Two-month production disruption hurts Alumex 2017/18 results Leading aluminum extruder sees building boom prospects down the road

Alumex PLC, the Hayleys subsidiary which is the country’s leading aluminum extruder, posted below target results in terms of both revenue and profits in the year ended Mar. 31, 2018 but is poised to take-off with a new state-of-the- art production facility at Ekala enabling an additional output of 1,000 mt., the company’s annual report said.

"This will undoubtedly enhance the company’s position as the leading aluminum extruder in Sri Lanka, both with a higher capacity and higher quality of products, enabling the company to capture the premium market segments in both Sri Lanka and the South East Asian region," Alumex Chairman Mohan Pandithage said in the company’s recently released annual report.

A fault in the main extrusion line discovered during a plant refurbishment program at the beginning of the financial year resulted in the loss of 750 mt. production capacity. Although production returned to normal within a short time, sales did not recover at the same pace as the overall demand for aluminum products in the construction industry declined in the latter half of 2017, Pandithage said.

"In this backdrop, our marketing strategy had to be reassessed to suit the competitive environment. These changes, together with the increased demand saw a return to profitability in the last quarter of the financial year."

With the GDP from construction expected to grow seven to eight percent in the next few years a consistent demand for aluminum extruded products is projected and with the strategies the company has in place, it was well positioned to restore the momentum of its business, he said.

The year under review saw the company’s turnover down 5% to Rs. 4.5 billion and the group profit after tax down 52% to Rs. 364 million from the previous year’s Rs. 753 million. Net assets per share were down to Rs. 7.53 from Rs. 7.74 and a dividend of Rs. 1.05 per share was paid, down from the previous year’s Rs. 1.45.

Managing Director Rohan Peris said that their having to keep the main extrusion line out of production for two months compounded an unfavourable market situation. There was also an unforeseen downturn in the growth of the construction industry. Curtailing production led to delays in completion of orders and delivery resulting in reduced sales and a drop in market share although they retained their market leadership.

Their upgraded production facility at Ekala will gear the company to supply aluminum extrusion to upcoming large scale infrastructure projects, both ongoing and in the pipeline. These include the Megapolis, Port City, multi-storey luxury hotels and apartments and commercial mixed development projects.

Alumex has a stated capital of Rs. 283.7 million, reserves of Rs. 665.5 million and retained earnings of Rs. 1.3 billion in its books. Total assets ran at Rs. 6.4 billion and liabilities at Rs. 4.15 billion.

Hayleys with 52.59% of the company is the controlling shareholder, followed by Akbar Brothers (13.50%) and Rosewood (Hirdaramani) 9.80%. Dean Foster, a Hayleys subsidiary owns 4.75%.

The directors of the company are Messrs. Mohan Pandithage (chairman), RP Peris (MD), DWPN Dediwela (COO), SC Ganegoda, RP Pathirana (alternate AJ Hirdaramani), AA Akbarally (alternate T. Akbarally), Dr. H. Cabral and S. Munaweera.

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Browns seek shareholder nod for rights issue as market price slumps below issue price

Old established Brown and Co. PLC has summoned an extraordinary general meeting (EGM) of shareholders on Tuesday (July 17) to seek their approval for a rights issue of 141.75 million ordinary shares of the company, in the proportion two new shares for every share already held priced at Rs. 50 a share.

A circular to shareholders indicated that funds to be raised by the rights issue, to be underwritten without charge by Lanka Orix Leasing Company PLC (LOLC), is intended to settle outstanding borrowings of Rs. 7.087 billion (approx) of a total of approx. 7.094 billion due as at June 1, 2018.

A substantial component of the company’s borrowings as at May 31 is due to related parties with approx. Rs. 6.66 billion due to related parties while approx Rs. 10.03 billion is due to other parties.

Although the Brown’s share traded at highs ranging from Rs. 74.50 to Rs. 73.20 and lows of Rs. 68.50 to Rs. 55.50 in March, April and May, the current downturn in the Colombo Stock Exchange has driven the share below the fifty-rupee rights issue price.

The share closed on Friday at Rs. 48.50 with a small quantity of 672 shares trading between this price and Rs. 50, and closing at Rs. 48.50.

