An attempted attack at the air force base adjoining Bandaranayaka International Airport (BIA) by LTTE led to a shaky start for the week whilst the investor community took one step back eagerly expecting a directional response from the government. Low turnover levels were witnessed whilst both gauges dipped considerably on the first day. A lackluster market was witnessed as the week progressed whilst investors adopted a “wait and see” approach for an event driven upside to materialize. However, the market closed giving mixed signals whilst last day of the week surpassed LKR1 bn turnover levels largely due to significant contributions by Millers and NDB Bank.

All Share Price Index declined by 72.9 points to close at 2,789.8 points (-2.5%WoW), whilst Milanka Price Index declined by 97.3 points to close at 3,837.6 (-2.5%WoW) points. The total turnover for the week improved to close at LKR2,204.0 mn (+9.9%WoW), whilst average daily turnover levels improved to LKR440.8 mn (+9.9%WoW) compared to last week’s LKR401.1 mn.

Among the gainers were Ceylon Tobacco (+18.6%WoW), Kotagala Plantations (+10.7%), NDB Bank (+9.4%), HNB Assurance (+4.5%) and V Capital (+2.9%).
Main looses for the week were Ceylinco Insurance (-16.4%WoW), Kshthriya Holdings (-15.3%), Dankotuwa Porcelain (-10.0%), Touchwood (-8.2%), Colombo Dockyard (-7.4%) and Commercial Bank [NV] (-5.6%).


Stipulated revisions due to the Companies Act, 2007

New companies act will be enforced from 1st of April and key implications to the investors and corporations could be identified as follows.
Stated Capital
In the past, financial statements carried issued capital (normally at par value) and share premium reserves separately despite both of these components materializing as a result of an issue of shares. The new companies act has replaced both these components with an item called stated capital. More precisely, total amount received or due and payable to the company comes under stated capital. However, different classes of shares (eg: ordinary, preference, voting, non voting, etc) can be shown with relevant break up under the stated capital. Further there is no nominal value (par value) for a share. A “reasonable price” needs to be determined when issuing shares. Value of shares issued for anything other than cash as consideration will be determined by the board of directors. (Eg: ESOP)
Distributions and Solvency test

“Distribution does not only refer to dividends but also transfer of property, incurring of debt to or for the benefit of shareholders”. New companies act strictly looks at the company’s ability to meet the solvency test at the time of the distribution. An auditor needs to issue a Certificate of Solvency assuring compliance with the solvency criteria.
Solvency test refers to the ability of the company to meet its debts as and when they fall due in the normal course of business. In effect, total assets should comfortably exceed total liabilities and stated capital.
Moreover, total reserves (i.e revenue, revaluation, etc) needs to be positive for the firm to declare dividends. Companies with accumulated losses could declare dividends only if the total reserve is positive and would continue to remain positive after the specific distribution.

Share buy back option
New companies act enables the company to purchase its own shares provided an auditor has to opine that the consideration given is a fair value (i.e. market value). If a company is to alter the articles to reflect a removal or an addition of business activity or to carry out a major transaction or an amalgamation, minority shareholders could request the company to purchase their shares.

Bonus issues
Issue of shares needs to be at a reasonable value and will not be at par value anymore. Therefore, bonus issues, if any, needs to reduce the reserves at a reasonable value (closer to the market price). This will result in a significant reduction in reserves thereby affecting the solvency test.
Eg: A Ltd declares a bonus issue of 2 for 5. Company has 10 shares at a par value of LKR10. Therefore 4 new shares will be issued. Reasonable price determined for the share under new companies act is, say LKR15 since in most cases reasonable value would be closer to the market value and be higher than the par value. Following implications can be identified.

As shown above, under the present act issue of 4 new shares as bonus will reduce the reserves by LKR40 (i.e. at par value) and will increase the issued capital by the same. However, under the new act, reserves will come down by LKR60 (4 shares at a reasonable value which is at LKR15 in this example). This will result in reserves reaching zero. This will have an adverse effect on the solvency test. Therefore as represented under the example illustrated above, companies could generally revert to other alternatives in order to increase the issued number of shares. Thus a viable option could be to undertake a “share split”, which would have no impact on the solvency test whilst subsequently increase the issued number of shares through splitting the existing shares.


