Both gauges rose strongly during the week, as investors foraged for value maximizing on the perceived buying opportunity in firms that have been pummeled but are poised to rebound strongly. Retail and strategic institutional interest prevalent throughout the week enabled the All Share Price Index to close with a gain of 54.2 points at 2,383.4 (+2.3% WoW), whilst the Milanka Price Index advanced 94.6 points to close at 3006.2 (+3.2% WoW) points.
Total turnover for the week was significantly higher than that of the previous week at LKR3,346.9 mn (+190% WoW) amidst strategic transactions on Ceylon Oxygen (COXY), James Finlay (JFIN), Caltex Lubricants (LLUB) and John Keells Holdingís (JKH). Average daily turnover levels witnessed a sizable increase amounting to LKR669.4 mn (+190% WoW, compared to last weekís LKR230.8 mn). Whilst Lanka IOC (LIOC), Sri Lanka Telecom (SLTL), Touchwood Invest. (TWOD), John Keells Hotels (KHL), and Asian Hotels & Properties (AHPL) also contributed profoundly towards weekly turnover.
Top gainers for the week were Stafford Hotels (+25.6% WoW), Fortress Resorts (+25.6%), Riverina Hotels (+21.0%), Lanka IOC (+16.9%), Hotel Reefcomber (+15.4%), Vanik Incorp. (+13.2%), Caltex Lubricants (+7.8%), Asian Hotel & Properties (+5.1%) and Sri Lanka Telecom (+5.0%).
Main losers for the week were James Finlay (-8.3% WoW), Tess Agro (-7.7%), Blue Diamonds (-6.5%), Muller & Phipps (-6.3%), Touchwood Inv. (-4.9%) and Sierra Cables (-4.5%).


ACL Cablesí 1Q07 net profit up 222% YoY Ė BUY

ACL Cables (ACL) has reported strong 222.2% YoY growth in consolidated net profit to LKR 273.9 mn in 1Q07, ahead of our expectations. Whilst the core holding companyís earnings have soared by 310.5% YoY to LKR176.5 mn, subsidiary Kelani Cablesí net profit has surged by 126.1%YoY to LKR100.4mn. Underpinning earnings growth has been strong demand for electric conducting lines and power cables on the back of rural electrification schemes, reconstruction of tsunami damaged areas and higher housing starts.
Revenue up 94% YoY in 1Q07. ACLís consolidated revenue has grown strongly by 94.1% YoY to LKR1, 779.9 mn in 1Q07 on the back of strong demand for aluminium conductors, rural electrification schemes and reconstruction of tsunami damaged areas whilst higher housing starts and new property development projects have boosted demand for electric power cables. Whilst ACLís core revenue has risen by 109.4% YoY to LKR1, 008.5 mn, 79% owned subsidiary Kelani Cables has witnessed an 85.8% YoY rise in turnover to LKR681.4 mn. The strong demand growth has also enabled ACL to raise prices, effectively passing on higher raw material costs to customers. Meanwhile, we understand that ACLís exports sales (which accounted for 12% of total) have grown by a modest 25% in the quarter.
Gross Profit up 156 % YoY in 1Q07. Following strong growth in turnover, ACLís consolidated gross profit has risen by a sharper 155.9% YoY to LKR541.5 mn, with ACLís core gross profit surging by 216.8% YoY to LKR327.6 mn and that of Kelani Cables rising by 108.6% YoY to LKR180.4 mn. This has enabled the groupís gross margin to rise to a substantial 30.4% in 1Q07 from 23.1% in the previous year. This follows strong demand growth, which has enabled ACL to pass on the entirety of the increase in raw material costs to it customers. We understand that the prices of ACLís main raw materials, copper and aluminium have risen by 100% and 33% YoY respectively, in addition to higher costs of plastic resin.
Operating profit up 173% YoY in 1Q07. Following slower increase in operating costs, ACLís consolidated operating profit has grown strongly by 172.7% YoY to LKR453.7 mn in 1Q07. Whilst administration costs have increased only by 35.5% YoY to LKR32.8 mn, distribution expenses have risen by 40.3% YoY to LKR51.2 mn during the period under review. This has enabled operating profit margin to improve to a considerable 25.5% in 1Q07 from 18.1% in 1Q06. The core holding companyís operating profit has increased by 234.5% YoY to LKR281.4 mn whilst Kelani Cables has posted 128% YoY higher profit of LKR144.4 mn in 1Q07.
Net profit up 222 % YoY in 1Q07. Meanwhile, with ACLís group finance cost rising only by 33.5 % YoY to LKR33.9 mn in 1Q07 and corporate tax increasing in line with pretax profit (the effective tax rate has decreased marginally to 28.9% in 1Q07 from 30.4%), consolidated net profit has soared by 222.2% YoY to LKR273.9 mn. At the net level, the core holding companyís net profit has soared by 310.5% YoY to LKR176.5 mn whilst Kelani Cablesí earnings have surged by 134 % YoY to LKR104.3 mn.
Share excellent value on 3.1X FY07 earnings. ACLís 1Q07 earnings are well above our expectations, due to the stronger than expected demand outlook and the company being able to pass on the entirety of the increase in its raw material costs to customers. Consequently, ahead of meeting with the management, we are raising our forecast FY07 net profit of ACL by 37.6 % to LKR620 mn that of FY08 by 22.6% to LKR760 mn. ACL is excellent value on 3.1X revised FY07 net profit given the strong demand outlook, dominant market share and improving operational efficiencies. We continue to recommend BUY.


