Sri Lanka stocks close flat

June 04, 2014 (LBO) - Sri Lanka's stocks closed flat Wednesday despite strong foreign buying, brokers said.

The Colombo benchmark All Share Price Index closed 0.04 points higher at 6,286.06. The S&P SL20 closed 1.25 points higher at 3,472.00, up 0.04 percent.

Turnover was 1.02 billion rupees, up from 405.22 million rupees a day earlier with 80 stocks closed positive against 90 negative.

John Keells Holdings closed flat at 235.00 rupees with market transactions of 514.83 million rupees contributing 51 percent of the daily turnover while six off-market transactions of 459.96 million rupees adding another 45 percent to the turnover.

JKH’s W0022 warrants closed 60 cents higher at 63.30 rupees and its W0023 warrants closed 1.30 rupees higher at 74.00 rupees.

Lanka IOC closed 70 cents lower at 40.50 rupees and PC Pharma closed 20 cents higher at 1.20 rupees, attracting most number of trades during the day.

Foreign investors bought 557.25 million rupees worth shares while selling 77.50 million rupees worth shares.

Dialog Axiata closed 10 cents higher at 9.90 rupees and Distilleries closed 2.00 rupees higher at 208.00 rupees.

Cargills Ceylon closed 2.50 rupees higher at 146.50 rupees and Nestle Lanka closed 20.40 rupees lower at 1,919.60 rupees.

Ceylon Cold Stores closed 4.00 rupees lower at 157.00 rupees and John Keells Hotels closed 30 cents lower at 15.20 rupees.

Commercial Leasing and Finance closed 10 cents lower at 4.00 rupees.

'Higher' growth stats mask reality - JB Securities Research

Ceylon FT: JB Securities Research forecasts the economy would grow by 5.5% to 6% in the short to medium term despite higher official estimates that don't add up when compared with primary data and ground realities.

"We forecast economic growth to hover at 5.5 - 6% in the short to medium term. Official growth statistics indicate higher levels but we find it difficult to reconcile this with primary indicators and the ground situation," JB Securities Research said in a report 'Sri Lanka: Value is Back in Equities'.

It said non-tradable sectors such as construction, mining and quarrying, post and telecommunication, electricity, gas and water, passenger, goods and railway transport were higher than GDP growth.

Manufacturing, private services and domestic trade grew on par with GDP growth.
Banking, insurance and real estate, agriculture, livestock and forestry, cargo-ports and civil aviation, ownership of dwellings, import trade and government services lagged economic growth.

Exports as a percentage of GDP are at historic lows.

"Tourism remains a sunrise industry with a high trickle down effect. We expect Asian tourists to boost visitor arrival growth to around 20% but their shorter stays to lead to guest night growth of around 10%. New room inventory is coming on stream to meet the new demand.

"The ongoing demographic transition has reduced the dependency ratio and provided a bulge in the working age population. Female labour participation remains low at only 35% - potential for workforce growth from this segment.

"IT-enabled industries continue to show steady growth, although quantification is a challenge since they are intangibles and don't cross borders. Nevertheless, new businesses and expansion of existing ones are creating higher-paying white collar jobs.

"Economic recovery in the US and EU is increasing demand for the country's manufactured exports – this bodes well for the rubber and apparel industries.

"Pressure on the currency from the current account channel is subdued due to a lower merchandise trade balance, higher service income and remittances. In contrast, outflows from maturing bonds on the financial channel are a possibility due to LKR yields narrowing and converging with those of USD sovereigns. Recent sovereign issuances have boosted reserves, thus outlook for the currency is benign with an appreciation bias.

"We expect headline inflation to trend up to high single digit levels from higher food inflation due to the ongoing drought. Private sector credit growth remains weak, thus we expect interest rates to remain at these levels for the rest of this year.

"Confrontational foreign policy with the west and fallout from the ongoing UN human rights probe remain a concern – the economy is highly dependent on the US and EU for its export markets and tourism arrivals," JB Securities said.

