Monday, July 4, 2011

Corporate earnings grow year-on-year, but dip quarter-on-quarter

Lanka Securities Private Ltd in a quarterly review for the period January to March 2011, released in June, said listed companies had made a combined net profit of Rs. 33 billion, up 57.3 percent from a year earlier while earnings grew 62.6 percent to Rs. 36.7 billion. But compared with the previous quarter, corporate earnings had dipped. Excerpts of the report follow:

"The corporate earnings for the Jan-Mar Quarter 2011 recorded a staggering 62.6% YoY growth to Rs.36.7bn as opposed to Rs.22.6bn in the comparative period. Having eliminated the non-recurring profit, quarter witnessed a net profit of Rs.33.0bn (+57.3% YoY) versus Rs.20.9bn in the comparative period. By the time of the writing this report 225 listed entities have released their quarterly financial statements out of the 256 total listed companies (Including the closed ended fund) while 31 companies will not be releasing their quarterly results for the quarter Jan-Mar 2011 as they are listed in the Diri-Savi board.

Oil palm sector companies registered the highest growth in quarterly profits (+286.5% YoY) given the surge in palm oil prices while Motor sector companies which recorded back to back highest growth in net profit for the last couple of quarters (due to the welcoming tax revision on import duties)saw a 132.5% YoY net profit growth. Meanwhile Beverage, Food & Tobacco Sector quarterly profits increased by208.2%YoY as a result of spectacular earnings performance of DIST. Among all the sectors, textile & footwear sector recorded the highest drop in net profit of 266.9% YoY while four other sectors namely Trading (-118.1% YoY), Power & Energy (-65.2% YoY), HealthCare (-38.2% YoY) and Information Technology (-28.2% YoY) similarly pressurized the corporate earnings.

Despite having an overwhelming earnings growth against the comparative quarter, total corporate earnings experienced a minor drop (-4.1% QoQ) compared with the Sep-Dec quarter 2010. This was caused by the underperformance of the sectors such as Bank, Finance & Insurance (-34.2% QoQ), Motors (-13.4% QoQ), Power & Energy (-75.2% QoQ). Non-recurring items in Bank Finance & Insurance sector was a force behind this deficit.

Nevertheless Beverage Food & Tobacco (+58.3% QoQ), Diversified Holdings (+29.0% YoY), Hotel & Travels (+136.2% QoQ), Oil Palms (+64.6% QoQ) shouldered the latest quarter earnings growth against the foregone quarter.

Beverage Food & tobacco sector registered the highest contribution (22.0%) to the quarterly profits followed by Bank Finance & Insurance sector (20.0%) and Diversified Holdings (19.0%). Emerging sectors in the CSE, Hotels & Travels (9.0%) and Telecommunications (7.0%) demonstrated increased influence to the overall earnings.

It can be stated that listed companies in CSE has been able reflect its share of contribution to the quarterly earnings through their influence to the market capitalization. Bank Finance & Insurance Sector accounts for 22% of the market capitalization while Diversified sector (21%) demonstrated the next highest contribution. Beverage Food & Tobacco sector which highly contributed (22%) to quarterly earnings showed a much lower contribution (12%) to the market capitalization."
See below for sector analysis.

Bank, Finance & Insurance Sector (BFI)

Sector posted quarterly earnings growth of 106.6% YoY almost doubling net profits to Rs.7.4bncompared to Rs.3.6bn in the comparative quarter.

Out of the blue newly listed UBC witnessed the highest growth in quarterly earnings (+219.3% YoY) in Licensed Commercial bank segment followed by PABC (+190.4% YoY) and NDB (+102.3% YoY).

Meanwhile elite commercial banks in the country, COMB (+86.4% YoY), HNB (+87.9% YoY) and SAMP (+63.8% YoY) continued to maintain their supreme position in the segment. Licensed commercial banks recorded a82.6% YoY growth in quarterly earnings.

