Sri Lanka listed company profits up 11-pct, market re-rated down: data

ECONOMYNEXT - Profits at Sri Lanka's publicly traded companies rose 11 percent to Rs225 billion in the 12 months ending September 2016 from a year earlier, while quarterly earnings were up 24 percent to Rs59.4 billion, a research report said.

But the market had steadily re-rated down in terms of price-to-earnings multiples and price-to-book values over the past 18 months.

CAP Partners, a Colombo-based advisory firm, said the top contributors to profits in the September quarter was Ceylon Tobacco (7.5 percent), Hatton National Bank (6.8 percent), John Keells Holdings (6.3 percent), Commercial Bank (6.2 percent) and Dialog Axiata (4.8 percent).

Net interest income was higher at banks, despite rising rates in the quarter, CAL Partners said.

Valibel One, lost Rs3.0 billion in the quarter, down from a profit of Rs836 million last year.

Profits in the telecom, power and energy, oil palms grew, while services, stores and supplies, chemical and pharmaceuticals had fallen, the report said.

In the 12-months ending September 2016, John Keells Holdings brought 6.5 percent of the profits, HNB 6.3 percent, Commercial Bank 6.1 percent, Ceylon Tobacco 5.5 percent and Lanka Orix Leasing Company 4.1 percent.

The 12-month trailing earnings had grown 2.1 percent in the same period last year.

Sri Lanka engaged in a 'Keynesian stimulus' in the first quarter of 2015, expanding state spending and financing the budget deficit through printed money, generating a balance of payments crisis and currency collapse.

The market was trading at a price-to-earnings multiple of 13.7 times, trailing 12 months in the first quarter of 2015, followed by 13.4 times in the second quarter 13.5 times in the third quarter and 13.4 times in the fourth quarter.

The price-to-earnings multiple (the period in years it takes for a theoretical buyer of a company to recover his investment at historical profits) is a reflection of forward expectations.

When investors expect earnings to be stagnant or fall, they will pay a lower price for stock.

The rupee started to collapse in the third quarter and corrective measures to stop money printing were put in place from the third quarter, analysts say.

In the first quarter of 2015, price-to-earnings multiples fell to 12.9 times, in the second quarter it fell to 12.7 times. In the current quarter, it was down to 12.2 times.

The price-to-book value had fallen from 1.55 times in the first quarter of 2015 to 1.41 times in the third quarter of 2016.

Colombo Stock Exchange Market Review – 23rd Nov 2016

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Colombo Stock Exchange Trade Summary 23-Nov-2016

Colombo bourse closed in red for the eight consecutive session marking the longest losing streak in four months. ASI closed at 6,242.68 down 13.30 index points or 0.2% while the S&P SL 20 index closed at 3,468.05 down 5.60 index points or 0.2%.

Market breadth was negative with 76 losers and 52 gainers. Hemas Holdings (LKR 95.00,-5%), Lion Brewery (LKR 455.90, -6.8%) and Ceylon Tobacco (LKR 869.00,-1.2%) shares saw decline in the share prices while Commercial Leasing (LKR 3.70,+8.8%), Commercial Bank (LKR 142.00,+0.7%) and Ceylon Cold Stores (LKR 740.80,+0.9%) gained grounds.

Market turnover fell to LKR 285mn. Top contributor to the turnover was John Keells Holdings (LKR 112mn) which saw a crossing of 0.6mn shares at LKR 145.00. Further, Access Engineering (LKR 36mn) and ACL Cables (LKR 18mn) made noteworthy contributions to the turnover.

Access Engineering, Textured Jersey continued be among the heavily traded stocks along with Ceylon Grain Elevators and Laugfs Gas.

Foreign investors were net sellers with net outflow of LKR 101mn. Top net outflows were seen in John Keells Holdings (LKR 88mn), Laugfs Gas – voting (LKR 15mn) and Access Engineering (LKR 14mn) while top net inflow was seen in ACL Cables (LKR 18mn). Foreign investors accounted for 29% of the day’s turnover.

Source: LSL

Sri Lanka shares fall for 8th session; tax proposals weigh

Reuters: Sri Lankan shares extended falls to an eighth session on Wednesday, posting their lowest close since April 7, as investor sentiment was hit by budget tax proposals, including revisions in corporate and withholding taxes.

