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 Colombo
bourse yet again depicted low market sentiments, where investor
participation to the market remained low throughout the week.
However crossings took place in SMLL, JKH, NDB, DFCC, CHL,
COMB and CINS shoot-up the weekly market turnover. Government
decision to reduce the penal rate of interest charged on reverse
repurchase transactions with the Central Bank by a further 175
basis points to 14.75 percent, drop in T-bill rates further in
this week auction and anticipated decline in inflation rate of
the country did not assist to up-lift the depressed investor
sentiments. All Share PriceIndex (ASPI) shed 11.1 points WoW to
1,621.8 while more sensitive Milanka Price Index (MPI) reported
a loss of 25.5 points WoW to close at 1,672.4.
Average daily turnover for the week was Rs.306.5mn. Foreigners
ended the week as net sellers of Rs.518.2mn while contributing
63.0% to the total market activity.
Market started the week on a negative note on Monday and ASPI
lost 13.1 points to stand at 1,619.8 while more sensitive MPI
dipped 18.0 points to close at 1,679.9. Seylan Merchant Leasing
recorded the highest turnover of Rs.12.6mn for the day and saw a
crossing transaction amounting to Rs.10.9mn (574,657 shares @
Rs.19.0). Seylan Merchant Leasing, C.W Mackie and John Keells
Holdings actively treaded during the day. The day’s turnover
amounted to low Rs.54.9mn.
The same bear run continued on Tuesday. ASPI dropped marginally
by 7.5 points to close at 1,612.3 and MPI dropped 9.4 points to
stand at 1,671.7. Day’s turnover amounted to Rs.87.8mn while two
crossings were recorded in Commercial Bank (200,000 shares @
Rs.78.0) and Ceylon Hospitals (400,000 shares @ Rs.54.0). Ceylon
Hospitals recorded the highest turnover (Rs.28.4mn) for the day.
Activity levels remained low during the day. On Wednesday,
turnover level was boosted with the crossing trades of
substantial volumes in DFCC Bank (9,723,524 shares @ Rs.68.5),
NDB Bank (2,136,400 shares @ Rs.95.0) and John Keells Holdings
(4,350,000 shares @ Rs.56.0) which the most of the deals being
foreign to foreign. Market ended flat on day’s close, where ASPI
increased 6.5 points to stand at 1,618.8 while more sensitive
MPI gained 9.4 points to close at 1,681.1. The turnover recorded
as high Rs.1,169.8mn.
Market ended on a positive note on Thursday reporting marginal
gains. ASPI gained marginally by 7.2 points to stand at 1,626.1.
MPI gained 3.9 points to close at 1,685.0. John Keells Holdings
recorded the highest turnover of Rs.105.6mn for the day and saw
a crossing transaction amounting to Rs.71.1mn (251,000 shares @
Rs.56.0 & 1,000,000 @ Rs.57.0). The day’s turnover amounted to
Rs.142.5mn.
Yet again, the market ended in red on Friday where ASPI dropped
4.2 points to 1,621.8 and MPI decreased 12.6 points to 1,672.4.
Activity levels remained low during the day. Ceylinco Insurance
injected Rs.25.5mn as the highest turnover of the day with a
crossing transactions which amounted to Rs.25.5mn (183,700
shares @ Rs.139.0), while total market turnover amounted to
Rs.77.4mn.
We expect steady improvement in investor participation to market
in the coming weeks considering the declining money market
interest rates of the country. Further on-going negotiations
with IMF for an emergency loan facility to strength domestic
foreign currency reserves and ending of the war against
LTTE terrorist expected to be impact favorably on macro economic
developments. However global economic meltdown is still expected
to be put pressure on economic growth of the country.
**** Fitch says JKH outlook
stable Fitch Ratings, Friday, affirmed the National
Long-term rating of Sri Lanka’s John Keells Holdings PLC (JKH)
at ‘AAA(lka)’. Fitch has also affirmed the National Long-term
rating on JKH’s senior unsecured notes at ‘AAA(lka)’. The
Outlook remains Stable.
