Sri Lanka Access Engineering June net down 39-pct

ECONOMYNEXT - Profits at Sri Lanka's Access Engineering fell 39 percent from a year earlier to 364.9 million rupees in the June 2018 quarter as falling margins from construction offset improving earnings from condominium sales and rent, interim accounts showed.

Earnings were 36 cents a share in the quarter, interim accounts filed with the Colombo Stock Exchange showed.

The share was trading 30 cents lower on Wednesday at 15.30 rupees.

Revenue grew 10 percent from a year earlier to 5.8 billion rupees, and cost of sales grew a faster 18 percent to 4.8 billion rupees dragging gross profits down by 16 percent to 990 million rupees.

The construction segment reported revenue growth of 5 percent from a year earlier to 3 billion rupees, but profits fell a sharp 82 percent to 86 million rupees.

Real estate saw revenue increase 312 percent to 196 million rupees, with profits increasing 179 percent to 183 million rupees.

This segment which comprises rents from high-rise buildings owned by the group and apartment sales made the highest contribution to group earnings.

Construction material sales grew 89 percent to 894 million rupees and profits increased 106 percent to 72 million rupees.

Automobile sales increased 11 percent to 2 billion rupees but profits fell 68 percent to 41.2 million rupees.

Group administrative expenses rose 18 percent to 432.7 million rupees and net finance cost rose 193 percent to 152 million rupees.

The company said it was disposing three subsidiaries for 1.54 billion rupees with the sales proceeds expected in equal instalments over a 12-month period beginning April 2018.

The company's banks have also issued guarantees worth 7.9 billion rupees at end June 2018.

Sri Lanka extends ban on PABC bank's primary dealership

ECONOMYNEXT - Sri Lanka's Central Bank said it was extending a ban on the primary dealership of listed Pan Asia Banking Corporation, barring it from accessing primary auctions of government securities.

"The Monetary Board of the Central Bank of Sri Lanka has decided to extend the suspension of business and activities of a Primary Dealer of Pan Asia Banking Corporation PLC (PABC) for a period of six months with effect from 15 August 2018, in order to continue the investigations being conducted by the Central Bank of Sri Lanka," the Central Bank said Wednesday.

The ban was imposed under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance, the banking watchdog said.

"The Central Bank wishes to emphasize that this regulatory action restricts PABC’s access to the primary auctions for government securities. It does not affect any of the other activities or services of PABC," it said.

Sri Lanka banking sector outlook negative: Fitch

ECONOMYNEXT - Fitch Ratings said it was maintaining a negative outlook for Sri Lanka's banking sector on slower growth in credit and profitability, with bad loan provisioning to increase on sluggish economic growth and disposable incomes falling.

"Fitch Ratings maintains a negative banking-sector outlook for Sri Lanka in 2018 as operating conditions should remain challenging, which could put mild pressure on performance during the rest of 2018 and possibly 2019," the ratings agency said in a statement Wednesday.

Nevertheless, performance of banks under Fitch's coverage remained fairly stable through 2017 and the first quarter of 2018. Their credit profiles are likely to remain broadly intact, the ratings agency said.

Sri Lankan banks have raised Tier 1 capital of 66 billion rupees and Tier 2 capital of 45 billion rupees since 2017 ahead of the full implementation of Basel III in 2019.

Further capital-raising is likely in 2018, although much of the shortfall was bridged in 2017.

"Higher credit costs could continue to hamper profitability in 2018. Credit costs rose in 1Q18, although pre-provision operating profitability buffers could still absorb the higher credit costs," Fitch said.

Fitch Ratings statement on the banking sector follows:

-Steady Profiles, Challenging Environment-

The performance of Sri Lankan banks under Fitch Ratings’ coverage remained fairly stable through 2017 and 1Q18, and we expect their credit profiles to remain broadly intact.

However, Fitch Ratings maintains a negative banking-sector outlook for Sri Lanka in 2018 as we expect operating conditions to remain challenging. This is likely to put mild pressure on performance during the rest of 2018 and possibly 2019.

-Capital Raising to Continue-

The implementation of Basel III in 2017 prompted Sri Lankan banks to raise capital, leading to improved capitalisation across most banks.

Fitch believes that large state commercial banks are the most likely to need further capital, as they are vulnerable to dividend demands from the state and their ability to raise capital may be constrained.

Sri Lankan banks have raised Tier 1 capital of LKR66 billion and Tier 2 capital of LKR45 billion since 2017 ahead of the full implementation of Basel III in 2019.