Distilleriesí 1Q07 net profit up 84% YoY Ė BUY

Distilleries (DIST), Sri Lankaís dominant hard liquor manufacture and owner of several acquired non-related but significantly large business operations, has recorded strong 84.2% YoY growth in net profit to LKR892.3 mn in 1Q07, somewhat ahead of our expectations. Earnings have been driven by the core hard liquor distilling business, subsidiaries; Sri Lanka Insurance Corporation (SLIC) and Lanka Bell (LB), and higher contribution from associate Aitken Spence (SPEN). In addition, improved profitability has been witnessed in the plantation subsidiaries, Balangoda (BALA) and Madulsima (MADU).
Net turnover up 65% YoY in 1Q07. DISTís consolidated net turnover has increased by 65.3% YoY in 1Q07 to LKR6,800 mn. It is difficult to obtain an exact breakdown of turnover of DIST but we understand that higher net premium income at SLIC and sharply higher sales revenue from LB (with the rapid rollout of its CDMA Ė Code Division Multiple Access Ė telephony service) has boosted top-line growth. Meanwhile, the core distilling businessesí net turnover has risen by 35% YoY to LKR2,147.1 mn.
Gross operating profit up 68% YoY. In 1Q07, DISTís group cost of sales has increased only by 45% YoY to LKR4,725.5 mn, enabling consolidated gross profit to jump sharply by 141.3% YoY to LKR2,074.5 mn. We understand that the slower increase in cost of sales is attributed to higher gross margins at LB and the plantations.
However, with investment income at SLIC growing by a less faster but nevertheless strong 30.7% YoY to LKR1,058 mn in 1Q07 and other operating income declining by 22.5% YoY to LKR288.9 mn, DISTís consolidated gross operating profit has risen by a slower, nevertheless substantial, 67.6% YoY to LKR3,421.4 mn.
Operating profit up 74% YoY. Meanwhile, DISTís consolidated distribution costs have risen sharply by 237.2% YoY to LKR221.6 mn and administrative expenses by 124.9% YoY to LKR632.9 mn 1Q07. This is largely on account of higher costs associated with the network expansion of LB and SLIC. However, SLICís expenses attributed to the life fund has risen by a relatively moderate 48.9% YoY to LKR991.6 mn and thus has enabled DISTís 1Q07 consolidated operating profit to increase strongly by 74.3% YoY to LKR1,565.3 mn
Profit before Tax up 132% YoY. Further, with DISTís 1Q07 finance cost declining by 71.1% YoY to LKR78 mn and its share of profit from its 28.8% owned associate company Aitken Spence growing strongly by 75.5% YoY to LKR97.2 mn (as a result of higher contribution from its Maldivian tourism operations), consolidated profit before tax has increased sharply by 131.7% YoY to LKR1,584.5 mn.
DISTís core hard liquor distilling operation (which controls 78% of the legal market) has performed well with pre tax profit rising by 30.3% YoY to LKR688.9 mn, although the major trust in earnings growth came from subsidiaries and associates. Although an exact breakdown of the composition of DISTís consolidated profit before tax is difficult to obtain, we estimate combined pre tax earnings contribution from Beruwala Distillery, Texpro and Periceyl to have risen sharply by 216.3% YoY to LKR315.4 mn in 1Q07. The other main contributing subsidiaries have been SLIC, whose profit before tax contribution has grown by 275% YoY to LKR270 mn and LB, which contributed profit before tax of LKR134 mn in 1Q07, up 235% YoY. Further, DISTís plantation subsidiaries Balangoda (BALA) and Madulsima (MADU) plantations combined pre tax earnings contribution increased by 464.3% YoY to LKR79 mn on account of higher rubber and tea prices. In addition, associate SPENís 1Q07 profit before tax contribution has also increased by 75.5% YoY to LKR97.2 mm.
