Thursday, February 18, 2010


K.A.S. Perera

During the past few months, Environmental Resources Investment (ERI) has recorded dramatic upward movements of prices and was a favourite among retail and high net-worth investors.

This also contributed to very high sentiment in the stock market and the turnover as well. It should be mentioned that many retail investors who burnt their fingers the previous year were fortunate to recover the losses fully and become net gainers.

However in the absence of necessary information, investor public and many stock brokers are unable to ascertain the potential value of the company. Consequently this has unfortunately led to adverse news not based on facts and also malicious rumours deliberately spread by certain persons.

This Group consists of those who do not like the company ranked as one of the highest capitalized companies, those who failed to buy the stock at a earlier stage and due to other factors such as sheer jealously in a stock market where cut throat competition among stock brokering companies is well-known.

It is also rumoured that financial institutions, due to the proposed massive cash infusion mainly for rehabilitation of sick companies are very concerned of erosion of profits and stiff business rivalry.

The company presently has three subsidiaries in Ceylon Leather Products, D.N.H. Financial and Environmental Resources Ltd., a virgin based company holding assets and debentures including an undisclosed percentage of shares of Eastern Platinum, a quoted company in the Toronto Stock Market.

This has been purchased for a consideration of Canadian dollar 76 payable in eight tranches. It is reported 52 percent investment is in Eastern Platinum Company.

Contrary to misconceptions that it is only an investment company such as Namal and other unit trusts, the main objective of the company is to purchase inefficient quoted and unquoted companies or those with constraints such as lack of funds.

Substantial value additions effected by rehabilitation of such units could be finally sold with a good margin.

For instance substantial improvements introduced to Ceylon Leather Products PLC resulted in an ultra modern factory and would give at least 100 percent gain if sold in the near term. Generally the company anticipates value addition and price growth of 200 percent to 300 percent prior to sale.

Eastern Platinum which has several platinum mines in South Africa was appr. Can dollar .92 (Rs 101) in the Toronto Stock Market at the time of purchase and this has risen to Can dollar 1.29 (Rs 130) on February 11.

This has risen from a low of Can dollar .25 (Rs 25) in 2009. On March 8, 2008 the share recorded highest price of Can dollar 3.60 (Rs 364).

The auto industry, a major user of platinum is expected to be fully revived by the year end and it is possible from the share to rise to high of Can dollars 3.60 and accordingly market value of Eastern Platinum would increase by almost 400 percent.

Consequently the net asset value of Environmental Resources PLC will rise dramatically.

Eastern Platinum has earned a net profit of Rs 187 million (Can dollar 1.85 million) for the quarter ended September 30, 2009 despite the downturn in the auto industry and low production mainly due to a strike in mines. During the quarter ending December 31, 2009 production has increased by 13 percent compared to the previous quarter and 17 percent compared to corresponding period ending December 31, 2008.

Consequently net profits are expected to record appreciable growth in the quarterly report to be released on March 31, 2010.

The company with a present paid up capital of Rs. 2469 million proposed one for two rights including many warrants and expects to mobilize Rs 4380 million during the current year and the total amount to be mobilized, a staggering Rs 44435 million up to 2015. The company has a unique advantage of purchasing ideal investment due to substantial cash position.

If we are to consider the company's minimum target of 200 percent increase in values the proposed value addition from above future investment amounts to Rs 88870 million in the long-term.

Similarly unlike other quoted companies, traditional use of historical and forecast EPS, PE and net assets value on a quarterly basis would be of little value for the financial analysts and investors due to practical difficulties and the objective of the company. However the company would be in a position to value its assets on a yearly basis.

The company is said to have evaluated over 35 companies in hydropower, tourism, manufacturing, plantation and IT and we understand this has been narrowed to eight to ten companies including interestingly four quoted companies which are at an advanced stage of negotiations for purchase. It is hoped most of the doubts raised has been explained.

The Board of ERI consists of persons with good track record and some have occupied highest positions in the country. The Chairman is one time Ministry Secretary and another has risen to the highest in the Administrative Service and served as Central Bank Governor.

Another was a career diplomat and former Ambassador to South Africa. The youngest is a computer expert having a rare Doctorate in Information Technology from a prestigious American University.

The only foreigner is a specialist in investments and conversant with financial markets in USA.

Some have doubts whether this has features of a pyramid scheme and it is strongly stressed these schemes have been introduced to attract maximum funds with the ulterior motive of defrauding.