Hemas Holdings : Strengthening the portfolio

FMCG segment accounts for a bulk of the group’s revenues and profits whilst HHL successfully market’s brands to challenge the industry leader Unilever. Relocation of FMCG factory costing around LKR600 mn will result in a tax saving of around LKR100 mn on current earning levels. HHL plans to enter countries with high population and low inflation such as India, Pakistan and Indonesia which will generate greater returns.
HHL’s pharmaceutical sector represents over 30 foreign principals which enabled the company to become the market leader with a share of 15%. The hospital in Wattala is expected to be commissioned by mid 2008 and targeted at middle and high income earners in the Gampaha district. HHL has a 25% stake in e-Channeling which enabled HHL to widen its health care sector.

Representation of key airlines such as Emirates and Malaysia will continue to reward HHL in FY07/08E. Tie ups with Hellmann and Topocean will continue to be profitable whilst regional expansion is on the cards.
Leisure sector has been contributing only around 5% to the total turnover which reduced the group’s exposure to risk of facing a bad year in tourism. HHL has planned to renovate and re-brand its hotels at a cost of around LKR500-700 mn and position it at a higher level to attract the up market tourist segment.
Heladhanavi, the 100MW power plant has contributed significantly in FY05/06 and we believe it to continue its profits backed by a strong need for electricity in the country. A further mini power plant of 2MW in Kandy too will be added to the national grid by mid 2008.

Relocating the FMCG factory and benefits of tax savings, commissioning of hospital, resorts with a new life and a new power plant in Kandy will come in to place concurrently by mid 2008.
Valuations justified. We believe the company to generate revenue closer to LKR9.9 bn in FY06/07E whilst large contributions by personal care (LKR3.4 bn), health care (LKR2.6 bn) and Strategic investment (LKR3.1 bn) are expected. We feel that the company will post a gross profit of LKR3,700.4 mn in FY06/07E, up 9%YoY with an average gross margin of around 37%. Very conservatively, the company has the potentiality to post a net profit of around LKR1,116.4 mn in FY06/07E, up 15% YoY on a strong base. Further, we believe the company will post a net profit of around LKR1,286.6 mn in FY07/08E (up 15%YoY) and LKR1,393.7 mn in FY08/09E (up 8% YoY). HHL recorded a profit CAGR of 48% over the past five years to record LKR969.8 mn in FY05/06. (Note: FMCG relocation will provide a tax benefit of around LKR50 mn in FY08/09E and LKR100 mn thereafter. Further, enhanced profits for leisure under the new theme and profits from 100 bed hospital has not been incorporated in FY08/09E)
Presently, the share is trading at around LKR110 an appreciation over 120% from its issued price of LKR50 at the IPO in September 2003.

As shown above, share prices have reached its highest of LKR140 whilst the lowest being LKR48. As can be seen price volatility (Standard deviation) has declined reducing the down side risk whilst lowest price of only LKR110 was recorded from the beginning of this year. Since January 2006, HHL has shown a dispersion of +/- LKR7.34 from the average of around LKR110.26, we believe the stock possess a technical bottom of LKR91.

At the present trading price of LKR110, historical P/E multiple on FY05/06 earnings stood at 11.4x whilst based on the future earnings, share is expected to trade at 10.0x FY06/07E profits, 8.6x FY07/08E profits and 8.0x FY08/09E profits. Given a trailing P/E of 21.6x for the diversified sector, HHL is currently trading at a discount to the market. Further it has been maintaining a steady dividend payout ratio and we believe it to continue its sound dividend policy. Taking the above factors in to consideration, share trades at an attractive price. Maintain-BUY


Corporate news

Amana launches indexes with Dow Jones

By Santhush Fernando
Sri Lankan Islamic finance giant-Amana Securities Limited is to launch an index-based product following the launch of its two indexes- Dow Jones Islamic Market AMANA Sri Lanka Index and Dow Jones Sri Lanka Titans 20 Index, in collaboration with Dow Jones last week.
“We are planning to launch an index based product. It would be possibly based on both indexes within the next six months. This will be done not only locally but internationally as well.” Said Chief Executive Officer (CEO) / Managing Director (MD) of Amana Securities Ltd, Ishrat Rauff,
Referring to the Dow Jones Amana Index, Mr. Rauff said that it was “the best performing index in the whole family of indexes.”