This includes LKR10 billion of equity by the large state-licensed commercial banks. Further capital raising is likely in 2018 although much of the shortfall was bridged in 2017.

-NPL Risks Remain-

Absolute NPLs for the sector rose by 25% in 1Q18 on the back of difficult operating conditions, with relatively slow economic growth and pressure on disposable income. The gross NPL ratio for the sector had risen to 3.0% by 1Q18 from 2.5% at end-2017.

There has also been an increase in rescheduled loans in 2017 and in 1Q18 across Fitch-rated banks, indicating on-going pressure on asset quality. However, we do not expect a significant increase in NPL ratios in 2018.

-Moderate Credit Growth Likely-

Loan growth for the sector picked up to 4.6% in 1Q18, but Fitch expects credit expansion to be kept in check due to the authorities’ focus on managing inflationary pressure and risks from any fiscal slippages.

Sector loan growth had also moderated in 2017 to 16.1% (2016: 17.5%, 2015: 21.1%), due mainly to the deceleration in private-sector credit demand as measures to tighten monetary policy in 2016 and 2017 took effect.

-Moderate Profit Growth-

The net profit growth for Fitch-rated banks in 2017 dropped to 10% from 25% in 2016 amid higher credit costs and taxes, although there was considerable improvement at the pre-impairment level. Higher credit costs could weigh on sector ROA in 2018.

-Stable Funding and Liquidity-

Deposits are likely to remain the main source of funding (83% of total funding at 1Q18) for Sri Lankan banks.

The share of current and savings accounts (CASA) for the sector had decreased to 34% of total deposits from 37% at end-2016 due to the shift to term deposits on account of higher interest rates. The loans/deposit ratio for the sector had eased slightly to 87% by 1Q18.

-SLFRS 9 Impact-

The implementation of SLFRS 9 in 2018 presents an additional challenge for Sri Lankan banks. The shift could add more pressure to capitalisation through a possible significant one-off adjustment, and drive a structural increase in normalised credit costs.

The Basel III capital shortfall could widen through the impact of SLFRS 9, although the impact on regulatory capital ratios is likely to be spread out across several periods.

Sri Lanka's Hemas Holdings June net down 20.2-pct

ECONOMYNEXT - Profits at Sri Lankan conglomerate Hemas Holdings fell 20.2 percent from a year earlier to 554.3 million rupees in the June 2018 quarter on higher finance costs, lower healthcare profits and losses in leisure and tech, interim results showed.

"The decline in earnings is due to reduced interest income post utilisation of cash reserves to acquire stationery company Atlas in January 2018 and increased interest costs relating to higher working capital due to strong growth in pharmaceutical distribution and the loan financing for our new logistics park," Chief Executive Steven Enderby told shareholders.

Earnings were 96 cents a share in the quarter, interim results filed with the Colombo Stock Exchange showed. The share last traded at 98.30 rupees.

Gross profit grew 17.6 percent to 4.7 billion rupees on revenues increasing 21.3 percent to 13.5 billion rupees and cost of sales growing a faster 23.4 percent to 8.8 billion rupees.

"Revenue growth was led by higher contributions in our consumer and healthcare sectors," Enderby said.

"Operating profit growth has been impacted by losses at N-Able, our IT technology solutions business, coupled with a weaker macroeconomic environment with sluggish consumer demand as disposable incomes have been dampened by rising costs from rupee depreciation and increased taxes," he said.

The group reported a net finance cost of 102.1 million rupees in the quarter, compared to a net finance income a year earlier of 100.9 million rupees.

Long-term borrowings were 4.5 billion rupees at end June 2018, up from 1.7 billion rupees a year earlier.

-Segment results-

Hemas' consumer businesses reported revenue growth of 36.2 percent from a year earlier to 5.4 billion rupees. Profits were up 8 percent to 569 million rupees.

"Market conditions domestically remain depressed with most market commentaries indicating low or negative growth in most major FMCG categories," Enderby said.

The group's Bangladesh business reported revenue growth of 6 percent but profitability remains a challenge due to heavy marketing spend, the Chief Executive said.

Stationery subsidiary Atlas reported revenue growth of 8.8 percent with operating profits breaking even, he said.

Healthcare revenue grew 24.7 percent to 6.4 billion rupees but earnings fell 6 percent to 339.5 million rupees.

"The pharmaceutical distribution operation registered strong revenue growth. However, managing the impact of price regulation and devaluations in the wake of depreciation of the rupee was a key operational challenge," Enderby said.