The government aims to boost its 2017 tax revenue by 27 percent to 1.82 trillion rupees year-on-year, and meet a commitment given to the International Monetary Fund in return for a $1.5 billion loan in May.

The benchmark index of the Colombo Stock Exchange ended down 0.21 percent at 6,242.68. It has fallen 2.77 percent over the past eight sessions after the budget was presented on Nov. 10.

The index was in oversold territory, with the 14-day relative strength index at 15.978 versus Tuesday's 16.929, Thomson Reuters data showed. A level between 30 and 70 indicates the market is neutral.

"Market is down in low trade as investors are on wait-and-see mode," said Dimantha Mathew, head of research at First Capital Equities (Pvt) Ltd.

Foreign investors sold a net 100.7 million rupees ($678,571.43) worth of shares on Wednesday, extending the year-to-date net foreign outflow to 1.27 billion rupees.

Analysts said the increase in various taxes and fees would reduce disposable income and challenge consumption-led growth.

Turnover was 284.9 million rupees, well below this year's daily average of 698.6 million rupees.

Shares of Lion Brewery Plc fell 6.81 percent, while Hemas Holdings Plc declined 5.00 percent and Ceylon Tobacco Company Plc fell 1.24. 

($1 = 148.4000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Sunil Nair)

Rising incomes seen lifting Sri Lanka consumer, retail stocks

ECONOMYNEXT – Sri Lanka’s consumer and retail sector has strong growth prospects given increasing disposable incomes and changing lifestyles, according to a new study by stock brokerage Asia Securities.

Mangalee Goonetilleke, research manager at Asia Securities, said that while new taxes in the government 2017 budget could reduce consumer spending, rising incomes means a shift to higher spending lifestyles.

Listed companies like Cargills, Singer (Sri Lanka), Ceylon Tobacco Company, Ceylon Cold Stores, Nestlé, Keells Food Products, Lion Brewery, Distilleries Company, Softlogic and Hemas stand to gain from higher consumer spending, she told a forum.

“The 2017 budget will have an impact on the sector with some companies raising prices which could reduce consumer spending,” she said. “But as incomes rise, there will be a shift to higher spending and lifestyle changes.”

Consumer firms that resort to “smart sourcing” should be able to withstand a slowdown in demand without hurting sales, she said.

Cargills is the largest food retailer, measured by sales and the number of stores. Its FMCG (fast moving consumer goods) business has a six percentage point margin difference over its retail and restaurant business and will be the future driver of growth, Goonetilleke said.

Singer is the largest consumer durables firms in sales and number of stores with an islandwide network and is close to consumers with a significant share of products made locally, such as fridges and washing machines, in which its unit Regnis is market leader.

Ceylon Cold Stores, which has reached the target price in Asia Securities buy recommendation, is the second largest food retailer and biggest ice cream vendor.

In the beverages business, Ceylon Cold Stores is market leader or neck-to-neck with Coca Cola, Goonetilleke said.

Ceylon Cold Stores is investing more money in new plant and should see strong growth in its impulse product range as it aims to catch up with market leader Cargills.

About 34-40% of Hemas’ sales come from FMCG and it is “aggressively marketing” its washing powder and soap brands and picking up market share from Unilever, Goonetilleke said.

Softlogic is third in consumer electronics, behind Abans and Singer, with its apparel business being able to capture the custom of high income people while its Samsung phones are doing well.

Sri Lanka's Cargills Bank makes Rs28mn net profit in Sept quarter

ECONOMYNEXT - Sri Lanka's Cargills Bank, part of CT Holdings Group, made a group net profit of Rs28 million in the September 2016 quarter compared with a loss of Rs79 million a year ago.

At bank level, interest income rose 288 percent to Rs442 million, while interest expenses rose 174 percent to Rs155 million, with net interest income up 267 percent to Rs287 million, according to results released by the company.

Net fee and commission income rose 48 percent to Rs17 million.

Group earnings per share were 05 cents compared with a loss per share of 18 cents the year before.

For the nine months to September 2016, the firm made a loss per share of 15 cents, down from 54 cents the previous year.