Furthermore among the Licensed specialized Banks, SEMB made a surprising return and recorded 210.0% YoY growth in quarterly earnings while MBSL (+71.5% YoY) made a noteworthy jump in profits. Yet DFCC (-14.0% YoY) & HDFC (-68.7% YoY) saw drop in their earnings due to the significant fall in top line. This resulted in licensed specialized banks segment recording a 17.8% YoY drop in quarterly earnings.

Among the Registered Finance Companies (RFC), CDB (+438.9% YoY) recorded the highest growth followed by VFIN (+223.2% YoY). Leading RFC with a diverse business scope, LOLC made a disappointing drop in net profit (-43.5% YoY) in the latest quarter which is attributable to the high negative goodwill & operating costs. This led the RFC segment to record a 63.6% YoY drop in quarterly earnings.

Banking heavyweights COMB,HNB,SAMP (Licensed commercial banks), DFCC (Licensed Specialized Banks), LOLC and CFIN (Registered Finance Companies) made notable contributions to the total sectorearnings.

At the end BFI sector recorded a -34.2% QoQ with regard to quarterly earnings due to,

*Insurance companies recognizing gains from the life insurance portfolio which took place in the Sep-Dec quarter hence respective quarterly earnings being higher than Jan-Mar quarter earnings.

*The Finance Company recorded provision for impairment losses, changes to the net realizable value of inventories and receivables and fair value of investment properties amounting Rs. 1.4bn.

Given the reduction in financial service VAT, low interest rates, stable inflation & optimistic economic outlook, we anticipate BFI sector to record sustainable growth in earnings in the forthcoming periods.

Beverage Food & Tobacco Sector (BFT)

Sector recorded a net profit growth of 208.2% YoY&58.3% QoQ recording the highest earnings ever in the post war period supported by the earnings of TAFL (+7,804.0% YoY) &DIST (+3,555.7% YoY). Productivity in breeder farms and hatcheries contributed to TAFL’s massive profit growth while Rs.3.8bn worth disposal of investment boosted DIST earnings.

Meanwhile KFP (-98.9% YoY), CCS (-74.4% YoY), COCO (-13.5% YoY), HARI (-25.4% YoY) experienced a drop in profits.

DIST made the highest contribution (27%) to the sector earnings while CTC (18%), CTEA (15%), NEST (14%) made notable contributions to the sector. We excluded the non-recurring gain of Rs.3.8bn of DIST in order to reflect the justifiable contribution to sector earnings.

BFT sector will be the driving force in the corporate earnings for the upcoming periods given the persistent growth in consumption along with the increasing per capita income.

Chemicals & Pharmaceuticals Sector (C&P)

Companies experienced a moderate growth of 26.7% YoY in quarterly earnings from Rs.470.2mn to Rs.595.8mn. LCEY (34%) which made the highest contribution to the sector earnings registered huge jump in quarterly earnings by 205.7% YoY while its peers, MORI (+215.5% YoY) & CIC (+52.4% YoY) recorded impressive earnings growth. A fully own subsidiary of HAYL , HAYC (one of the largest coconut shell based activated carbon manufacturer in the world) faced a dip in its profits (-53.6% YoY). This was due to drop in profits (-82.4% YoY) attributable to its associate, Carbotel Ltd. which is the leisure arm of the HAYL group. Furthermore rise in charcoal prices negatively affected the margins enjoyed by the company.

Construction & Engineering Sector (C&E)

Being highly dependent on DOCK, the sector saw a 70.4% YoY growth in earnings. DOCK posted a 78.4% YoY jump in profits while KAPI was increased losses by 64.4% YoY and ended up in the negative territory. LDEV continued to show dip in profitability (-177.9% YoY) and made a net loss for the quarter.