The shareholder circular said that LOLC is currently the ultimate holder of 54% of Browns shares through various related companies while owning 4.77% in its own account. It further said that if, resulting from the underwriting, LOLC were to hold above 30% of Browns, the mandatory offer provisions of the Company’s Takeovers and Mergers Code will not apply to LOLC.

Browns plan to dispatch provisional letters of allotment on July 24 upon receiving shareholder approval for the rights issue at the EGM.

Browns have paid no dividend for 2017/18, a dividend of 50 cents per share the previous year and 30 cents per share a year earlier. In 2014/15 it paid a dividend of Rs. 2.65 a share according to figures furnished in the rights issue circular.

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Asset rich John Keells Hotels looking at leaner expansion model Bentota Beach closure & part closure of two Maldives resorts impact on profits New Cinnamon Red in Kandy

John Keells Hotels PLC. (KHL), one of Sri Lanka’s largest hotel operators owning and managing a portfolio of 1,204 four and five-star rooms in 10 hotels across Sri Lanka and the Maldives saw a decline in both revenue and profitability in the year ended Mar. 31, 2018, with revenue down to Rs. 11.6 billion from the previous year and after-tax profit down to Rs. 1.1 billion from the previous year’s Rs. 1.86 billion.

The company’s chairman, Mr. Susantha Ratnayake, attributed the decline to the complete closure of Bentota Beach by Cinnamon for redevelopment and the partial closure of Cinnamon Dhonveli Maldives and Ellaidhoo Maldives by Cinnamon to facilitate refurbishments.

"The closures resulted in KHL recording a profit before tax of Rs. 1. 35 billion for the financial year ended Mar. 31, 2017, a decline of 40% over the previous year. Excluding the impact of the closures, KHL recorded a satisfactory performance given the increased room supply in the informal and graded sector, particularly in the coastal areas of the country," Ratnayake said.

The company which claims to be Sri Lanka’s hospitality trendsetter commands assets of Rs. 33.2 billion and a net asset value per share of Rs. 18. It posted 81% occupancy in the Sri Lanka sector, up marginally from 80% the previous year, and 82% in the Maldives, down from the previous year’s 89%.

Ratnayake said that Sri Lanka’s tourism sector recorded a subdued 3.2% growth in 2017 to 2.1 million arrivals against the robust 14% in 2016 falling short of the government’s target of 2.5 million arrivals. This was due to three month partial closure of the BIA for renovations and travel advisories from key markets due to floods, dengue and the declaration of a 12-day State of Emergency.

Maldives had recorded 1.39 million tourist arrivals in calendar year 2017, up 8% over the previous year. Arrivals were impacted by the unfavorable political climate in the country resulting in travel advisories being issued from key source markets including China, USA, UK and India. But Russia had recorded a strong recovery in outbound travel to the Maldives growing 33.1% over the previous year with nearly 62,000 arrivals.

Ratnayake said that the redevelopment of 159 rooms and Bentota Beach is ongoing with the hotel due to recommence operations next year. Exceptional expenses at Bentota Beach included an asset write-off and a voluntary retirement scheme expenses.

Looking at the outlook for the future, he said that the government has targeted 2.5 million arrivals this year with traffic from India expected to reach 450,000. The Sri Lanka Tourist Proportion Bureau is focusing on increasing awareness of Sri Lanka as a destination promoting film tourism, destination weddings, MICE (meetings, incentives, conferences and exhibitions) travel and religious and pilgrimage related travel to position Sri Lanka as a ‘destination for all seasons.’

"The group has strong conviction on the long-term growth prospects of the industry and is actively pursuing investment opportunities and partners to expand the Cinnamon hotels portfolio," Ratnayake said.

"The group is conscious of the high asset base of the industry group and in this light, in line with global trends, the group’s future expansion will be executed through asset-light models."

He also announced that they will strengthen their Sri Lanka presence and have made plans to commence construction of Cinnamon Red in Kandy with a room inventory of 210.

JKH with 80.32% of the company, followed by the EPF (5.39%) and the Sri Lanka Insurance Corporation’s Life Fund (4.80%) are the largest shareholders of Keells Hotels. All other shareholders individually own less than one percent.