Loans stood at Rs12.3 billion as at 30 September 2016, while deposits were Rs7.3 billion.

During nine months ended 30 September 2016, 400.14 million shares were allocated raising a capital of Rs5.8 billion, the company said.

Sri Lanka Fitch rates National Insurance Trust Fund 'AA-(lka)'/Stable

ECONOMYNEXT - Fitch Ratings said it has assigned Sri Lanka’s National Insurance Trust Fund Board (NITF) a National Insurer Financial Strength Rating (IFS) and National Long-Term Rating of 'AA-(lka)' with a stable outlook.

“NITF's ratings reflect strong ties with the government of Sri Lanka, a strong business profile as the only reinsurer in the country, high capitalisation and conservative investment policy, which are counterbalanced by its high dividend payouts that are likely to continue,” a statement said.

The full statement follows:

Fitch Ratings-Colombo-21 November 2016: Fitch Ratings has assigned Sri Lanka-based National Insurance Trust Fund Board (NITF) a National Insurer Financial Strength Rating (IFS) and National Long Term Rating of 'AA-(lka)'. The Outlook is Stable.

NITF's ratings reflect strong ties with the government of Sri Lanka (B+/Negative), a strong business profile as the only reinsurer in the country, high capitalisation and conservative investment policy, which are counterbalanced by its high dividend payouts that are likely to continue.

KEY RATING DRIVERS

NITF's ratings reflect strong ties with the government as it is fully owned by the state and effectively functions as an arm of the state in the implementation of some policies, such as serving segments that are not covered by commercial insurers, and its role as the only reinsurer in the country. NITF was also the fourth-largest contributor to the government's consolidated fund in 2015.

NITF's rating reflects its strong business profile, which is underpinned by its role as the only reinsurer in Sri Lanka and its established products, including Agrahara, which according to NITF is the largest health insurance scheme in the country covering all state-sector employees and their families, as well as management of the Strike, Riot, Civil Commotion and Terrorism fund, which is available to all insurers in Sri Lanka.

Sri Lankan insurance regulation requires all non-life operators to cede 30% of their reinsurance to NITF. Inward reinsurance premiums accounted for 22% of NITF's gross written premiums (GWP) in 2015. Fitch expects reinsurance to be a key growth area for NITF, in line with industry growth in a country where penetration of non-life insurance is low.

In 2015, NITF's new management obtained retrocession to cover its reinsurance portfolio and as a result, claims stemming from the May 2016 floods in Sri Lanka were manageable. Flood-related claims caused NITF's combined ratio to increase to 97% in 1H16 from 53% in 2015. NITF has since reinstated the retrocession cover for rest of 2016 after exhausting it for flood-related claims.

NITF's profitability is high as reflected in the pre-tax return on assets of 39% in 2015, mainly due to the low combined ratio of 53% compared with the industry's 99%. NITF benefits from a low expense ratio - 14% in 2015 compared with an industry average of 36% - a reflection of its product portfolio, which requires smaller operating scale compared to a typical insurer, because most of NITF's business is directed from the state.

NITF's capitalisation metrics are strong, although it is still not reporting its regulatory risk-based capital to the authorities. Shareholders equity/total assets and non-life net premiums written/shareholder equity were strong at 73% and 0.9x, respectively, at end-2015. However, Fitch is of the view that capitalisation could come under pressure if there is a significant increase in the already high dividend payouts to the government in the future.

NITF's reserving lacks sophistication, in Fitch's view. NITF is in the process of getting its reserves externally certified and NITF expects reserving to improve with the inclusion of incurred but not reported (IBNR) reserves. According to management, NITF's liabilities are mainly short-tail in nature, and estimated to be less than one year.

NITF is only permitted to invest funds in government securities and equity of hospital projects under the NITF Act. NITF's entire investment portfolio is currently invested in government securities.

RATING SENSITIVITIES

An increase in market share while sustaining strong profitability and capitalisation as well as improvements in its risk management will lead to an upgrade in NITF's ratings.

NITF's rating will be downgraded if its importance to the state weakens. This could be reflected in a reduction in the share of government-related business. A weaker business profile, deterioration in capitalisation or aggressive underwriting could also lead to a downgrade.