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Market Indices
A flash in the pan Breaking the silence of what was an otherwise relatively quiet trading week, the Sri Lanka bourse gained 2.7% on Wednesday on news of a change at the market regulator. The rise nevertheless proved to be only short lived with the market succumbing to retail selling pressure during the ensuing days. Bucking the downward trend however, the IPO of Peoples Leasing Company (PLC) was oversubscribed on its opening on Thursday. PLC which is a fully owned subsidiary of state banking giant Peoples Bank offered 390 million shares @ LKR18/-.
Notwithstanding Wednesdays flash in the pan, on a week on week basis, the ASPI and MPI remained virtually unchanged up by just 0.93% and 0.65%
Global Markets
28-Oct 4-Nov
Sri Lanka - ASPI India - Sensex Pakistan - KSE 100 Taiwan Weighted Singapore - Straits Times Hong Kong - Hang Seng
Prime Lending Rate (Avg. Weighted) Deposit Rate (Avg. Weighted) Treasury Bill Rate (360 Days) Dollar Denominated Bond Rate LKR/US$ (Selling Rate) LKR/EURO (Selling Rate)
Market Performance
to end the week at 6407 and 5699. Market turnover of LKR6.5 bn (+141%WoW) was boosted by parcels of Galadari, Hayleys and HVA foods changing hands that collectively accounted for 40% of the weeks total. Reflecting a modest improvement in sentiment, gainers outpaced losers with Infrastructure Developers, Serendib Land and Kalamazoo recording a81.5%, 48.7% and 29.6% rise and offsetting declines in Beruwela Walk Inn, Huejay and Bimputh Lanka which lost 16.7%, 13.6% and 13.1% respectively. Global markets meanwhile remained jittery throughout the week following political uncertainty in Greece and the lack of any concrete details with regard to the EU bail out initiative. With both buyers and sellers largely sitting in the wings in anticipation of a market trigger, as we move deeper into 4Q2011, we expect the current earnings cycle to underpin market trajectory. While we expect market activity to be relatively restrained in the immediate term, we expect momentum to gather steam in the medium to longer term with a break to the upside from the relatively sideways flag that we have been experiencing so far. Consequently, we view the current market environment as an opportunity for investors to clean their books, re-align their portfolios and reposition themselves to take advantage of the markets anticipated break to the upside. We consequently advise investors to break away from the herd, maintain a healthy investment horizon and focus on companies that will deliver quality earnings.
3Q2011 Corporate resultsthe story continues While a mixed bag of corporate results were released this week, the majority of the results were largely positive with strong top line growth driving firm bottomline growth. John Keells Holdings, a proxy to the economy reported a net profit growth of 38% to LKR1.75bn for the 3Q2011 (adjusting for an extra-ordinary capital gain of LKR1.79bn during 3Q2010) firmly epitomizing the strength of the domestic economy. Although growth appears to have been generally broad based for the conglomerate, the transportation, leisure and consumer foods segments reported the strongest contribution.
JKH-Segmental PAT
800 700 600 LKR Mn 500 400 300 200 100 0 2010 2011
Overall consolidated revenues are up 22% for companies that have reported their 3Q2011 corporate results so far together with a 2% improvement in operating margins on the back of a general reduction in costs and operating efficiencies. Notwithstanding lower other income generation, (which has historically been a catalyst boosting earnings growth), consolidated earnings have grown by 17% for 3Q2011 companies.
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Unraveling hidden gems We believe that the risk trade of 2009 and 2010 has now given way to a highly active stock selection approach. With the 3Q2011 corporate results release in full swing, we believe that investors with a medium to longer term investment horizon will now have the ideal opportunity to sift through the market and unravel hidden gems that have strong intrinsic values and have hitherto been relatively undiscovered. Is it possible to beat the Market?
Revenue
Operating Profits
Net Profits
Revenue Growth
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Millions Manufacturing Land & Property 3Q2010/2Q2011 3Q2011/2Q2012
While many may question the viability to reenter the market on the grounds that is has not delivered on a YTD basis, we believe this window period of consolidation is vitally important for corporate earnings to catch up especially consideration the markets lofty valuations following the 2009/2010 bull run. The question facing many investors seeking to invest in the Sri Lanka bourse is whether the countrys 8-9% forecast GDP growth and 35-40%+ corporate EPS growth is likely to be absorbed into market dynamics and momentum. We certainly think so but would like to highlight the fact however that the markets transition from a historically momentum based trading model to a fundamentally based investment model is unlikely to happen immediately but rather in a series of stages. Considering this phased development process, we advise investors to be highly selective in their investment decision making in order to benefit fully from the markets transitioning.