The share traded at a high of Rs. 11.90 and a low of Rs. 8.30 during the year, closing at Rs. 9.30. This compared to a trading range of Rs. 13.50 to Rs. 9.80 closing at Rs. 10 the previous year.

The directors of the company are Messrs. SC Ratnayake (chairman), KNJ Balendra, JGA Cooray, JR Guneratne, JEP Kehelpannala. BJSM Senanayake, NB Weerasekera and Ms. AK Moonesinghe.

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ASPI positive for first time since late May says Acuity

Sri Lankan equities reversed seven consecutive weeks of negative returns last week, helping the ASPI end on a positive note for the first time since late-May this year, Acuity Srtockbrokers said in their Share Market Weekly.

It noted that despite temporarily falling below the key 6,100 level, the benchmark Index gained ~29 points or 0.48% over the week (cf. -86 point loss the previous week) and similar to that week when the Index breached the 6,100-mark to hit a 15-month low of 6044.03, the ASPI lost ~31 points on Monday to drag the index once again below this key 6100-mark.

However, the ASPI rebounded notably over the latter half of last week and its ~61 point gain between Wednesday and Friday more than offset the losses recorded earlier in the week and helped push the Index safely above the 6,100-mark for the second consecutive week, the report said.

"The stronger performance on the Index was mainly attributable to the return of d.lkInstitutional and high net worth investors and crossings accounted for 46% of weekly turnover (cf. just 36% a week earlier) with Jetwing Symphony and HNB accounting for 53% of the bulk parcels," Acuity said.

"Despite the Index’s stronger performance, overall activity levels on the Bourse remained dull, with turnover decreasing 31% W-o-W to Rs.2.0Bn. Daily turnover levels subsequently hit a 12-week low on both Monday (Rs.155Mn) and Tuesday (Rs143Mn) cf. the previous low of Rs.102Mn recorded in Mid-April amid the traditional New-Year holidays."

The foreign equity sell-off on equities meanwhile, continued once again last week with net outflows from the CSE amounting to Rs.221Mn cf. Rs.900Mn a week earlier. Net foreign outflows from the CSE widened further to Rs.2.8Bn, reflecting the heightened risk-aversion for Emerging and Frontier Market assets since Feb., 2018.

Acuity expected markets in the week ahead likely to look for cues both from domestic political & economic developments.

www.island.lk

Sri Lankan shares extend gains to 2-week closing high

Reuters: Sri Lankan shares rose for a fourth straight session on Friday and posted their highest close in two weeks as investors bought banking and diversified stocks, stockbrokers said.

But a lack of supportive news amid concerns over political uncertainty capped the upside, analysts said.

The Colombo stock index ended 0.32 percent higher at 6,138.08, its highest close since June 29. It rose 0.5 percent this week, its first weekly gain in eight weeks.

"Market sustained its momentum. Local investors have got activated and they are buying on valuations," said Hussain Gani, deputy CEO, Softlogic Stockbrokers.

Turnover stood at 626 million rupees ($3.92 million), less than this year's daily average of 900.5 million rupees.

The benchmark stock index hit its lowest close since March 30, 2017 on July 4, and has declined for 19 sessions in 26 through Friday.

A downward revision in economic growth estimate by the central bank has hit sentiment, analysts 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 told reporters last Friday, adding that the earlier estimate was "ambitious".

Foreign investor net sold equities worth 4 million rupees on Friday, extending the year-to-date net foreign sale to 2.4 billion rupees.

Shares in Lion Brewery (Ceylon) Plc rose 8.9 percent, Nanda Investment Plc ended 12.4 percent higher, Cargills (Ceylon) Plc climbed 1.8 percent and conglomerate John Keells Holdings Plc gained 0.4 percent.

Investors are waiting for some positive news both on the economic and political front, said analysts, adding that the government's policy implementation had been sluggish since both main parties in the ruling coalition lost local polls in February.

The International Monetary Fund said on June 20 that Sri Lanka's economy remained vulnerable to adverse shocks because of sizable public debt and large refinancing needs. 