The International Monetary Fund (IMF) has forecast a growth rate of 7% this year, lower than the official forecast of 7.5%. In a report published in 2013, the IMF heavily criticized the country's official data regime.

Provisional projections published by the Treasury's 2013 annual report showed that economic growth had slumped to 6.4% during the first quarter of 2014.

The slump comes after an 8.2% economic growth rate the previous quarter ended December 2013, 7.9% for the September 2013 quarter and 6.8% for the June 2013 quarter. The economy grew at 6.1% for the March 2013 quarter.
www.ceylontoday.lk

Regulation risk 'ultra high': JKH

Ceylon FT: With a revenue of Rs 89.2 billion in 2013/14 (up 5% from a year ago) and a net profit of Rs 13 billion (down 3%), diversified John Keells Holdings PLC's risk management review rates the regulatory environment as 'ultra high'.

"The regulatory environment continues to pose a degree of uncertainty resulting in the group being challenged in its efforts to define medium and long term strategies. As a mitigatory measure, the group has resorted to structures, which while being robust and effective are also flexible and adaptable to changes in the legal framework and business needs," the group's risk management review in the 2013/14 annual report said.

It said the group participates in various industry associations and industry chambers as a means of creating greater awareness and enlisting the support of the decision makers in obtaining 'greater clarity and achieving greater consistency of government policies and initiatives'.

The previous financial year, 2012/13, saw the regulatory environment rated 'ultra high' as well, worsening from a rating of 'high' in 2011/12.

The group gave the macroeconomic and political environment top marks.

"Despite global economic conditions, the Sri Lankan economy has seen, and is seeing, a positive growth trajectory. The government continues to make investments in infrastructure development and some of the policy measures taken are expected to improve the long term sustainability and growth path of the economy. Accordingly, the group believes that a lower risk rating is warranted," the group said.

In 2012/13 the macroeconomic and political environment was rated a 'moderate' risk and 'low' in 2011/12.

"The group remains positive about the resilience of the economy and members actively participate in business associations, think-tanks and other key policy making bodies in supporting the government in its efforts towards creating sustainable and equitable growth," the group said.

However, the company noted elsewhere in the same annual report that despite the GDP registering a 7.3% economic growth rate for 2013, up from 6.3% in 2012, it was primarily driven by exports and domestic capital formation, and "did not necessarily translate into enhanced performance in all businesses".
www.ceylontoday.lk

SEC Act to be further reformed to strengthen enforcement

Following are excerpts from an interview with SEC Chairman Dr. Nalaka Godahewa:

By Cathrine Weerakkody

Q: What is your view on the practicality of term and age limits for directors, as finding good directors to sit on a PLC board is no easy task? Also, the question is whether term limits should be decided by the shareholders or by the regulator?
A: At this stage of development in our market it is more appropriate to allow the shareholders to decide whether there should be an age limit for a board director and if so, what that limit should be for the respective company. Perhaps a more critical issue is board diversity and the need to have the right balance. Boards must have systems in place for self assessment and succession planning. Regulators in most parts of the world share a similar view. 

Q: On managing shareholder expectations of dividends, any thoughts?
A: Recognising the shareholders’ expectations should be one of the company’s highest management priorities. A listed company should aim to provide shareholder returns through comprehensive consideration of the business environment, including business performance, retained earnings, and a balance between dividends and funds required to support growth plans. However the dividends policy if not managed well can also lead to problems such as raising unrealistic expectations amongst shareholders and creating over dependence on regular dividend payouts. Increasing demands for dividends can strain cash flow and prevent the company from reinvesting profits in future growth, as well as for badly needed capital improvements. This can lead to an illiquidity spiral which hinders the company’s ability to pay dividends in the future. In terms of allocation of financial resources, dividends are not necessarily the only way of meeting shareholders’ return-on-equity objectives.