Hemas Hospitals achieved an occupancy rate of 60 percent in the quarter.

"Revenues and profitability were flat compared to a year earlier when occupancy levels were higher due to the dengue epidemic".

Subsidiary Morison reported a 31 percent decline in profits to 83 million rupees due to higher operating costs and exiting from Alcon eye-care distribution, after making revenues of 844.3 million rupees in the quarter.

The tourism and aviation segment of the group saw revenues grow 16 percent to 792.4 million rupees. The segment reported a loss of 140.2 million rupees, down 30 percent from a year earlier on improving occupancies at Serendib Hotels and Anantara Peace Haven.

Logistics and Maritime segment revenue grew 15.4 percent to 718.3 million and profits were up 10 percent to 171 million rupees.

"Construction of the new logistics park facility is now almost finalized with our first customer moving into our new 3PL warehouse in early August," Enderby said.

Other segment revenue fell 48 percent to 557 million rupees and losses deepened to 275 million rupees in the June 2018 quarter, from a loss of 65 million rupees a year earlier.

"Our technology business, N-Able got the year off to a slower start with revenue decline of 68.5 percent due to delays in project completion during the quarter in contrast to its strong start the previous year," Enderby said.

Sri Lanka’s HNB Assurance June profits up 4-pct

ECONOMYNEXT - Profits at Sri Lanka's HNB Assurance Plc rose 4 percent from a year earlier to to 106.3 million rupees in the June 2018 quarter helped by higher premiums and investment income, interim accounts showed.

The firm reported earnings of 2.13 rupees per share. For the six months to June the group reported earnings of 16.10 rupees per share on net profits of 805.1 rupees which grew 357 percent from a year earlier helped by a one-off gain.

The stock closed at at 112 rupees Tuesday.

HNB Assurance has a life insurance business, and owns a general insurance subsidiary.

Net written premiums in the June quarter grew 15 percent to 1.8 billion rupees from 2017, with gross written premiums up 9 percent to 2.1 billion rupees, and reinsurance costs down 19 percent to 250.1 million rupees.

Total benefits, claims and other expenses grew 16 percent to 2.1 billion rupees from a year earlier, of which insurance benefits and claims paid increased 55 percent to 802.6 million rupees.

Income from investment activities grew 18 percent to 453 million rupees from a year earlier.

Group assets grew to 20 billion rupees in June from 18.6 billion rupees in December, while equity increased to 4.1 billion rupees from 3.8 billion rupees.

Six months to June, gross written premiums rose 12 percent to 4.3 billion rupees from 2017, and reinsurance costs fell 3 percent to 531.7 million rupees, resulting in net written premiums of 3.7 billion rupees, up 14 percent.

Net insurance benefits and claims were up 39 percent to 1.4 billion rupees from 2017. However, total benefits, claims and other expenses remained flat at 3.7 billion rupees due to a 381.2 million one-off gain from a regulatory change in the methodology of valuing life insurance policy liabilities.

Year to date interest and dividend income grew 22 percent to 904.7 million rupees from 2017.

For the 6 months, life insurance profits after tax grew to 713.5 million rupees from 100 million rupees a year earlier, while general insurance profits after tax grew to 91.5 million rupees from 76.2 million rupees a year earlier.

Sri Lanka's Alumex to be export competitive with new plant

ECONOMYNEXT- Alumex Plc, which has commissioned Sri Lanka's largest aluminium extrusion plant says it is eyeing exports and plans to compete strongly in a domestic market with import tax protection that forced customers to pay high prices to be phased out in the future.

With the opening of a two billion rupee plant with the most modern technology and an output of 1,200 metric tonnes a month, Alumex is trying to reduce prices and meet global competition.

“We’re trying to match the prices of the United Arab Emirates," Managing Director Pramuk Dediwela said.

"If we can match those prices, we don’t have to worry about imports coming from any part of the world."

He said that aluminium products in the UAE have high standards at low cost.

The Sri Lankan government has announced plans to remove all protectionist tariffs by 2020 to make the economy competitive.

The aluminium sector has 30 percent import tariffs.

“It is a protected industry,” Dediwela said.

He said that with the addition of Alumex’s new plant, local supply capacity is three times the current local demand of 15,000 metric tonnes per annum.

Dediwela said that with the opportunities the port city project and the general construction boom is presenting, all local manufacturers have expanded capacity.

Alumex alone has a 24,000 metric tonne annual capacity, he said.

“With this plant, the country doesn’t need to import any aluminium extrusions," he said.

