Sri Lankan shares hit 2-week closing high

Reuters: Sri Lankan shares ended firmer at a near two-week high on Thursday, a day after the U.S. Federal Reserve raised interest rates by 25 basis points, the first in almost a decade.

World stock markets jumped on Thursday as investors chose to take the first hike in U.S. interest rates since 2006 as a mark of confidence in the world's largest economy, also lifting the dollar but piling on the pain for oil prices.

The main stock index ended 0.39 percent firmer at 6,859.99, its highest since Dec. 4. It hit a more than eight-month closing low on Monday.

Stockbrokers said the Fed rate hike could increase the cost of funds locally as well.

"Already we have seen some foreign inflow and the Fed decision was already factored in," Danushka Samarasinghe, Softlogic Stockbrokers' research head said.

"But there could be outflow from the bond market, which in turn puts pressure on the rupee," he said.

Foreign investors sold a net 44.5 million rupees ($310,320) worth of equities on Thursday, extending the net outflow to 4.07 billion rupees so far this year.

Turnover stood at 577.2 million rupees ($4.03 million), around half of this year's daily average of 1.1 billion rupees.

The market is expected to be lacklustre with low turnover due to year-end holidays starting next week, stockbrokers said.

Shares in Bukit Darah gained 6 percent, while large fixed-line phone operator Sri Lanka Telecom gained 2.2 percent, helping the overall index gain.

($1 = 143.4000 Sri Lankan rupees) 

(Reporting by Shihar Aneez; Editing by Biju Dwarakanath)

Rupee depreciation and rising interest rate expected to affect economy

Rupee depreciation and Interest rate rise to gradually slowdown consumer demand; Market returns may struggle over the Medium Term…

We expect consumer demand to remain high though on a marginal decelerating trend during 1H2016 amidst higher disposable income among consumers. The rupee depreciation and rising interest rate environment may affect the economy predominantly during the 2H2016 while the effect will be partially felt during the latter part of 2Q2016 as well. Amidst significant forex losses wiping out the high growth rates produced via consumer demand, we would like to downgrade our Earnings forecast to Dec 2015E /Mar 2016E at 9%-11%YoY from the previous 11%-13%. With the slowdown in economic conditions we continue to maintain our earnings forecast for Dec 2016E / Mar 2017E at 4%-5%YoY.

In terms of market returns we expect a volatile period during the short term due to strong earnings and rise in interest rates. However, with earnings expected to slow down over the medium term 1 year period and continued rise in interest rates, we expect market returns to be negative.

Our previous forecasts on earnings

Our "Results Update June 2015 Report" forecast for future earnings was as follows:

Consumer Demand to continue until rupee depreciation and interest rate hike; Market returns may continue its positive trend: The significantly high consumption demand taking place is adversely affecting the balance of payments resulting through heavy imports. We expect credit growth and consumption demand to continue up until a heavy rupee depreciation and an interest rate hike which is gradually taking place. In addition to the Banking and Finance, Food & Beverage, Manufacturing and Trading sectors which are positively benefited by the credit growth and consumption demand, we expect the currency depreciation to positively benefit hotels, plantation and selected manufacturing sector exporters. Amidst the developments we maintain our market earnings forecast for Dec 2015E / Mar 2016E at 11%-13%YoY. The positive market returns are likely to continue with settling of the political and policy uncertainty. We expect a slowdown in economic conditions beyond June 2016 resultant to likely rise in interest rates affecting companies across the board. As a result we expect Market earnings to slowdown for the earnings period Dec 2016E / Mar 2017E resulting in an earnings forecast of 4%-5%YoY.

Our "Results Update March 2015 Report" forecast for future earnings was as follows:

Consumer Demand to drive Dec 2015E / Mar 2016E earnings growth; Market returns may improve once uncertainty settles: Low interest rate regime, higher disposable income and stable exchange rate are likely to drive market earnings for Dec 2015E / Mar 2016E positively affecting Banking and Finance, F & B, Manufacturing and Trading sectors while indirectly affecting Diversified sector as well. We continue to maintain market earnings forecast for Dec 2015E / Mar 2016E at 11%-13% YoY. We believe market returns are likely to stay low amidst the current uncertainty in the political front. We expect Market returns to be strong once the prevailing uncertainty settles down. However, we expect a slowdown in economic conditions beyond June 2016 due to possible rise in interest rates affecting companies across the board. As a result we expect Market earnings to slowdown for the earnings period Dec 2016E / Mar 2017E resulting in an earnings forecast of 4%-5% YoY.