($1 = 159.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Subhranshu Sahu)

Sri Lanka's ACL Cables turns to households, calls for extended protectionism

ECONOMYNEXT - Sri Lanka's ACL Cables is calling for extended protectionism to limit competition, amid a construction sector slowdown at home, fixed priced sales contracts, and competition in export markets.

ACL Cables said its export revenue grow 26.6 percent from a year earlier to 2.3 billion rupees in the year to end March 2018, while local sales grew at a slower 8.6 percent to 14 billion rupees.

Due to the slowdown in domestic sales, total revenue grew 11 percent during the year but cost of sales grew nearly twice as fast contracting gross profit by 18.8 percent to 2.6 billion rupees.

Net profit for the year to end March 2018 fell 39 percent from a year earlier to 763 million rupees, amounting to earnings per share of 5.82 rupees. The stock was trading 1.60 rupees lower at 39 rupees on Thursday.

Rising prices of raw materials, for instance copper increasing 43 percent to 7,000 US dollars a tonne, could not be passed on to consumers quickly.

"Another factor which contributed to the reduction of Gross margin was the locking of prices of cables with contractors in major projects and CEB," Managing Director Suren Madanayake told shareholders.

Higher interest costs were also hurting profits.

The company said it was reorganising its distribution network to reach a broader consumer market, or households, given the slowdown in the construction sector and large customers locking in prices.

There are signs market conditions will improve.

"Continued development of the Port city, creating interest among international investors is a good sign and we believe that there is a huge potential for construction Industry which in turn could lead to very high demand for cables in the coming years," Madanayake said.

However, dealing with the present challenge of falling profitability requires an export strategy.

"The export market is huge and competition is at its peak," ACL Cables Managing Director Suren Madanayake said.

"It is very important to penetrate the export market further in order to understand the international competitive environment and to improve our efficiencies.

"As we adapt to the external environment,we can increase our turnover and capacity utilisation."

The firm however continued to lobby for protection, limiting competition, and economic freedoms of a family that is trying to build a house, forcing them unfairly to pay higher-than-world-prices, giving bigger profits to producers.

Cable firms in Sri Lanka had already enjoyed protection for many years at the expense of families trying to put a roof over their heads.

"The FTAs with China and Singapore are threatening the healthy situation we are in," Madanayake said.

"However, we are lobbying the Government to maintain the Cables in the Negative list since the industry has potential for further expansion in to the export market.

"Such expansion needs a Local base protected from unfair trade practices and economies of scale of neighbouring countries," he claimed.

The firm did not specify what the 'unfair trade practice' was.

The firm also made a another standard argument, saying there were cheap imports which may be of low quality, which analysts say is a separate issue and is already addressed by Sri Lanka standards.

Import duties may in fact promote the import of the cheapest and lowest quality goods, by making the better brands too expensive, fair trade advocates say.

Sri Lanka's massive import protection given to steel, tiles, sanitary ware, have pushed up construction costs. Many protected businesses are however cannot export as long term protection has made them inefficient.

ACL Cables however is in exports unlike many other so-called 'geriatric' businesses that have enjoyed fat profits from import duties for decades.

Protection was advocated in Western nations like Germany, for nationalist 'infant industry' so that poor consumers in particular will sacrifice the well-being of their families and children on behalf of big business in the hope that eventually they will get freedom after business 'grew up'.

Sri Lanka's Melstacorp may increase focus on acquisitions: Fitch

ECONOMYNEXT - Fitch Ratings has affirmed Sri Lanka's Distilleries Company's AAA(lka) rating upgrading the outlook to stable, based on the liquor producer's market dominance as a successful reordering of the group allows parent Melstacorp PLC to focus on acquisitions, the ratings agency said.

"We believe the (Melstacorp) group restructuring will allow management to increase its focus on acquisitions in non-alcoholic beverage segments," Fitch Ratings Lanka said in a statement.

Melstacorp, which owns 92% of DIST, has yet to meet the requirement set by the Colombo Stock Exchange to increase the company's public float to 7.5 percent from 3.2 percent. "We think this is more of a formality at this stage," Fitch said.

"The group has historically pursued acquisitions actively and, while it has not indicated any specific targets at present, Distilleries' rating could come under pressure if there are significant debt-funded acquisitions, particularly those that weaken the group's overall business risk and increase cash flow volatility," the ratings agency said.