Diversified Holdings Sector (DIV)

Sector registered a marginal increase in quarterly earnings to Rs. 7.2bn by 9.1% YoY. This insufficient growth was due to almost 5 companies recording drop in quarter earnings including the premier conglomerate JKH (-10.1% YoY), HAYL (-70.6% YoY) andHHL (-7.6% YoY).

Significant drop in net profits for Consumer Foods & Retail (-62.5% YoY), Information Technology (-122.6% YoY), other sectors (-94.1% YoY) drove JKH net profit down. Meanwhile provisions made by MGT with regard to discrepancies in inventory and receivables & reversal of revaluation of assets dragged down the HAYL quarterly earnings.

Nevertheless CARS (+323.5% YoY), newly listed conglomerate FLCH (+189.0% YoY) and Sunshine Holdings (+62.7% YoY) shouldered the sector earnings.

Despite the disappointing earnings growth, JKH (+36%) remained as the top contributor to the sector earnings followed by evolving conglomerate CARS (+24%) and SPEN (+13%).

Footwear and Textiles Sector (F&T)

While recording a net loss of Rs.244.5mn sector saw a massive drop in profits by 266.9% YoY which can be attributable to the provisions made by MGT with respect to discrepancies in inventories and receivables. Modest performance by ODEL (+29.0% YoY) was overshadowed by the drop in earnings of CLPL (-12.6% YoY), MGT (-265.9% YoY), KURU (-51.8% YoY). Nevertheless sector was able to cut losses by 60.6% QoQ as the scale of the provisions made by the MGT was lower than the foregone quarter.

Healthcare Sector (HLT)

Sector recorded attractive54.8% YoY growth in its net profit (Excluding non-recurring gains). NHL (170.9% YoY), AMSL (34.4% YoY) and LHCL (+81.2% YoY) shouldered the sector earnings while CHL (-113.3% YoY) was the only down performer. Non-recurring gains in AMSL, NHL in comparative period profits were excluded for our analysis.

Hotels & Travels Sector (H&T)

Being the star sector possessing the highest prospects in terms of growth and earnings, Hotels & Travels experienced a significant growth in earnings by 74.7%YoY from Rs.1.8bn to Rs.3.2bn. This is further verified by the +136.2% QoQ growth. Despite Sep-Dec quarter being the peak tourism season in terms of tourist arrivals (+50.8% YoY), latest quarter tourist arrivals revealed further improvements (+2.8% QoQ& +34.1% YoY).

Remarkableimprovement of quarterly earnings were witnessed in TAJ (+1,482.9% YoY), SERV (+1,212.7% YoY), KHL (+617.0% YoY) andGHLL (363.1% YoY). Meanwhile prominent hotel operators AHPL (+171.9% YoY),AHUN (+40.8% YoY) andTRAN (+278.5% YoY) experienced noteworthy net profit growth reflecting the gravity of the growth in hotel sector earnings.However HSIG (-16.6% YoY), RENU (-52.8% YoY) andMRH (-50.9% YoY) witnessed fall in net profit.

AHPL (25%), AHUN (18%), KHL (16%) and TRAN (12%) contributed to almost 71% of the total sector earnings while JKH contributing 53% (AHPL, TRAN, KHL) of the sector earnings reflecting its dominance over country’s hotel industry.

Information Technology Sector (IT)

Quarterly earnings for the sector which solely dependent on PCH (E Channeling did not release earnings records for the quarter as it is listed in the DiriSavi Board) faced a drop in earnings (-28.3% YoY). Escalating operating expenses (+42.0% YoY), Income Tax (+35.0% YoY) badly affected the PCH earnings for the quarter.

Investment Trusts Sector (INV)

Sector experienced further growth in quarterly earnings(+27.6% YoY-Excluding non-recurring gains) owing to the staggering growth posted by GUAR (+223.2% YoY) which almost contributed to half of the sector earnings. Apart from RHL (+301.0% YoY) and SHAW (+106.9% YoY) which showed promising returns other companies made threefold drop in their earnings. Non-recurring gain of Rs. 195.1mn in ASCO was disregarded for the analysis.