Our "Results Update December 2014 Report" forecast for future earnings was as follows:

Earnings Forecast for Dec 2015E / Mar 2016E remain at 11%-13%; Market returns to grow once uncertainty settles: We upgrade our earnings forecast for Dec 2014 / Mar 2015E to 10%-12% from the previous 6% -7% amidst earnings continuing to remain above our expectations predominantly led by heavy trading income in the banking sector and consumer led earnings growth coming in earlier than we anticipated. We continue to remain bullish on consumer led earnings growth which is likely to drive market earnings in Dec 2015E / Mar 2016E to reach our forecast of 11%-13%. Market returns suffered during the current 2 quarters with Dec Quarter recording +0.6% return and Mar Quarter up-to-date recording c.-2.3% amidst the prevailing political uncertainty. Despite healthy earnings growth in most companies, gap between market returns index and market earnings index has been widening; thereby we are bullish on market returns during the 2H2015 when the policy direction becomes clearer and the political uncertainty settles down.

Our "Results Update September 2014 Report" forecast for future earnings was as follows:

Earnings recovery on track; Market returns may show strong growth: With company earnings registering in line with our expectations, we continue to maintain our forecast for Dec 2014E / Mar 2015E earnings growth at 6%-7% YoY while retaining our forecast for earnings growth for Dec 2015E / Mar 2016E at 11%-13%. In line with previous expectations market return slowed down during the last 2 months with the market return registering a growth of 0% while the YTD return remained at 23%. Amidst the growth in Market Earnings being in line with expectations and slow Market Returns in the last few months, we expect Market Return to remain strong during the next few quarters once the political uncertainty eases off.

Forex losses and Commodity Price decline outweighs Consumption boom Sep Quarter -6% YoY:  September quarter earnings showed a slowdown to -6% YoY to LKR 47.6Bn and 2%QoQ marginal improvement on the back of continuously under performing Power & Energy, Oil Palms and Plantations sectors. Positive contribution derived from growing consumption led Banking, Finance & Insurance, Beverage, Food &Tobacco and Manufacturing sectors have assisted earnings to maintain at supportable level.

Consumption drive persists: Banking, Finance & Insurance sector continued its growth momentum by achieving a profit of LKR 20.60Bn (+6% YoY) primarily led by the boost in private sector credit growth. Cost efficiencies and improved demand along with increased disposable income drove profitability in both Beverage, Food & Tobacco and Manufacturing sectors by +35% and +20% respectively.

Forex losses and Commodity Price decline: However, global palm oil price crisis reduced the earnings of the Palm Oil sector leading to a YoY decline of 1000% to a loss of LKR 900Bn. Further, negative margins along with the reduction of oil prices led Power and Energy sector to experience a loss of LKR 595Mn (-73%) mainly ascended from LIOC. Diversified sector also saw a decline in earnings by 10% to LKR 724Mn. Change in the exchange rates caused the forex losses in the Telecommunication sector resulting in earnings shredding to LKR 1.3Bn(-65%YoY).
- FC Research

www.island.lk

Renuka’s Rs 1B property project delayed two years

Ceylon Finance Today: Renuka Holdings which raised over Rs one billion in cash last year through a rights issue, apparently for a property development project at Galle Face, Colombo, has however seen this project stalled for over a year.

Nonetheless, the company in a stock exchange filing made on Monday said that the project would kick start in the latter part of next year.

It said that the delay was due to obtaining BoI approval and the discovery of a sewage line at the proposed development site.

When this reporter asked a representative from the secretaries to the company, namely Mrs. S.S.W. Senanayake, director, Renuka Enterprises (Pvt.) Ltd., whether the property in question was their own property? She replied in the affirmative.

She, however was unaware what the details of this investment would be.

When asked as to why, prior to the rights issue, the company didn't get BoI approval or check whether there was a sewer line running in or through the property? She asked to level those questions to the directors.

The company is controlled by the Rajiyah family, Dr. S.R. and Mrs. I.R., and is largely in the food business, with the prime concentration being on coconut related food products.
However, neither of the two was immediately available for comment.

Nevertheless, the company's secretaries in their letter to the Colombo Stock Exchange had however said that the sewage pipe has been relocated (it was done last month), while BoI approval for the project was finally obtained in August 2015.

Upon commercial operations, the project would enjoy an eight year tax holiday, the secretaries said.

Meanwhile, in the rights issue held by the company late last year, it was able to raise a sum of Rs 1.03 billion.