JKH’s rating reflects the diversified nature of its businesses,
the currently strong financial profile driven in part by its
high cash position (estimated at LKR10bn as of March 3,2009 at
the holding company), continued strong operating cash generating
ability, and the dominant market share of some subsidiaries.
However, Fitch notes that JKH has yet to announce plans with
regards to the deployment of its cash assets. Should these
deployments be in long-term projects with aggressive investment
schedules, as well as protracted projected dividend flows, JKH’s
credit metrics can be expected to weaken over the medium term.
As such, Fitch notes that that there remains some probability of
event risk with regards to JKH’s ratings -which the agency will
continue to monitor and take necessary rating actions as
warranted.
Fitch expects JKH’s bunkering business (post FY08 margin
erosion) and the Maldivian hotels segment to overcome
operational restrictions faced in FY09, and provide more
standard returns in FYE10. The agency also takes comfort from
the expected contributions to JKH’s cash flows in the near term,
from the property sector (in FYE10) as well as the customary
dividend flow from South Asian Gateway Terminal (SAGT). The
container handling associate of JKH group increased ownership
from 34% to 42% during FY09.
JKH has maintained its financial structure relatively well, with
significant equity issues (LKR13bn in FY07) leading to a strong
balance sheet. In April 2008, JKH drew down on an USD75m debt
facility from International Finance Corporation (IFC) with the
option to use the funds for investments into new ventures. Part
of these cash balances have been used to increase the group’s
ownership stake in existing ventures (such as SAGT, Ceylon Cold
Stores, Union Assurance and John Keells PLC) as well as to
repurchase 4% of the shares outstanding in November 2008.
"
Key industry level challenges over the short term, remain the
expected slowdown in transshipment volumes impacting its
transport segment, as well as the slowdown in tourism in the
Maldives. Fitch also notes that the ability of the remaining
property project to recognise its planned revenue and profits
according to schedule, may be somewhat pressured in the current
environment. However, Fitch believes that these JKH ventures
remain capable of providing adequate profitability in the near
term- even under these stressed conditions, based on dominant
market position and past performance.
**** CB
offers solutions to troubled leasing companies By
Azhar Razak
In a desperate move to improve the business of some of the
‘troubled registered leasing companies’ in the island, the
Central Bank last week requested the companies to provide a way
out to their customers.
Central Bank’s governor Ajith Nivard Cabraal said that they
requested the troubled leasing companies to offer customers a
new leasing package which would enable the lessees to reclaim
their seized assets.
‘Due to the high costs of financing there has been an increase
in defaults within the industry affecting many leasing
companies. Therefore, we suggest the troubled leasing companies
to return the seized assets to the original owners, if 25% of
the total outstanding including any arrears, were paid as down
payment. The balance 75% could be paid through a new lease
facility drawn over two years,’ Cabraal said at a press
conference held last week.
The Governor pointed out that the leasing companies should not
penalise the customers further (who wished to take advantage of
the scheme) by charging them any sunk costs which they had
already borne.
‘Costs such as penal rate charges, seizing charges or storage
charges, have to be absorbed by the leasing companies concerned,
and should not be added to the total outstanding. Therefore, we
believe that this scheme would mutually benefit the customers as
well as the leasing companies,’ Cabraal said.
Of late, the Central Bank has been taking a string of measures
aimed at stabilising the registered finance institutions (RFC)
and Specialised Leasing Companies (SPC) in the country. The
Central Bank last month offered four billion rupees in bonds and
guarantees to RFC’s and SLC’s that were struggling, including a
Rs. 2 billion credit facility against the sale of land through
the state owned Lankaputhra Bank.
‘We have already finalised the operating instructions pertaining
to the Rs. 2 bn facility, and are now ready to disburse this
amount to those institutions who come forward,’ the Governor
said.
The Governor meanwhile noted that the fall of Golden Key, a cash
cow of the Ceylinco group, had created mayhem in other
subsidiaries in the group, and their intervention was aimed at
preventing other imminent bankruptcies of RFC’s within the
Ceylinco Group.