Chemical &
Telecommunication
Information Technology
Diversified Holdings
Plantation
Trading
Motors
Millions
Information
Chemical &
Telecommunication
Trading
Motors
Diversified Holdings
Plantation
Health Care
Health Care
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Corporate News
Banking heavyweight Sampath Bank reported a 46% jump in its 3Q2011 earnings to LKR1.1 bn supported by both higher interest income and fee based income generation together with increased tax cuts. The banks net interest income rose by 18% to LKR2.5 bn on the back of a 21.1% increase in its top line to LKR5.6 bn against a 21.5% rise in interest expenses to LKR3.0 bn. The banks loan book rose by 28.4% to LKR158.5 bn, while bad loans declined by 11% to LKR5.2 bn with loan loss reversals of LKR226 mn recorded during the period. Deposit growth also remained in double digit territory rising by 19.5% to LKR179.6 bn compared to LKR160.3 as at December 2010. Tile manufacturer Royal Ceramics reported an impressive 3Q2011 net profit growth of 121% to LKR496 mn boosted by strong growth in construction activities in the country. Revenues increased by 23% to LKR1.9 bn spearheaded by firm growth in the companys tile business and a turnaround in its sanitaryware unit. Conglomerate Aitken Spence released its 3Q2011 net profit reporting a 3.8% decline to LKR583 mn notwithstanding improved performance from its hospitality and shipping businesses. While revenue growth at 17% to LKR7.4 bn was encouraging, profits from its strategic investments and services sectors declined during the quarter denting earnings growth. Meanwhile Ceylon Cold Stores, the F&B subsidiary of conglomerate John Keells Holdings reported a fourfold increase in net profit to LKR189 mn during 3Q2011.
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Global Outlook
United States Developments in the Eurozone continued to weigh on US equities. The S&P 500 Index recorded its first weekly drop since September falling 2.5% to close the week at 1253 with financial and industrial stocks bearing the brunt of the fall. On a positive note, the US added 80,000 jobs in October with its unemployment rate declining to a 6 month low of 9.0% from 9.1% while 3Q2011 corporate results have also come in surprisingly better for several bluechip companies. This weeks market decline follows an 11% rally in October fueled by S&P 500 profits that have exceeded market estimates by 4.6%, the 11th straight quarter of higher-than-expected earnings. Meanwhile, S&P 500 companies are poised to report their largest annual revenue increases on record with consolidated revenues expected to rise by 11% to US$1052 per share in 2011. Notwithstanding the positive news, equity market trajectory will continue to depend on events unfolding in the Eurozone as the US moves deeper into the 4th quarter. Eurozone Following a choppy week of trading, european markets closed lower on Friday after the G20 meetings appeared to offer limited support to stem the crises. The Euro Stoxx 50 slid 6.2% during the week to close at 2292 led by declines mainly in the DAX and FTSE100. Despite political events in Greece that saw Prime Minister George Papandreou calling a referendum on the next bail out, confidence in an international package to support the crises has not completely waned.
Economic News
Inflation slowed to its lowest level in 14 months declining to 5.1%YoY in September compared with 6.4% in October - its third consecutive monthly decline. This is attributable to lower food prices, namely vegetables, fish and sea food offsetting an increase in the price of rice. Other constituents of the index that rose were clothing, housing, water, electricity, fuel, furnishing, household equipment and routine household maintenance. With headline inflation figures falling, we expect the economy may well be on its way to achieving the governments GDP growth target of 8.3% this year.
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Global Outlook
European officials are consulting investors over two options to translate the bailout funds 440 billion euros in guarantees into 1 trillion euros of spending power. The first option is to reduce the regions troubled economies borrowing costs by issuing partial protection certificates, a form of insurance for bond sales. The second option is to create special investment vehicles to be offered to investors from markets such as Russia and China. Asia Following a highly jittery week, Asian markets closed higher on Friday on generally positive news from both the Eurozone and the US. Markets breathed a sigh of relief as Greeces Prime Minister revoked his decision to call a referendum while the US Fed reported that the economy grew during the 3Q2011 and posted a decline in unemployment numbers for October. On a weekly basis however, the MSCI Asia Pacific Index was still down 4% with Nikkei, TOPIX and Hang Seng leading the list of losers. Asian markets are likely to continue to remain volatile this week piggy backing on US and European events. Notwithstanding this however, stock valuations have now fallen to multi-year lows and appear increasingly attractive even considering the prospect of forecast slower economic growth in the region.