Q: To ensure a strong capital market with long-term investments and also create an opportunity for investors to hedge risks what role can the regulator play?
A: The role of the regulator involves developing, implementing and promoting consistent standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and addressing any systemic risks. In order to achieve these, the regulator should have operational independence and accountability in the exercise of its powers and functions and observe the highest professional standards including appropriate standards of confidentiality. The regulator should not overstep their mandate and allow the markets to evolve within the accepted parameters.

Q: What is the SEC doing to promote more liquidity for potential foreign investors?
A: The approach is twofold. Firstly the recent issued directive to make it mandatory for public listed companies to maintain a minimum 20% public float is expected to release more closely held stocks to the market. Secondly there is an active effort to promote more IPOs into the market targeting a large number of successful but non-listed companies.

Q: The ever increasing cost of compliance would be a challenge for most small time businesses to grow and expand. What are your thoughts?
A: Compliance has a cost but the benefits of listing overweight those costs. It is actually lack of awareness of opportunities preventing most companies away from the market.

Q: Are there any initiatives from the SEC side to build capacity in the boardroom?
A: SEC recently endorsed two corporate director training programs initiated by the Institute of Chartered Accountants of Sri Lanka and the Institute of Directors respectively. Both programs had SEC input in developing the curriculum. The corporate governance code was revised in 2013. SEC is currently studying rules imposed by regional counterparts related to independent directors to assess what initiatives are required in this area.

Q: What are your thoughts on our financial reporting standards?
A: We are very much up to date with evolving global standards. The accounting bodies have been doing a good job keeping our accounting standards up-to-date.

Q: Finally, what are the key milestones in your road map to create a vibrant capital and debt market?
A: There are 10 key initiatives in the road map. They involve
Demutualisation of the Colombo Stock Exchange where the process has already begun and we hope to complete same in 2015 and perhaps list the CSE in 2016.

Improving the corporate debt market where initiatives have already shown results with the corporate debt market growing over 400% in 2013 and showing similar growth potential in 2014.

Strengthening the broker back office system through harmonisation amongst the brokering houses and modernisation with latest technology which has now come to the implementation stage which should commence within the next few months.

Enhancing capital market education and improving financial literacy an ongoing project where we have been very aggressive during the last two years.

Introduction of a central counter party system or CCP which is essential to broad base our product portfolio and our project team has key representations from SEC, CSE and also the Central Bank of Sri Lanka. This too will be completed by end 2015.

Amending the SEC act to further fine-tune our regulatory framework where major emphasis would be on providing civil and administrative enforcement powers to SEC where we currently limited to criminal sanctions. This project is completed and the draft act is now with the ministry of finance to be submitted to cabinet and then to the parliament.

Developing the Unit Trust industry will be a major emphasis. Particularly with us trying to attract more retail investors we see potential for this sector.

Expanding the product portfolio will be also linked to the CCP because derivatives can be introduced only after the CCP is in place. But several other things such as expanding bond products, introducing ETF, Introducing REITS etc are in the pipeline.

Increasing the number of listed companies in the market. Currently we have 293 listed companies and we have about 45 companies who are already in discussion with us showing interest to list within the next three years. I expect many more to come in with the type of promotions the teams are doing

Attracting new investors both local and foreign. Even the road show which was held in UK on 30 May was part of that process. Prior to that we have covered India, Dubai, HK and Singapore and the next one would be USA in September 2014.
(The writer is a CIMA finalist and a final year undergraduate student in the UK)
www.ft.lk

Richard Pieris records revenue of Rs. 34.7 b in 2013/14

The Richard Pieris Group ended its performance in financial year 2013/14 reporting a Group Revenue of Rs. 34.7b with a Profit before Tax of Rs. 2.3 b. The reported profit for the year does not include any gains of a capital nature.

Retail sector: After a very successful seasonal campaign the sector had a relatively quiet quarter but its marketing activities gained momentum towards the latter half of the quarter with the commencement of the Avurudu campaign. During the quarter ended on 31 March 2014 the sector launched Sri Lanka’s first ever retail co-branded credit card in partnership with Standard Chartered Bank. This Privilege Visa credit card provides numerous rewards and benefits to its users. 