**** CSE
revises listing rules The Listing Rules of the
Colombo Stock Exchange have been revised subsequent to obtaining
comments from the stakeholders. The changes arising from the new
Companies Act have been incorporated in the new rules.
The name ”Second Board” has been changed to “Diri Savi Board” in
the new rules, for listing of shares. The eligibility criteria
to list equity and debentures of a company have been revised.
New rules have been incorporated to list units of closed–end
funds, scrip dividends, re-purchase of shares, redemptions,
minority buyouts and the further issue of shares by a Listed
Entity through public subscription. Rules relating to the
further issue of securities, such as Rights Issues,
Capitalisation of reserves, Share Swaps and Warrants have also
been revised.
Greater flexibility has been provided to listed companies on the
circulation of interim financial statements and Annual Reports.
The current requirement of dispatching the interim financial
statements to all security holders or publishing in the
newspaper has been removed. This will be available on the CSE
website. Listed companies have been given the option of
forwarding the Annual Reports to the security holders in the
form of CD-ROMs.
The revised Listing Rules will be effective from April 1, 2009.
**** MIG – Leisure workshops
in Anuradhapura and Sigiriya The Market Interest
Group – Leisure sector of CIM Sri Lanka Region in partnership
with Rajarata Hoteliers Association - Sri Lanka Institute of
Tourism and Hotel Management and the Sri Lanka Tourism
Development Authority organised workshops at Sigiriya and
Anuaradhapura on February 19 and 20, at the Ceylon Hotel
Corporation Rest House Sigiriya and Sri Lanka Institute of
Tourism & Hotel Management, Anuradhapura, respectively. The
programmes were conducted by CEO / President of Global Knowledge
Consultants, Dayan D.L. Fernando and received excellent
feedback.
The programme held in Sigiriya was attended by over 110
participants, the purpose of which was to introduce the
fundamentals of Marketing to front-line managers in hotels and
restaurants in the area.
The programme held in Anuradhapura consisted of two sessions.
The morning session targetted front-line managers and focused on
familiarising them with the basics of marketing with practical
insights to how marketing could be practiced in the hospitality
industry. The evening programme was pitched at senior managers
and focussed on promoting Anuradhapura as a tourist destination,
among both locals and foreigners.
The primary objectives of the CIM Sri Lanka Region Market
Interest Groups (MIG) are to establish, promote and practise
marketing excellence within various industry sectors. Its aim is
to raise the level of appreciation of marketing as a management
process, by inculcating marketing thinking to a greater degree
within each sector. The Institute hopes to conduct these
regional workshop in the future as well, in different parts of
the county where there is potential for leisure industry.
**** BoC distributes
children’s savings books, mammoties, spectacles to customers
Under the Bank of Ceylon’s ‘Gam-Udana’ programme, a ceremony was
held at Manampitiya Prathiba hall with regard to loan
disbursement and the opening of 500 Rankekulu Children’s Savings
accounts. It also included the distribution of mamoties,
spectacles, and several varieties of plants among the customers
and residents of the area. ****
Fitch downgrades The Finance PLC
Fitch Ratings has downgraded Sri Lanka’s The Finance Company
PLC’s (TFC) National Long-term rating to ‘BB+(lka)’ from ‘BBB(lka)’,
and its subordinated debentures to ‘BB-(lka)’ (BB minus(lka))
from ‘BBB-(lka)’ (BBB minus(lka)). The ratings have been placed
on Rating Watch Negative (RWN).
The RWN indicates that TFC’s rating could be downgraded further
or affirmed.
The downgrade reflects the liquidity stresses faced by TFC due
to adverse public perceptions on the Ceylinco Group. These
perceptions are tied to the liquidity problems faced by, and
subsequent collapse of, the Golden Key Credit Card Company Ltd
(GK).
TFC and GK are both entities within the Ceylinco group, a large
local conglomerate.