The affirmation of Distilleries AAA(lka) credit rating reflects the group's strong credit profile which is underpinned by its entrenched market position in Sri Lanka's alcoholic-beverage sector.

High entry barriers, which drive strong operating cash flows and low leverage, offset the weaknesses in Distilleries other, less operationally significant, investments, Fitch said.

Fitch Ratings statement:

Fitch Ratings has removed the Rating Watch Negative (RWN) on Distilleries Company of Sri Lanka PLC's (DIST) National Long-Term Rating, and has affirmed the rating at 'AAA(lka)'. The Outlook is Stable.

The removal of the RWN reflects our view that DIST and parent Melstacorp PLC have effectively concluded the group's restructuring exercise without an increase in credit risk after the private placement of DIST shares to Melstacorp in February 2018. Melstacorp, which owns 92% of DIST, has yet to meet the requirement set by the Colombo Stock Exchange to increase the company's public float to 7.5% from 3.2% but we think this is more of a formality at this stage.

Fitch rates DIST based on the consolidated profile of Melstacorp due to the strong linkages between the two entities, as defined in our Parent and Subsidiary Rating Linkage Criteria. The affirmation of DIST's National Long-Term Rating reflects the group's strong credit profile, underpinned by its entrenched market position in Sri Lanka's alcoholic-beverage sector and the high entry barriers, which drive strong operating cash flows and low leverage, and offset the weaknesses in its other, less operationally significant, investments.

DIST's rating also factors in the group's enhanced operating scale and cash flow diversity following the increase in its effective shareholding and management control of Aitken Spence PLC (ASP) to 51% in March 2018, from 49% previously. Fitch believes DIST's rating has a higher tolerance for leverage (defined as lease adjusted debt net of cash/operating EBITDAR) following the acquisition, and we have increased the leverage threshold above which the rating could be negatively impacted, to 2.0x from 1.5x to reflect this. We proportionately consolidate ASP's financials with that of Melstacorp in arriving at the rating to reflect our view that Melstacorp may provide support to ASP in a hypothetical distressed scenario only to the extent of its proportionate shareholding in light of ASP's large public float.

KEY RATING DRIVERS

Strong Linkages with Parent: There are strong operational and legal linkages between DIST and Melstacorp's subsidiaries, and DIST accounted for an estimated 71% of Melstacorp's consolidated revenue and 77% of its EBITDAR, excluding Melstacorp's insurance subsidiary, in the financial year to March 2018 (FY18). DIST and Melstacorp share the same board of directors, and DIST has previously provided financial support to weaker group entities in the form of corporate guarantees.

ASP Improves Business Risks: We believe the combined credit profile of Melstacorp and ASP is among the top tier of Sri Lankan corporates for credit quality. We have assessed ASP's standalone credit profile as slightly weaker than that of DIST due to ASP's exposure to segments with more volatile cash flows such as leisure and plantations, and ASP's slightly higher leverage (2.5x in FY18). This is offset by the greater diversification of Melstacorp's earnings and larger operating scale as a result of the combination.

Melstacorp's consolidated earnings continue to be underpinned by the strong alcoholic-beverage sector, which we expect to account for more than 65% of the proportionately consolidated EBITDA of the combined group in the medium term.

Margin to Improve: We expect the group's EBITDAR margin to rise by around 150bp in FY19 (FY18: 24%) as we forecast DIST's standalone EBITDAR margin will recover to around 37%-38% from FY19 due to better sourcing strategies. DIST's EBITDAR margin rose to 41% in 4QFY18, after falling to around 24% in the first three quarters of FY18 (FY15-FY17 average: 39%) due to higher costs as a result of a doubling of import duty on ethanol - a key input - in 2016. We also believe DIST will be able to pass on higher costs as we do not foresee a significant increase in excise duty levied on hard liquor over the medium term.

Leverage to Peak in FY19: We expect Melstacorp's leverage, including its 51%-share of ASP's net debt and EBITDA, to peak at 1.5x in FY19 (FY18 estimate: 1.4x) mainly due to large capex plans at ASP's power and leisure segments. Leverage is also high at the group's telecom subsidiary, Lanka Bell Limited, and plantation subsidiaries. We expect Lanka Bell to continue incurring high capex as it expands its 4G coverage. Volatile tea and rubber prices continue to affect the group's plantation business, although revenue improved in FY18.

