Chairman of SriLankan Airlines Nishantha Wickramasinghe, said the firm was doing preliminary work on a possible listing of a part of SriLankan Catering, a profitable unit that runs a flight kitchen for the parent firm and also serves other airlines calling at Colombo.
Wickramasinghe said an investment advisor to the deal has not yet been appointed.
Sri Lanka's stocks rose more than 110 percent by the end September 2010, which analysts say was partly due to lack of large new initial public offerings though existing firms - especially hotel firms - have made capital calls.
"Anything which is going to enhance of the size of the market the liquidity has to be viewed as a positive event," Channa Amaratunga, head of CT Capital, an investment consultancy said.
"You need big IPOs which can broaden the depth of the market materially."
SriLankan Catering earned revenues of 2.7 billion rupees in the year to March 2010, down slightly from 2,791 million rupees a year earlier, according the accounts published by its parent.
The firm's profits however fell from 1,259 million to 635 million though it is not immediately clear why the profits fell.
Operating expenses and depreciation charges were largely flat at 1.5 billion rupees and 380 million rupees, but there had been re-capitalization exercise with the firm engaging in a share buy-back.
During the year the firm had given back 4,000 billion rupees to the parent in a share-buy back, which earned a 3.97 billion for the parent.
But the catering firm's dues from the parent were also brought down to 2.3 billion rupees from 5.7 billion rupees.
Even at a profit of 635 million rupees, the firm would be worth about 6.3 billion rupees, on a price earnings multiple of 10 times. The broader Colombo market is trading at more than 25 times now basking in a post-war euphoria and low interest rates.
Of the 2.7 billion rupee revenues of SriLankan Catering, 1.6 billion rupees came from the parent. Future profits of the firm will depend on transfer pricing mechanism it will employ.
SriLanka chief executive Manoj Gunewardene says catering transactions are already 'arms length' but before a sell down a policies on transfer prices will have to be disclosed.
So far the catering firm has been profitable and has a tax holiday till 2021.
SriLankan is going through a corporate re-structuring phase after the government took a 43 percent stake back from Dubai-based Emirates Airlines.
SriLankan may also separate its engineering unit which has been wining business from the region.
Earlier in the week Sri Lanka's information minister Keheliya Rambukwella said the government was planning to sell down a 49 percent stake in a joint venture gas distributor with Shell after buying back the private firm's 51 percent.
Unlike SriLankan Catering however, the gas distributor had been hit by government interference in pricing.
Most of Sri Lanka's energy utilities, including listed Lanka Indian Oil Corporation (LIOC) are losing money due to the double bit government import taxes and price controls.
Analysts say a transparent pricing policy is needed to ensure that the gas distributor remains profitable and can generate cash for expansion if a public listing is to succeed.
"It is certainly a welcome announcement because it will be a large IPO and can be an ideal conduit for the surplus liquidity in the system," Murtaza Jafferjee head of JB Securities.
"What I would like to find out is whether there is a transparent LPG pricing formula so that the gas company does to have to face the same uncertainty that LIOC has to face and the company will be run by professional management".
"Investors pay a premium for quality management."
Before Shell take-over, under the then state-run Colombo Gas Company gas shortages were common and new cylinders were rationed and over-priced to reduce demand.
source - www.lbo.lk
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