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DNH TOP 30
Company CSE CODE Share Price (LKR)
Sri Lanka Telecom Lanka ORIX Leasing AHOT Properties Dialog Axiata Softlogic Holdings Colombo Fort Land & Buildings Aitken Spence John Keells Holdings Commercial Bank Hemas Holdings Hayleys Hatton National Bank Distilleries Richard Pieris Eden Hotel Lanka Nawaloka Hospitals Kotagala Plantations Asiri Hospitals DIMO Kegalle Plantations Royal Ceramics Lanka WallTile Ceylon Glass Laugfs Gas VallibelOne National Development Bank DFCC Bank Sampath Bank Ceylon Leather Ceylon Grain Elevators Expolanka Holdings SLTL LOLC AHPL DIAL SHL CFLB SPEN JKH COMB HHL HAYL HNB DIST RICH EDEN NHL KOTA ASIR DIMO KGAL RCL LWL GLAS LGL VONE NDB DFCC SAMP CLPL GRAN EXPO 51.00 88.30 88.50 8.10 18.80 50.10 125.50 195.40 109.00 35.20 380.30 185.10 167.00 9.60 40.00 3.90 86.50 8.80 1282.90 115.50 144.90 106.10 7.90 39.50 25.60 130.00 119.10 207.40 84.40 100.80 10.40
Valuation Guide
Net Profit (LKR mn)
2008
7,367 1055 623 -2879 3 717 3069 4965 4268 719 803 3219 3430 -305 311 -109 171 198 103 177 206 437 -261 229 N/A 1605 1360 1414 -24
2009
778 2,385 689 -12208 -38 50 2987 5552 4304 935 2609 4352 2136 712 498 97 323 318 278 376 711 766 -61 528 N/A 2085 1713 2098 36
2010
3,943 7,367 2148 5047 N/A 556 3428 9063 5524 1355 1216 4464 8308 2141 101 1071 668 262 2122 883 1374 909 579 1003 N/A 2150 7137 3303 107 475 1547
-53
N/A
134 518
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DNH TOP 30
EPS (LKR mn) EPS Growth (%) PE (X)
Valuation Guide
Price to Growth (X) Dividend Yield (%) Shares in issue (mn)
2008
2009
2010
2009
2010
2008
2009
2010
2010
SLTL LOLC AHPL DIAL SHL CFLB SPEN JKH COMB HHL HAYL HNB DIST RICH EDEN NHL KOTA ASIR DIMO KGAL RCL LWL GLAS LGL VONE NDB DFCC SAMP CLPL GRAN EXPO
4.08 2.22 1.41 -0.35 0.00 3.98 7.56 5.91 11.19 1.40 10.71 9.00 11.43 -0.16 5.89 -0.08 5.34 0.22 11.60 7.08 1.86 8.00 -0.27 0.59 N/A 9.77 5.13 9.05 -0.96 -0.88 N/A
0.43 5.02 1.56 -1.50 -0.05 0.28 7.36 6.61 11.28 1.83 34.79 12.17 7.12 0.37 9.43 0.07 10.09 0.36 31.32 15.04 6.42 14.03 -0.06 1.36 N/A 12.70 6.46 13.42 1.44 2.23 0.26
2.18 15.50 4.85 0.62 N/A 3.09 8.44 10.79 14.48 2.65 16.21 12.49 27.69 1.11 1.91 0.76 20.88 0.29 239.06 35.32 12.40 16.65 0.61 2.59 N/A 13.09 26.92 21.13 4.28 7.92 0.87
-89% 126% 11% 324% N/A -93% -3% 12% 1% 30% 225% 35% -38% -333% 60% -189% 89% 61% 170% 112% 245% 75% -77% 131% N/A 30% 26% 48% -250% 355% N/A
407% 209% 212% -141% N/A 1012% 15% 63% 28% 45% -53% 3% 289% 201% -80% 1004% 107% -18% 663% 135% 93% 19% -1049% 90% N/A 3% 317% 57% 197% 255% 228%
12.5 39.8 62.9 N/A N/A 12.6 16.6 33.1 9.7 25.1 35.5 20.6 14.6 N/A 6.8 N/A 16.2 39.5 110.6 16.3 77.9 13.3 N/A 66.8 N/A 13.3 23.2 22.9 N/A N/A N/A
118.3 17.6 56.9 N/A N/A 180.4 17.1 29.6 9.7 19.3 10.9 15.2 23.5 26.1 4.2 56.7 8.6 24.6 41.0 7.7 22.6 7.6 N/A 29.0 N/A 10.2 18.4 15.5 58.6 45.2 39.2
23.3 5.7 18.2 13.1 N/A 16.2 14.9 18.1 7.5 13.3 23.5 14.8 6.0 8.7 20.9 5.1 4.1 29.9 5.4 3.3 11.7 6.4 13.0 15.2 N/A 9.9 4.4 9.8 19.7 12.7 12
0.06 0.03 0.09 -0.09 N/A 0.02 1.01 0.29 0.27 0.30 -0.44 5.76 0.02 0.04 -0.26 0.01 0.04 -1.70 0.01 0.02 0.13 0.34 -0.01 0.17 N/A 3.18 0.01 0.17 0.10 0.05 0.05
1.2% N/A 1.1% 2.5% 0.0% 0.2% 0.8% 1.2% 2.7% 2.1% 1.1% 2.5% 0.3% 2.8% N/A 0.8% 11.6% 1.1% 4.8% 3.0% 1.7% 2.0% 3.8% 0.0% N/A 5.0% 8.4% 2.2% N/A 1.0% 1.2%
1,805 475 443 8,144 779 180 406 840 765 512 75 358 300 1,937 53 1,410 32 889 9 25 111 55 950 387 1,087 164 265 156 25 60 1,955