GK, a specialised credit card issuer, which faced liquidity
stresses in order to repay “guaranteed return investments” to
its customers, went into court administered insolvency in order
to structure and implement a repayment schedule for investors.
GK is not regulated by the Central Bank of Sri Lanka (CBSL) and
is not licensed to accept retail deposits.
TFC, however, is regulated by the CBSL as a registered finance
company (RFC) and is monitored with respect to liquidity,
capital adequacy, and asset quality, among other parameters.
On December 27,2008 CBSL announced that it would act under the
Monetary Law Act in the event of an imminent risk to any
licensed or registered financial institution, and on February
20, 2009, it announced an LKR4.2b stimulus package to support
liquidity for distressed entities in the RFC sector. On March
18,2009, CBSL disclosed a specific series of actions it has
taken to ameliorate the situation at TFC, namely placing
Lankaputhra Development Bank (a state- owned bank) as a
management agent of TFC, appointment of key executives to TFC,
removal of executive powers of some of the previous directors,
and administrative support via a panel of experts approved by
the Cabinet of Ministers.
While Fitch takes some comfort in the measures announced by CBSL,
it notes that the current trajectory of deposit renewals may
require further liquidity and capital support. The timeliness
and the quantum of such support would be critical factors in
determining TFC’s long-term liquidity profile and stability.
Fitch also notes that TFC accounts for approximately 24% of the
RFC sector, and together with its large exposure to real-estate,
can be deemed as sufficiently systemically important within the
RFC sector.
TFC’s profitability has also worsened as lending was constrained
due to liquidity considerations, while asset quality remained
challenged due to current macroeconomic conditions. Prior to
this rating action, Fitch on 4 December 2008 revised TFC’s
Outlook to Negative from Stable to reflect the company’s
deteriorating profitability due to increased funding costs and
the lack of a commensurate increase in real-estate related
income.
****
Supreme Court refuses interim relief in CIMA case
The Fundamental Rights application filed by Gowri Shanker
Somasunderam, Viren Wijesinghe, Sunil Dharmaratne, Keith Bernard
and Dinesh Weerakkody came up for hearing before the Supreme
Court last week. In this application, the petitioners alleged
that the CIMA parent body through its CIMA council in London,
United Kingdom had wrongly suspended the Sri Lankan Divisional
Council of CIMA in December 2008, without informing any reasons
and any justification.
It was further alleged in the petition, that CIMA Sri Lanka is
an association that has been registered with the Tertiary and
Vocational Education Commission of Sri Lanka and that therefore
The Ministry of Vocational and Technical Training should be
directed to enact laws affecting CIMA.
When the matter was taken up before the Supreme Court before
Sarath N. Silva (PC), the Chief Justice and Justices Gamini
Amaratunga and K. Sripavan, Sanjaya Rajaratnam, Deputy Solicitor
General appearing for the state respondents, intimated to court
that the provisions of the Tertiary and Vocational Education Act
No 20 of 1990, does not permit the state to enact laws
pertaining to governance issues of a body such as CIMA.
Counsel for the petitioners Sanjeewa Jayawardene, invited the
attention of court to sections 14 and 17 of the Act and whilst
contending that the Act does contain provisions to such effect,
invited the court to direct the Ministry concerned to make such
laws and also moved for interim relief to remove the suspension
of the Divisional Council.
At this stage Romesh De Silva, Senior Counsel for CIMA UK,
objected to any interim relief being granted, and stated further
that the suspension was made in view of the fact that the
Divisional Council in Sri Lanka refused to follow the
instructions of CIMA UK. He also contended that the suspension
was reasonable and was done after according the Council members
several opportunities to air their concerns. He also stated that
the petitioners had no case and their application cannot be
maintained.
The Court refused the application, and also observed that it
would be in the best interests of the CIMA, if the Divisional
Council members resigned without any admission of guilt on their
part, and a fresh Council is elected among the local members so
that CIMA could surge forward with their work.
