Sri Lanka listed company profits zoom in March quarter - Reported by LBO
- Forecasting an Earnings Multiples of 15.5 times by end of this year.
- A Rumor "VAT" 20% charged for banks to be removed from the next budget.
- 170% profit gains for the March quarter alone by the listed firms.
- Market to reach 5000 index level by end of 2010.
- Net Foreign out flow for the period so far for this year is only 1% of the market capitalization of the Colombo Stock Exchange.
The earnings rise comes on the back of 180 percent growth in the December 2009 quarter from a year earlier a report by Asia Securities, Colombo based stock brokerage said.
"Going forward we won't see earnings grow at these high rates but around 35 percent annually in the next couple of years," says Sanjitha Rajasekaran the research manager at Asia Securities.
The analysis is based on the reported profits of 220 companies out of the 235 that are listed, some of which have not published their quarterly accounts yet.
"We’re forecasting an earnings multiple of 15.5 times by the end of this year."
Re-rated
Earnings multiple also called the price-to-earnings ratio (PER), is profits per share of a company divided by its market price. In theory it indicates the number of years taken by a buyer to recoup his investment through profits, if they remain stable.
But rising profits will bring down the earnings multiple, allowing companies that grow faster to have a higher earnings multiple than slow growing one. Falling profits has the opposite effect.
At a macro-level, a country that grows faster will also be able to sustain higher earnings multiples re-rating the entire market upwards.
During the past year, Sri Lanka's market has had an average P/E multiple of 21 times, Asia Securities says. This is historically high. Now it is 23.3 percent.
Compared to some other countries in the region, Sri Lanka is no longer cheap. In South Asia it is only lower to Bangladesh where authorities have been consciously trying to put the breaks on the market.
According to Bloomberg newswires data, India has a market earnings multiple of 17.8 times, Pakistan 10.1 and Bangladesh 37.8 times.
In East Asia, Vietnam had a multiple of 11.2, Singapore 13.2 17.1, Malaysia 17.1 and Indonesia 31.6 times.
The overall market measured by the benchmark Colombo All Share Price Index zoomed 125 percent in 2009, driving up earnings multiples, despite weaker profits from an economic slump.
But the economy is now picking up, from a slowdown to 3.5 percent last year. The central bank has upgraded its growth forecast for 2010 to 7.0 percent from 6.5 percent.
So far this year the market is up 36 percent.
Sri Lanka has had a war, high budget deficits, inflation and periodic balance of payments crises for more than three decades. A war-less country is new territory.
But analysts urge caution.
"Twenty one times is a high trailing PE; historically," says Rajasekaran. "However the market has moved to a higher plain."
"Its not the time to take trading positions for the short term."
One factor that can hurt the country is excessive government spending. Last year the budget deficit was 9.8 percent of gross domestic product.
Unrestrained government spending and a recent heavy reliance on foreign commercial debt can still cause problems for the country in the medium term.
But for now firms are reporting higher business volumes, with stronger consumer demand.
Broad Based
This quarter's profit gains in listed firms are broad based. Asia Securities says listed company earnings grew 45 percent to 67 billion rupees in the most recent financial year.
For firms ending their financial year in December 2009, like all the banks and telcos, the gain was largely due to a turnaround in the last quarter. Banks also made extraordinary bond profits.
Firms with a March 2010 financial year end have benefited form two quarters of high earnings growth.
In the March quarter alone, profits rose in 16 of the 18 sectors in to which categorized at the Colombo Stock Exchanges (CSE). Profits fell in the construction and footwear & textiles sectors where six out of the 220 firms tracked by Asia Securities are listed.
The six firms making up the diversified sector earned 6.3 billion in profits in the March 2010 quarter, up 80 percent from the 3.5 billion rupees they made a year earlier amid a war.
The war ended in May 2009, with the military wiping out the Tamil Tiger leadership.
"Aided by markets that were previously underserved, and the improvement in the local economy, most FMCG (fast moving consumer goods) categories saw double digit growth," Hemas chief executive Husein Esufally told shareholders in the annual report.
"This was in contrast to the previous year when category growth was almost flat and several categories shrank."
Earnings of 35 listed banks and financial firms rose 65 percent to 5.6 billion rupees in the March quarter. Bank shares have made steep gains over the past two months. Many banks have been opening new branches in the north and the East.
"There is also this rumor that the 20 percent financial services VAT 'value added tax' will be removed by the budget," adds Rajasekaran.
The delayed budget for this year will be presented to parliament on 29 June.
Central Bank Governor Nivard Cabraal has said a so-called financial service Value Added Tax, which has pushed up the effective income tax rates of banks to around 60 percent will be taken off in stages as general tax revenues pick up.
The market is up eight percent since the government slashed import duties on cars and electronic items on June 01. Prices of vehicles, electronic goods and food are expected to fall increasing consumption and state revenues.
In the first quarter Regnis, which makes refrigerators for Singer, a consumer durables firm, said sales were up 60 percent, even before the tax cut.
Hemaka Amarasuriya told shareholders in a quaterly review that consumer markets were showing sign of "early recovery" from the downturn in 2009.
Current growth rates are sustainable up to mid-year and possibly thereafter in order to fulfil unsatiated demand for the replacement market," chairman Hemaka Amarasuriya told shareholders in his quarterly review.
"Expansion of rural electrification accompanied by a return of consumerism in the North signals a period of strong and sustainable growth for the white goods industry with new customer entry."
Caution
"We were forecasting the market will hit 4600- 5000 levels by year end," says another equity analyst who requested anonymity due to company policy.
"It’s now at 4,600. If it gets to 5000 in the next couple of months I would advise investors to prune around five percent of their holdings."
The analyst is expecting 25 percent annual growth in Sri Lanka over three post war years.
Meanwhile state controlled firms, pension funds and insurance companies have started buying in to stocks this year.
But some long term foreign investors are selling out. Net foreign outflows this year totalled 14 billion rupees by Wednesday.
This is about 1 percent of the market cap of the Colombo Stock Exchange.
Meanwhile most foreign investors are holding on to their stakes. JKH, SLT and most banks have large foreign ownership. Dialog and Chevron are controlled by their foreign parents.
source - www.lbo.lk
1 comment:
Earnings multiple also called the price-to-earnings ratio (PER), is profits per share of a company divided by its market price. In theory it indicates the number of years taken by a buyer to recoup his investment through profits, if they remain stable.
Are we learning new Ratios???
PER = Market Price/EPS
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