Plastics and Distribution sector: The sector faced a range of challenges during the quarter ended 31 March 2014, which included unfavourable market conditions, low purchasing power of consumer due to adverse economic conditions. The sector’s products do not constitute a purchase priority in daily life and this proved to be a drawback in the phase of the sluggish economy and the reduced spending power of consumers. However, each of the sector’s SBUs continued to search for market opportunities, while focusing on reducing overheads to enhance their competitiveness, profitability, and focused on minimum work-in-capital investments to optimise costs.

Plantation sector: The impact of the wage increase in the plantation sector employees had its impact on the reported results of the period under review. Rubber prices yet again were down when compared to last year and had an adverse impact on the reported results. There was an increase in the coconut production due to favourable weather conditions with favourable prices. The total production of oil palm also increased when compared to the corresponding period of the previous year and the oil palm prices continued to increase. However, there was a decline in the production of tea when compared to last year though the prices improved.

Tyre sector: In a challenging financial year the tyre sector performed exceptionally well and benefited from the low raw material prices. It further expanded its product portfolio with the introduction of a new mini truck tyre ‘Hida,’ which was introduced to the market at a very competitive price.

Rubber Manufacturing sector: The sector ended the financial year on a very positive note where it reaped the benefits of many a restructuring activities which took place over the last 24 months. The reported results were marginally higher than the previous year which is commendable in a financial year where most of the sectors faced many challenges. The sector continued to focus on many marketing activities and participated at several international fairs and exhibitions. With the level of current success the sector has many expansion plans for the future.

The Group continues to focus on its core sectors and will utilize the local and global opportunities to expand its business. Planned expansions in its Retail operations will continue and a large format retail outlet was opened in the city of Panadura in May 2014.

A spokesman for the Company stated that the Group is already considering many expansion opportunities and new activities taking into account the strengths of the Group in the different sectors for its long term growth.
www.ft.lk

LOLC ups FY14 post-tax profit by 22% to Rs. 3.1 b

Lanka Orix Leasing Company PLC (LOLC) has increased its consolidated after tax profit by 22% to Rs. 3.12 billion in the financial year ended 31 March over the previous year.

Pre-tax profit also grew by a similar percentage to Rs. 4.5 billion. Net profit attributable to ordinary shareholders amounted to Rs. 1.53 billion, though down from Rs. 1.9 billion in FY13.

Group income rose by 6% to Rs. 45 billion. Gross profit was however down by 11% to Rs. 5.5 billion in FY14.

A 44% growth in other income to Rs. 3.6 billion helped profit before operating expenses rise by 19% to Rs. 20.3 billion.

This was despite a 13% rise in net finance costs to Rs. 16.4 billion.

In the fourth quarter, LOLC Group revenue was Rs. 1 billion down from Rs. 11.75 billion whilst pre-tax profit improved to Rs. 1.46 billion from Rs. 1.0 billion in the corresponding period of FY13.

After tax profit rose from Rs. 775 million to Rs. 1.13 billion whilst the bottom line rose from Rs. 187 million to Rs. 239 million in 4Q of FY14.

In the full year, financial services reported a pre-tax profit of Rs. 4.13 billion (up from Rs. 3.3 billion in FY13) whilst trading produced Rs. 542 million in comparison to a loss of Rs. 208 million in the previous year. Insurance chipped in with Rs. 82 million pre-tax profit up from Rs. 27 million in FY13 and plantation’s contributions was Rs. 13 million down from Rs. 235 million in the previous year. Leisure reported a loss of Rs. 334 million down from Rs. 902 million in FY13 and power and energy losses were Rs. 159 million, up from Rs. 12 million in FY13.

Group assets as at 31 March were Rs. 175.4 billion, up from Rs. 163 billion a year earlier. Liabilities rose from Rs. 119.6 billion in FY13 to Rs. 130.6 billion in FY14.
www.ft.lk