In the case of ERI almost 94 percent is held by the Lion heart and in future too similar percentages would be brought to the country by the company by way of foreign exchange which is beneficial to the country.

ERI has a high skilled staff in finance and are competent in the evaluation of companies for ultimate purchase.

Since substantial portion of funds are owned by the major shareholder they would be extremely careful in their investments.

It is therefore obvious that such suspicion is due to either thorough ignorance or ulterior motives. It is sad most of the stock brokers and investors are ignorant of the comparative value of the normal share and the warrants. For instance warrant 2010 would be converted to a normal share and the investors would be able to trade it on June 13 after payment of Rs 22 per warrant.

Accordingly theoretically the price difference should be Rs 22. Unfortunately for instance comparative price difference is Rs 87.25 on February 12, 2010 which means warrant 2010 is under priced by a huge Rs 65.25.

It is observed there are valid reasons for most of the shares at present price despite negative assets and very high PE. For instance hotels shares in fact under priced due huge prospects where star hotels would not cope up with the demand during the year end winter season and major rally in this sector is long overdue. In fact results for the last quarter is only a tip of the iceberg. For instance above mentioned Keells hotel recorded a net profit of Rs 82 m for the last quarter.

There is a school of thought that forces opposing the Government attempted to bring down the market on February 9 day after the arrest of the defeated opposition candidate but failed mainly due to the fact Environmental Resources PLC price increased by Rs 43.

The price increase of the company impacted heavily since it is one of the highly capitalized companies. It is said due to various unfounded rumours they were successful in bringing down the prices for next three days and similarly indices plummeted.

Net result was that local/foreign newsprint and electronic media screamed political instability due to the arrest. This is very damaging to the country's image.

Such anti-national forces should realize the President had crushed terrorism after 30 years and undertaken simultaneously massive economic development in infrastructure such as Ports in Hambantota, Colombo, Power Projects in Norochcholai, Kerawalapitiya, Upper Kotmale and Trincomalee that would provide 1910 MW. It should be understood that power is the foundation for any development. Massive road and irrigation projects completed and under construction are other significant achievements. Achievements as above simultaneously is very remarkable in the midst of unprecedented world recession with a satisfactory GDP growth of around 4 percent in 2009 and above 6 percent growth year according to Central Bank estimates.

The writer is of the view country has potential for growth of 7 percent to 8 percent next few years.

The Government had drastically reduced inflation to 3.5 percent last year with a foreign reserves of US 5200m enough for 6 1/2 import requirements.

The stock market is very vibrant and State banks have reduced lending rates to unbelievable level with Treasury Bills (TB) rates in single digits.

Above achievements easily make the President not only the best leader since Independence but also for the past 500 to 600 years.

It is the experience of the writer with industrial credit of a State bank and as a member of think tank at macro level on industrial development of the country that since 1977 despite attempts made to rehabilitate sick companies, there have been many failures.

The banks after evaluation of sick companies may provide additional funds, some advice and monitoring but diversion of funds, high lifestyles, personal character and deficiency in management quality where banks had in some instances no control. Appointment of bank directors is also always not possible due to many reasons.

As a solution after obtaining approval of the then Industries Minister, the writer was involved in the preparation of a proposal for Cabinet approval through normal channel to set up a bank with private sector participation to buy sick companies and rehabilitate and sell through public tender. This was a very complicated proposal requiring massive funding and unfortunately abandoned.

It gives personal satisfaction to see a company with identical objectives ready to full this vacuum which could contribute to the national economy immensely considering their achievement in Ceylon Leather Products PLC (former Leather Corporation). It should be mentioned that this is an area private sector and commercial/development banks are reluctant to enter due to many factors and the entry of ERI to fill this vacuum without Government participation is commendable.

It is important that all Sri Lankan should realise above and unite for the development of the Colombo Stock Market.

The huge amount of funds in the region of Rs 44000 million be mobilized and invested upto 2015 and expected minimum return of 200 percent would make the company largest in terms of capital and the minimum growth of Rs 88,000 million would also result as the highest net assets company in the stock market. The prospect for the future based on fundaments is unprecedented and may justify a price far in excess of the highest price of Rs 270 recorded todate.

This is strongly recommended for retail, high net-worth and institutions and it would dominate the stock market for number of years and will be most attractive to investors.

(The writer is a retired Assistant General Manager of the Bank of Ceylon and a senior consultant in Banking, Finance, Industrial Projects, Restructuring and Investments)

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