Sanjeewa Jayawardene appeared for the Petitioners instructed by
G G Arulpragasam. Sanjaya Rajaratnam, Deputy Solicitor General
appeared for the State Ministers and the Attorney General.
Romesh De Silva [PC] appeared with Kalinga Indatissa, Ranil
Samarasooriya and Eraj De Silva instructed by Upendra Gunasekera
for CIMA UK.
Maxi Bastianz and Sudath Jayasundara appeared for Claude Perera
instructed by Ms Sajini Amarawickrame. ****
Share valuation techniques
part II
Basically, it is recommended to apply PE method when valuing
Beverage, Food & Tobacco companies assuming they all are
continuing operations. However some exceptional cases do exists
in a few companies in the sector, such as Ceylon Tobacco (CTC),
Nestle Lanka (NEST) and Lanka Milk Foods (LMF). CTC & NEST have
maintained an attractive dividend policy during the past, and
investors who bought shares were heavily focussed on the
dividends. At present CTC gives the highest dividend yield (i.e.
dividends as a % of the market price) and has resulted in
substantial return for investors (including the capital gains)
despite the recent bearish sentiment. In terms of total return
(dividend + capital gain), NEST too gave a substantial return,
which is also over and above the alternative investment
opportunities available in the market. Since the share
performance is directly related to dividends, it is extremely
important to have a sound knowledge on the future profitability
of the company. In the event of profitability coming under
pressure, and the company being unable to maintain its standard
dividend, then the share price might come down. For instance,
Tea Smallholder was an attractive stock for investors due to its
high dividend yield when the tea prices were high. However with
the burst of the commodity bubble, tea prices fell sharply, and
the company was unable to pay high dividends, resulting in a
decrease in the share price.
Though the Dividend Valuation Model (DVM) is theoretically the
best method to value high dividend paying companies, yet it is
rarely used by local investors. More detailed information about
DVM will be discussed later.
In another example, LMF’s share performance has a relationship
with the share prices movement of Distilleries Company of Sri
Lanka (DIST). This is due to the fact that LMF owns a stake in
DIST and when DIST share price fluctuates, it will have a direct
influence on the market value of the company’s investments.
However PE of the company should be taken in to consideration as
the primary valuation tool for this stock.
Chemicals and Pharmaceuticals
The best valuation method for companies in the Chemicals and
Pharmaceutical sector is the PE method. However some companies
like CIC and Lankem Ceylon possesses diversified stakes in other
area such as agriculture, plantation and construction. Therefore
intrinsic PE for these companies can be different from intrinsic
PE of the sector. In such a situation it is advisable to look at
the past, and understand a PE range at which the company has
traded. Then this should be applied to the current and expected
PE, and if it is closer to the lower band then it is a good buy.
Chemanex is also another company in the sector that requires an
assessment from a different angle. The sale of Commercial
Leasing stake resulted in high cash to the company, which is now
deposited in interest generating assets. This will result in
high interest income to the company despite turbulent business
environment, and due to high interest rate scenario. Therefore
it is vital to identify the net cash position of the company
(net cash per share after deducting debt), and the amount you’re
paying for the operations of the company should be assessed
separately. As an example, if net cash per share is Rs.30 and
the Market price per share is Rs.50, then for operations you’re
paying Rs.20. It is also important to remember that the company
is capable of using its high cash for future expansions in its
operations, or venturing into other businesses that yield higher
returns than interest income.
Construction and Engineering
There are only three companies listed under Construction and
Engineering sector. It is difficult to apply a proper valuation
method to arrive at a clear decision on these companies due to
the volatile nature of the profitability in these companies.
However Dockyard (DOCK) showed an impressive steady performance
during its recent financials (you should keep in mind that DOCK
too had a volatile past track record). The profit of this
company is highly dependant on the contracts they have entered
in to. Payments for ship-building will be made at several stages
based on the completion stage as agreed in the agreement. Also
DOCK has maintained a fairly good dividend payout. The lack of
information is a barrier for a rationale investor to carry out a
perfect valuation for this company.
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