confectionery goods to meet regulatory standards over the last two years.

However, falling sales due to a sugar tax has resulted in the company deferring investments on a new bottling plant, with the current facility operating under capacity, the company said.

The sugar tax resulted in an average 33 percent increase in prices of its portfolio in 2017/18.

Ceylon Cold Stores is going ahead with 4.2 billion ice cream manufacturing plant, hoping to achieve better margins from impulse buying by consumers.

The company is also rebranding its supermarkets to Keells and refurbishing all outlets. It's investing in a 225,000 square foot centralized distribution centre.

Sri Lankan shares fall for third straight session in dull trade

Reuters: Sri Lankan shares extended fall for a third straight session on Wednesday as investors sold blue-chip shares, but foreign buying helped limit losses.

The Colombo stock index ended 0.34 percent weaker at 6,162.49. The index, which is down nearly 3 percent in the year so far, had on Friday recorded its highest close since June 29.

Turnover stood at 161.4 million Sri Lankan rupees ($1.01 million), less than a third of this year’s daily average of 873.1 million rupees.

“Today the market came down on blue-chip selling in dull trade,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

“Investors are waiting to see the direction and the good sign is we are seeing net foreign buying for the fifth straight day.”

Foreign investors bought equities worth net 4.3 million rupees ($26,959.25) on Wednesday, but they have been net sellers of stocks worth 2.4 billion rupees so far in the year.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Ceylon Tobacco Company Plc fell 9.5 percent, while conglomerate John Keels Holdings Plc ended 0.9 percent down, biggest listed lender Commercial Bank of Ceylon closed 1.0 percent down, Dialog Axiata Plc lost 0.1 percent and Hemas Holding Plc ended 1.3 percent lower. 

($1 = 159.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Vyas Mohan)

Multi Finance to top up capital with Rs200mn private placement

LBO - Central Bank of Sri Lanka (CBSL) registered finance company Multi Finance is to increase its capital base by way of private placement.

The Colombo Stock Exchange listed company is to raise Rs200mn at Rs13/share which is approximately the net asset value of the company. The shares will be placed with controlling shareholder Fairway Holdings. Fairway is one of the largest property developers in Sri Lanka controlled by lawyer cum property developer Hemaka De Alwis.

In a stock exchange announcement released today, the purpose of the capital raise is to: ” meet the core capital requirement of Rs1bn in terms of section 3.2 of Finance Companies Direction No.1 of 2013 to comply with the Finance Companies minimum core capital direction No.2 of 2017.”

The issue is subject to approval by the CSE, SEC and shareholders at a general meeting.

Multi Finance finished last year close to breakeven and is supporting a small balance sheet of just 2 times equity. Deposits are a relatively small Rs650mn, however this is up 75% from 12 months prior.

Nation Lanka Finance squeaks out a profit in the June quarter, deposits at Rs7.7bn

LBO - Colombo Stock Exchange listed company Nation Lanka Finance PLC (CSF) has turned a profit in the quarter ended June 30, 2018. The Central Bank of Sri Lanka (CBSL) registered finance company is the first listed finance company to report earnings for the quarter ended 20 days ago.

The company reported a profit of Rs19mn for the June 2018 quarter vs. a loss of Rs53mn in the same quarter in 2017.

The group maintains a significant balance sheet of Rs9.7bn in assets on a relatively small Rs619mn in equity. Total deposits from customers are relatively large at Rs7.7bn, up Rs300mn from the prior year quarter.

The company has reported all regulatory capital and regulatory liquidity levels above the required minimums, however non performing loans are high at 14%.

The share price of the company last traded close to its net asset value of Rs80 cents per share, a much higher valuation that high quality companies in the sector.

Registered finance companies in Sri Lanka have had a troubled history with many institutions going bust and deposit holders holding the bag. As the quarterly listed finance company results are reported, LBO will aim to highlight for the public how these companies are performing, and any red flags that may appear.

Singer Sri Lanka to sell 3-year fixed rate debt rated A-(lka): Fitch

ECONOMYNEXT - Singer Sri Lanka Plc, a consumer durables firm, will sell 1.5 billion rupees 3-year listed debt, which has been given an expected rating of 'A-(lka)' Fitch Ratings said.

The fixed rate debt will be used to re-finance existing debt.

"We expect demand for consumer durables to pick up in the medium term as consumers adjust to higher costs, supported by an earnings recovery in the agricultural sector, continued low personal taxes and stable interest rates," Fitch Ratings said in a statement Friday.

Singer's revenue growth slowed to 1 percent in 2017 on weak demand, after two years of double-digit growth, due to higher indirect taxes and a prolonged drought.

"We believe Singer was able to better respond to the weak demand compared with peers due to its defensive product portfolio and strong brand presence."

The full statement is reproduced below:

Fitch Ratings has assigned Singer (Sri Lanka) PLC's (A-(lka)/Stable) proposed senior unsecured redeemable debenture issue of up to LKR1.5 billion an expected National Long-Term Rating of 'A-(lka)(EXP)'.

The debenture is to be issued at a fixed rate with a tenor of three years. Proceeds will be used to refinance debt.

The proposed debenture is rated at the same level as Singer's National Long-Term Rating, as it ranks equally with its other senior unsecured obligations. The final rating is subject to the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Recovery in Sales Volume: We expect demand for consumer durables to pick up in the medium term as consumers adjust to higher costs, supported by an earnings recovery in the agricultural sector, continued low personal taxes and stable interest rates.