92.0 42.0 39.2 66.0 14.6 9.0 51.0 164.2 83.4 18.0 28.5 66.2 50.1 18.6 2.1 5.5 2.8 7.8 11.4 2.9 16.1 5.8 7.5 15.3 27.8 21.3 31.6 32.4 2.1 6.0 20.3
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Nominal GDP (LKR bn) % YoY Nominal GDP (US$ bn) % YoY Real GDP Growth (%) GDP per Capita (US$) % YoY Population (mn) % YoY Inflation (%) M2 (LKR BN) % YoY Average Oil Prices (US$ / barrel) % YoY Exports (US$ bn) % YoY Imports (US$ bn) % YoY Trade Balance (US$ bn) % YoY Current Account Balance (US$ bn) % YoY Balance of Payments (US$ bn) % YoY Budget Deficit (US$ bn) % YoY Budget Deficit as % of GDP Exchange Rate (LKR/US$)
1,822 15 19 14 5.9 981 13 19.3 2 6.3 581 14 28.1 15 5.1 9 6.7 10 (1.5) 7 (0.1) -65 0.5 67 (1.4) -1 (7.3) 96.5
2,091 15 21
2,453 17 24 18
2,939 20 28 16 7.7 1,421 15 19.9 1 10 993 21 61.1 21 6.9 10 10.2 15 (3.4) 36 (1.5) 130 0.2 -60 (2.0) 15 (7.0) 104.0
3,579 22 32 14 6.8 1,617 14 20.0 1 15.8 1,148 16 69.1 13 7.6 10 11.3 11 (3.7) 9 (1.4) -6 0.5 150 (2.2) 12 (6.9) 110.6
4,411 23 41 26 6.0 2,014 25 20.2 1 22.6 1,282 12 94.5 37 8.1 7 14.1 25 (6.0) 62 (3.9) 177 (1.4) -380 (2.9) 29 (7.0) 108.3
4,835 10 42 3 3.5 2,057 2 20.5 1 3.4 1,537 20 61.1 (35) 7.1 -12 10.2 -28 (3.1) -48 (0.2) -94 2.7 -293 (4.1) 45 (9.9) 114.9
5,602 16 50 18 8.0 2,399 17 20.7 1 5.9 1,813 18 77.5 27 8.3 17 13.5 32 (5.2) 67 (1.4) 563 0.9 -67 (3.9) -5 (7.9) 113.1
5.4 1,062 8 19.5 1 9 688 18 36.1 28 5.8 14 8.0 19 (2.2) 47 (0.6) 813 (0.2) -140 (1.5) 12 (7.5) 101.2
6.2 1,241 17 19.7 1 11 823 20 50.6 40 6.3 9 8.9 11 (2.5) 14 (0.7) 0 0.5 -350 (1.7) 11 (7.0) 100.5
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Nominal GDP
GDP Per Capita 2003 2004 2005 2006 2007 2008 2009 2010
10 8 6 4 2 0
Population (mn)
Population
9 8 7 6 5 4
16 14 12 10
8 6 4
BOP(US$ bn)
3 2 1 0 -1 -2 2003 2004 2005 2006 2007 2008 2009 2010 Balance of payment 120 115 110 105 100 95 90
LKR/US$
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Disclaimer
This Review is prepared and issued by DNH Financial (Pvt.) Ltd. (DNH) based on information in the public domain, internally developed and other sources, believed to be correct. Although all reasonable care has been taken to ensure the contents of the Review are accurate, DNH and/or its Directors, employees, are not responsible for the correctness, usefulness, reliability of same. DNH may act as a Broker in the investments which are the subject of this document or related investments and may have acted on or used the information contained in this document, or the research or analysis on which it is based, before its publication. DNH and/or its principal, their respective Directors, or Employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to sell or buy the investments referred to in this document. This Review may contain data which are inaccurate and unreliable. You hereby waive irrevocably any rights or remedies in law or equity you have or may have against DNH with respect to the Review and agree to indemnify and hold DNH and/or its principal, their respective directors and employees harmless to the fullest extent allowed by law regarding all matters related to your use of this Review.No part of this document may be reproduced, distributed or published in whole or in part by any means to any other person for any purpose without prior permission.DNH Financial is a fully owned subsidiary of Environmental Resources Investment PLC (ERI).
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