"When total local capacity is three times the demand, it’s a national crime to import," he said."It will cost us in foreign exchange."

Economists and philosophers have explained that imports are not a crime, and the right to buy a good from any producer regardless of the geographical location at the best price is a freedom all citizens inherently have in a true free country and stealing somebody's freedoms to force them to pay more of their hard-earned money causes harm, especially to the weakest members of a society.

Members of a society should act freely but in ways that does not cause harm to others by taking away their freedoms, which can be economic freedoms, the right to life or property.

Most building material in Sri Lanka have high costs due to protectionist tariffs, giving easy profits to a handful of businessmen as well as promoting inefficiency at the cost of ordinary families who are trying to put a roof over their heads.

Sri Lanka's export industries and hotels are also having high start-up costs due to protection given to building materials, pushing up costs and making it difficult to compete with countries, especially in East Asia, which have free trade.

In addition to lowering the overall competitiveness of an economy, businessmen who build protected industries also use up capital and resources in activities which exploit the people and generally lowers the well-being, reducing resources available for non-exploitative businesses.

Alumex has a 46 percent share in the aluminium extrusions market and related party Swisstek Aluminium Ltd has a 30 percent share, Dediwela said.

Lanka Aluminium Industries Plc, owned by a third party, has a 19 percent market share and the remaining 5 percent is from imports, he said.

Alumex is aiming for a 50 percent market share, he said.

Dediwela said that more importers are already eyeing entry due to the potential in Sri Lanka.

The current local excess capacity will be filled in another 5 years with the expected construction, he said.

In the interim, Alumex is looking at exports to utilize the plant capacity, and will set up two showrooms in India, one in the Maldives, one in Nepal and one in the Seychelles to improve distribution networks, he said.

Currently, exports to these markets are less than 2 percent of revenue and Alumex is targeting 10 percent, he said. Alumex may also enter the UAE, he said.

If demand picks up in these regional markets, Alumex will look at a possibility of building a plant in South Asia, he said.

“We have big expansion plans at the moment but we haven't finalised which country to build it in.”

“The technology we have in Sri Lanka is more advanced than technology available in other countries, whether it’s India, Bangladesh, Pakistan or Nepal. So, we want to share that.”

High labour and energy costs in Sri Lanka are affecting the decision as well, he said.

“Costs are not that high in Bangladesh. Even India.”

India has four or five plants which are as big as the new Alumex plant, he said. However, the Alumex plant has fully automated extrusion, which is currently unavailable elsewhere in South Asia, he said.

Eco-friendly processes and low wastage are also features of the new plant, he said.

Another local plant is also in the cards 5 years from now if capacities become full, Dediwela said.

Sri Lanka 's Lion Brewery June net up 134-pct

ECONOMYNEXT - Profits at Sri Lanka's listed Lion Brewery grew 134 percent from a year earlier to 737.7 million rupees in the June 2018 quarter on growing demand from tourists for its beers and lower excise taxes, the company said.

Earnings were 9.22 rupees a share, interim accounts filed with the Colombo Stock Exchange showed.

"The continuing growth in the tourism sector has contributed to our performance dauring the year," the company said in a statement to shareholders.

"Importantly, we are seeing a greater influence from the tourist sector in the retail shops rather than from the larger hotel chains.

"This seems to confirm the available empirical evidence that more and more tourists are moving into accommodation in boutique hotels, hostels and the informal sector," the company said.

The share last traded at 620 rupees.

Gross profit in the quarter grew 190 percent to 2.7 billion rupees on revenue growth of 74 percent to 9.4 billion rupees and cost of sales increasing a slower 49 percent to 6.7 billion rupees.

Beer export to 19 countries saw volumes increasing 21 percent in the June quarter, but the company said it does not publish separate revenue number for domestic and foreign beer sales.

The government reversing an earlier decision to charge higher excise taxes on beer compared to hard liquor also helped domestic volumes recover as consumers switched back from hard liqour like the popular 'gal' and 'pol' arrack.

'Gal arracku' is referred to arrack distilled from sugar cane because of plantations that sprang up around the Gal Oya irrigation project in Ampara. 'Pol' is coconut.

"We are (also) seeing evidence of a reduction in the consumption of illicit alcohol. Thus, the Excise Duty reforms of November 2017 have resulted in both social and financial returns to all stakeholders," Lion Brewery said.

Net finance costs grew 3 percent to 309.5 million rupees.

Distribution costs rose 63 percent to 832.3 million rupees and administrative expenses increased 23 percent to 293.7 million rupees.