Singer's consumer electronics and home appliance revenue growth slowed to 1% in 2017 on weak demand, after two years of double-digit growth, due to higher indirect taxes and a prolonged drought that affected the livelihood of a significant proportion of Sri Lanka's population. We believe Singer was able to better respond to the weak demand compared with peers due to its defensive product portfolio and strong brand presence.

Growth in IT, Digital Media: Fitch expects Singer's IT and mobile segments to be key growth drivers in the medium term, aided by Sri Lanka's increasing smartphone penetration and short replacement cycles compared with most other consumer durables. Singer is the country's largest smartphone retailer and exclusive agent for Huawei, Sri Lanka's second-largest smartphone brand. Singer's IT and digital media revenue has increased at a CAGR of 57% over the past five years. We expect it to maintain its market leadership for the next three years, with the renewal of its contract with Huawei.

EBITDAR Margins to Stabilise: Fitch expects Singer's EBITDAR margin to improve by around 50bp-60bp from the current level of 9.1%, to stabilise at around 9.5% from 2019, on better sales volume and cost pass-through to customers. Singer's EBITDAR margin contracted by almost 150bp in 2017 due to lower sales as well as higher indirect taxes and sales costs. The margin contraction was seen across most product segments, as weak demand compelled the company to absorb a majority of the tax increases and cost escalations to sustain top-line growth.

Leverage to Improve: We expect Singer's leverage to improve meaningfully from 2019 amid the recovery in the operating environment and better margin, but headroom under the current rating will remain low due to high capex, dividend payments and working capital investments, which may limit debt pay down. Higher inventory build-up amid sluggish demand, coupled with lower profitability in 2017, saw leverage worsen to 5.5x, compared with 4.3x at end-2016.

No Extraordinary Support from Parent: Fitch will continue to rate Singer on its financial strength due to weak-to-moderate linkages between Singer and its new 81% parent, Hayleys PLC, under Fitch's Parent and Subsidiary Rating Linkage Criteria, as well as the size of Singer's balance sheet and significant debt at end-2017. Hayleys acquired a controlling stake in Singer in 2017.

We do not expect additional pressure for higher dividend payments from Hayleys, as Singer's average dividend payout, at around 60% of after-tax profit, is already high on average compared to most corporates.

Low Dependence of Singer Finance: We do not believe Singer will be called upon for an additional capital infusion to Singer Finance (Lanka) PLC (BBB(lka)/Stable) due to the 80%-owned finance subsidiary's strong capitalisation, which is well above the regulatory minimum, better-than-peer asset quality and strong funding profile. Singer's last equity infusion of LKR550 million was in 2017 to support the subsidiary's new credit card business.

DERIVATION SUMMARY

Singer is Sri Lanka's co-market leader in consumer-durable retail, backed by a strong portfolio of well-known brands and an extensive distribution network.

Singer is rated one notch above its closest peer, Abans PLC (BBB+(lka)/Stable), to reflect its stronger financial risk profile. Abans' business profile has also weakened relative to Singer due to its investment in a large real-estate project.

The one-notch differential between DSI Samson Group (Private) Limited (BBB+(lka)/Stable) and Singer stems from Singer's better business risk profile, as it enjoys a robust market position in the sale of consumer durables domestically, while DSI's sales remain under pressure from rising local-market competition.

Sunshine Holdings PLC (A-(lka)/Stable) is rated at the same level as Singer due to Singer's stronger business risk profile and significantly larger operating scale being offset by higher leverage and more volatile operating cash flow stemming from the higher discretionary demand for its products. Richard Pieris & Company PLC (A(lka)/Stable) is rated one notch above Singer due to its stronger business risk profile, reflected in its cash flow diversity, more defensive end-markets and lower leverage.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Revenue growth to average in the low double digits from 2019-2021, helped by a volume recovery in consumer electronics and home appliances as well as strong growth in IT and mobile-product sales.

- EBITDAR margin to improve and stabilise at around 9.5% from 2019, amid better cost pass-through and volume recovery.

- Capex to average around LKR800million per annum over the next couple of years, to be spent on store refurbishment.

- Dividend payout to average around LKR820million per year for the next two years.

- No equity infusions into Singer Finance.

RATING SENSITIVITIES

Developments that may, individually or collectively, lead to positive rating action:

- Singer's leverage - as measured by adjusted net debt/EBITDAR, excluding Singer Finance - falling below 4.5x on a sustained basis (end-2017: 5.5x)

- Fixed-charge coverage, as measured by operating EBITDAR/interest paid + rent, sustained above 1.5x (end-2017:1.4x)

Developments that may, individually or collectively, lead to negative rating action:

- A sustained increase in Singer's leverage to over 5.5x

- Fixed-charge coverage falling below 1.2x for a sustained period

- Any significant equity support to subsidiary, Singer Finance

LIQUIDITY

Tight but Manageable Liquidity: Singer had LKR1.8 billion of cash and LKR11.2 billion in unutilised credit facilities to meet LKR14.4 billion of long-term debt maturing in 2018 as at end2017, leaving the company in a tight liquidity position. We do not expect the company to generate positive free cash flow in the next 12 months due to high capex and shareholder returns. However, we believe Singer will be able to roll over its short-term working-capitalrelated debt, amounting to LKR9.2 billion, in the normal course of business, leaving the company's liquidity position more manageable.