The issue which was oversubscribed, comprised the provision of 44.52 million new voting shares at Rs 21 each and another 6.43 million non voting (NV) shares at an issue price of Rs 15 each. The ratios of both of those issuances comprised on the basis of 'one for one' each. These new shares were listed a year ago on 17 December, 2014.

The company has since made one dividend announcement/payment, ie of 35 cents a share, both voting and NV (announced on 6 August, 2015), with payment to have had been made on 30 September, 2015.

Though the company in the second quarter (2Q) ended 30 September, 2015 marginally grew its top line from Rs 3.84 billion to Rs 3.85 billion on a year on year (YoY) basis, its bottom line grew markedly from Rs 315.8 million to Rs 441.41 million.

This was mainly possible by reducing its sales cost from Rs 2.95 billion to Rs two billion; administrative expenses from Rs 248.12 million to Rs 223.19 million and finance costs from Rs 34.25 million to Rs 20.83 million, respectively.

The company which is controlled by the Rajiyah family, Dr. S.R. and Mrs. I.R., is largely in the food business, with the prime concentration being on coconut related food products.

The company's voting shares in the 2Q ended 30 September, 2015 closed at Rs 28.80 a share, down 27.27% (Rs 10.80) YoY over its commensurate close in the same period of last year, which was Rs 39.60 a Meanwhile, its NV share in the review period, closed, down Rs 3.50 a share (12.73%) to Rs 24 a share, compared to its close of Rs 27.50 per NV share as at 30 September, 2014.

(PGA)

www.ceylontoday.lk

Brac borrows Rs 341m at 4.5% premium

Ceylon Finance Today: Brac Lanka Finance plc, an LOLC subsidiary, received a cash infusion of Rs 341 million from its parent, the company's secretaries informed the Colombo Stock Exchange (CSE) on Tuesday.

It said that the interest charged on the loan is AWPLR plus 4.5%. According to the Central Bank of Sri Lanka (CBSL), the AWPLR in the week ended Friday (11 December) was 7.33%.

In other developments, People's Insurance Ltd., on Tuesday informed the CSE that its IPO to raise Rs 750 million had been oversubscribed. The sale comprized 50 million ordinary shares at Rs 15 each. (PGA)

www.ceylontoday.lk

America's first interest rate hike in nearly a decade is here.

The Federal Reserve raised its key interest rate on Wednesday from a range of 0% to 0.25% to a range of 0.25% to 0.5%.

The rate hike is a small one, but it will affect millions of Americans, including investors, home buyers and savers. Savers should eventually see a little more interest on their deposits at the bank, but big banks didn't make any increases Wednesday. Mortgage rates will gradually rise.

The move was widely expected. It is a sign of how much the economy has healed since the Great Recession. The central bank believes the U.S. economy is strong now and no longer needs crutches and that the move "marks the end of an extraordinary period" of low rates designed to boost the recovery from the Great Recession.

"I feel confident about the fundamentals driving the U.S. economy, the health of U.S. households, and domestic spending," Fed chief Janet Yellen said during a press conference. "There are pressures on some sectors of the economy, particularly manufacturing, and the energy sector...but the underlying health of the U.S. economy I consider to be quite sound."

The Fed telegraphed it will be patient with future rate increases so as not to kill the economic recovery. The central bank's statement said the economy will only merit "gradual increases" in rates, which are likely to remain low "for some time." Yellen repeatedly said during the press conference that future rate hikes will be "gradual."

Stocks rallied with the Dow rising 224 points after the announcement and Yellen's press conference.

Investors were pleased to see that the Fed expects "only gradual increases" in rates next year and that the committee explicitly said it would take into account "readings on financial and international developments."

The Fed put interest rates near zero during the financial crisis in December 2008 to help stimulate the economy and boost the collapsed housing market.

But the economy is no longer in crisis. In fact it is a lot healthier -- unemployment now is at 5%, half of the 10% rate it hit in 2009 during the worst of the jobs crisis.

Over 12 million jobs have been added since the recession ended. Wages -- which have barely grown during the recovery -- have also started to pick up recently.

On Wednesday, the Fed's committee improved its economic outlook. Compared to its last forecast in September, the Fed raised its expectations for growth next year to 2.4%, up from 2.3%. It also lowered its projection for unemployment in 2016 to 4.7%, down from 4.8%.

The Fed still has low expectations for inflation. The central bank has two goals: low unemployment and stable inflation. The Fed's target for inflation is 2%, but right now it's close to zero. The Fed sees inflation inching up in the years to come, but not hitting 2% until 2018.

Known as "liftoff," the Fed's action is expected to be the first of more rate increases that will probably come in 2016. The last rate hike was June 2006.

www.money.cnn.com