Net profit up 84% YoY. Meanwhile, despite DISTís corporate tax rising by 187.1% YoY to LKR524.4 mn and minority interest increasing by 907% YoY to LKR167.8 mn, consolidated net profit has grown sharply by 84.2% YoY to LKR892.3 mn 1Q07.
SLIC acquires Apollo Hospitals. Meanwhile, in line with its strategy of diversifying in to key growth sectors of local industry, DISTís subsidiary SLIC increased its stake in Lanka Hospitals Corporation Limited (LHCL), the owner of the prestigious Apollo Hospital in Colombo and an associate of Apollo Hospitals India, to 36.1% in July, 2006. This compelled DIST to mandatorily offer to purchase the remainder of the share capital of LHCL, which was duly carried out with Apollo Hospitals Enterprises Limited of India selling its entire holding of shares amounting to 33.22% of equity to SLIC at LKR28 per share. Hence, with the completion of the mandatory offer SLIC currently holds 78.1% (122.2 mn shares) of the issued share capital of LHCL.
Forecast FY07 net profit revised up 10.5% to LKR4,131 mn (+41.5% YoY). The performance of DISTís core hard liquor distilling operation and subsidiaries, SLIC and LB, in 1Q07 have been ahead of our expectations.
Hence, ahead of meeting the management we are revising DISTís estimated FY07 earnings up by 10.5% to LKR4,131 mn (+41.5% YoY). We also project DISTís earnings to rise by a further 32.4% YoY to LKR5,468.2 mn in FY08. Share undervalued on 3.7X FY07 earnings.
DISTís share price has performed strongly in 2006, having fallen to a low of LKR31.25 the counter has rebounded and is now trading at LKR50.50 after having traded at a high of LKR54. DIST remains significantly under valued, trading on just 3.7X FY07 earnings and 2.8X forecast FY08 net profit.
We also believe that the company is set to benefit substantially in the future by unlocking the value of its unlisted subsidiaries of SLIC and LB via initial public offerings.
In such an event, DIST would reap substantial capital gains which can be effectively utilized for further strategic acquisitions.
In addition, we also expect the core hard liquor distilling operation to benefit from the Governmentís commencement of a serious crackdown on illicit liquor manufacture. We reiterate BUY.



Sri Lanka Telecom (SLTL), announced the launch of its Bharat Lanka Optical Fibre Cable (BLFC) a joint venture between SLTL and the Indian public sector telecom giant Baharat Sanchar Nigam (BSNL). The 320 km long cable is a USD18 mn investment shared equally between the parties and will run between Tuticorin in India and Mount Lavinia with an initial capacity of 10 Gigabits which is expected to be upgraded progressively. Further, the cable will pave the way for SLTL to handle telecommunication traffic from BSNL to other international destinations through its undersea cable facilities of SEA-ME-WE3 and SEA-ME-WE 4 cables.
Specialist Gasses (Private) Limited (SGL) a subsidiary of Actis South Asia Fund 2 LP announced that it acquired 4.78 mn shares amounting to 70.85% of the issued share capital of Ceylon Oxygen Limited (COXY) from Yara International ASA. The strategic transaction was done in two tranches with 1.15 mn shares and 3.63 mn shares changing hands at LKR241.75 and LKR242 per share, respectively.
Further, in compliance with the provisions of the Company Takeovers and Mergers Code, SGL will make a mandatory offer to the remaining shareholders with 2.97 mn shares amounting to 29.15% of COXY at LKR242 per share