Leading Alcoholic-Beverage Maker: DIST accounts for over 60% of Sri Lanka's hard-liquor production and has been able to maintain its market leadership due to its entrenched DCSL brand and access to a country-wide distribution network. The complete advertising ban on alcoholic beverages acts as a high entry barrier and further strengthens DIST's dominance. However, hard-liquor makers' volumes are likely to drop following the government's more favourable taxation policy towards beer makers from November 2017. We expect DIST's volumes to remain flat in FY19 despite the policy given its strong market position and revenue to grow by low-single digits thereafter as it passes on higher input costs.

Importance to State Revenue: We expect the alcoholic-beverage sector's importance to government revenue to reduce the risk the government will hobble the industry. Incremental excise tax increases on hard liquor will likely be slow as prices beyond consumer affordability could lower the government's income. Excise taxes on liquor contributed an estimated 8% to government tax revenue in 2016, with DIST accounting for around half of this amount.

Acquisitive Nature - Event Risk: We believe the group's restructuring will allow management to increase its focus on acquisitions in non-alcoholic beverage segments. Melstacorp disposed of its investment in a fully owned licensed finance company, Melsta Regal Finance Limited, in March 2018 while it increased its stake in its plantation-sector assets in September 2017. The group has historically pursued acquisitions actively and, while it has not indicated any specific targets at present, DIST's rating could come under pressure if there are significant debt-funded acquisitions, particularly those that weaken the group's overall business risk and increase cash flow volatility.

DERIVATION SUMMARY

DIST is Sri Lanka's leading alcoholic-beverage manufacturer, with a strong portfolio of wellknown brands and access to an extensive distribution network. DIST's 'AAA(lka)' rated peers, Sri Lanka Telecom PLC (SLT, AAA(lka)/Stable) and Dialog Axiata PLC (AAA(lka)/Stable) enjoy a larger operating scale, reflecting the size of the local telecom market and the companies' market leadership in fixed line and mobile, respectively. DIST's operating scale is smaller because a significant portion of the country's alcoholic-beverage consumption occurs outside the formal sector, which is not recorded.

DIST is also exposed to more regulatory risk in the form of increases in indirect taxation, but these risks are counterbalanced by its entrenched market position and high entry barriers, which allow the company to pass on cost inflation and maintain margins, supporting substantially stronger free cash flows (FCF) than the telcos. DIST's capex as a proportion of revenue is also considerably lower than the telcos, and most of DIST's investments in other businesses are discretionary. The telcos' high capex intensity is driven by the need to continually upgrade infrastructure and keep abreast of evolving technology, and to service growing network traffic, while competition keeps tariff increases in check, resulting in larger and more sustained negative FCF than DIST.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Consolidated revenue to grow by mid-single digits in FY19 before increasing to high-single digits over FY20-FY21
- Consolidated EBITDAR margin to improve 25% in FY19 on the back of improving alcoholbeverage segment margins (FY18: 24%)
- Lower excise tax hikes as the government would be mindful of falling revenue collection if demand were to decline
- Capex to peak at LKR13 billion in FY19, mainly on account of power and leisure segmentrelated capex by ASP
- A group dividend payout of 30% of net profit over FY19-FY21

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action - There is no scope for an upgrade since the company is at the highest rating on the Sri Lankan National Rating scale. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Consolidated financial leverage (measured as adjusted net debt/EBITDAR excluding Continental Insurance Lanka Limited and 51% consolidation of ASP) increasing to over 2x on a sustained basis (end-March 2018: 1.4x) - A structural change in the domestic alcoholic-beverage industry that considerably weakens DIST's competitive position

LIQUIDITY

Comfortable Liquidity Position: The group had a comfortable liquidity position at end-March 2018, with LKR19 billion of unutilised but committed credit lines and LKR16 billion of unrestricted cash and cash equivalents available to meet LKR19 billion of debt maturing in the next 12 months. The group has strong access to local banks due to its position as one of Sri Lanka's largest corporates and its solid credit profile.