“Although we launched the two indexes today we complied them almost a year ago. We went up to 43 % since last year. These indexes will be shown on the Dow Jones website. If someone is following the market he will see that this is a good market. Then the next step is for us, to take the story out there and sell it be it Middle East, Singapore, Malaysia or to London.”

Dow Jones Indexes, a leading global index provider, and AMANA Securities Limited, a Trading Member of the Colombo Stock Exchange (CSE) last week announced the launch of the Dow Jones Islamic Market AMANA Sri Lanka Index.
Separately, Dow Jones Indexes launched the Dow Jones Sri Lanka Titans 20 Index, a blue-chip measure of the country’s 20 largest and most liquid stocks on the same day.
The Dow Jones Islamic Market AMANA Sri Lanka Index tracks the performance of Sri Lankan companies that comply with Shari’ah-based investment principles and is the latest offering in the Dow Jones Islamic Market (DJIM) Index family.

The index is designed to underlie financial products such as mutual funds, exchange-traded funds (ETFs) and other investment vehicles.
“Islamic banking and finance is about US$ 300 billion and growing at 15 percent a year, ¬faster than conventional finance in the Gulf region and parts of Asia. Shari’ah-compliant investing is an area that we expect will only grow in the years ahead.”

The Dow Jones Islamic Market AMANA Sri Lanka Index provides Shari’ah-compliant investors access to stocks suitable for Islamic investment as well as exposure to an untapped emerging market.
It is the latest addition to the Dow Jones Islamic Market Index suite, which was originally created in 1999 and continues to serve as the premier benchmark family for Islamic-based equity portfolios.” said Michael A. Petronella, President of Dow Jones Indexes and Reprints.

To be included in the Dow Jones Islamic Market AMANA Sri Lanka Index, stocks must pass industry and financial ratio screens. Companies that are involved in alcohol, defense/weapons, entertainment, financial services, pork-related products and tobacco are excluded.
Also excluded are companies for which the following financial ratios are 33% or more: debt divided by trailing 12-month average market capitalization; cash plus interest-bearing securities divided by trailing 12-month average market capitalization; and accounts receivables divided by trailing 12-month average market capitalization.
The new Dow Jones Sri Lanka Titans 20 Index is designed to underlie financial products and joins the Dow Jones Country Titans Index family.

To be eligible for inclusion, companies are ranked first by float-adjusted market capitalization and then by 12-month average daily currency trading volume.


DFCC-HNB investment bank to be operational by June

By Ravi Ladduwahetty
The new Rs. 500 million joint venture investment bank between the two giants – the DFCC Bank and Hatton National Bank will be operational by end June
We are targeting end June and we will announce the name end April, DFCC Bank Director/ CEO Nihal Fonseka who is the Chairman designate of the proposed investment bank told The Nation Economist.
He said that the formation of the company, the company name and the brand will all have an ethos which will be disclosed to the media and the market end April subject to the regulatory approvals. Both banks will have a 50% equity stake each in the new joint venture.

Top banking sources said that the rationale underpinning the merger is to bring under one umbrella the core businesses of both companies which have been done by different departments including stock broking, fixed income operations and corporate banking and additional areas which include Fund Management and other Investment Banking deals. The idea is to merge the synergies which will put together the advantage of the scales of operation as well, they said.

While Fonseka has been named as the Chairman, HNB’s Senior Deputy General Manager (Business Development) Jayantha Perera will be the new Managing Director. The other board members will be HNB Stock Brokers General Manager/ CEO Deva Ellepola, DFCC Stockbrokers Managing Director/CEO Ray Abeywardena, DFCC Bank’s Senior Vice President Corporate Banking Tyronne De Silva, DFCC Bank’s Senior Vice President (Treasury) Manohari Gunawardena and HNB Securities Managing Director G. Ramanan.








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