Land & Property Sector (L&P)

Fair value adjustments to investment properties of ONAL (+479.9% YoY) & EQIT (+172.6% YoY) shot up sector earnings by 23.9% YoY to Rs.376.9mn. OSEA which made the highest contribution (31%) to the sector earnings showed a 35.3% YoY dip in profitability. Further OSEA witnessed a 75.0% QoQ decrease in earnings causing the sector to record a 48.1% QoQ drop in earnings. Medium size player in the sector, PDL (19%) and CTLD (14%) assisted the sector earnings by registering growth of 12.6% YoY and 42.4% YoY.

Manufacturing Sector (MFG)

Sector quarterly profits increased by 48.8% YoY on account of moderate growth posted by RCL (+39.9% YoY) & LLUB (+10.2% YoY), which retains almost 45% of the sector earnings. SUGA widened its losses by 90.9% YoY and 329.8% QoQ to a quarterly loss of Rs.723.5mn. Positive growth by CARE, GRAN, SINI, REG, TKYO helped the sector to hinder the pressure imposed by SUGA, CERA, HEXP and REXP.

Motors Sector (MTR)

Sector demonstrated a monstrous growth in profitability by 132.5% YoY to Rs. 1119.8mn which can be attributable to the overwhelming demand for vehicle hyped by the reduction in vehicle imports duties. Nevertheless sector saw a 13.4% QoQ drop in earnings giving signs of fading effects of tax revision hence we are not anticipating abnormal profit growth in the forthcoming periods that was seen in the last quarter. But with the prevailing economic conditions in the country and growing demand along with per capita income we anticipate sustainable growth in the companies in the sector. Most dominant player in the sector with the highest contribution the quarterly profitability (44%), DIMO posted an aggressive 379.2% YoY growth in earnings.

Oil Palms Sector (OIL)

Having captured the position of the Motor sector as the star performer of the CSE, Oil Palms recorded a massive 286.5% YoY and 64.4% QoQ growth in profitability which can be directly attributable to the surge in palm oil prices (+48.6% YoY). BUKI which almost dominate 85% of the sector earnings made an imposing return by recording 78.1% QoQ earnings growth while other companies also saw attractive earnings growth.

Plantations Sector (PLT)

Plantation sector which plays a vital role in the country’s economy as well as social development saw a significant jump in earnings this quarter owning to the surge in rubber prices. Net profit for the quarter increased to Rs.2.bn from Rs.1.4bn with a 41.4% YoY jump. Furthermore earnings increased by 28.9% QoQ.

Rubber prices in the category of Latex crepe 01x increased by 16.4% for 1QFY11 boosting earnings of rubber dependent plantation counters such asAGAL (+236.6% YoY), KOTA (+144.8% YoY), KVAL (+119.8% YoY) and KGAL (+13.9% YoY).

Yet plantations such as HAPU (-42.1% YoY), BOPL (-10.5% YoY), MASK (-54.7% YoY) and UDPL (-118.9% YoY) experienced steep drop in earnings due to being heavily dependent on tea. This can be attributable to the fact that tea prices has been constantly declining for the last quarter especially due to the political struggles in middle eastern countries (biggest customers of Sri Lankan tea) adversely affecting the demand for tea. High grown tea (-7.9% Jan-Mar) saw a notable drop in prices followed by medium grown tea (-3.04% Jan-Mar). Low grown tea had the least impact with prices declining by 1.4% during Jan-Mar.

As per the recently signed collective agreement between plantation workers & authorities, workers were given a salary increase of 27.2% (increased combined daily wage to Rs.515.0 from previous Rs.405.0).As this agreement is valid for two years until another agreement being signed salary cost will be based on this new structure. As the salary cost represents almost 60% of the total cost of production this would obviously put more pressure on the margins of the plantation companies. Hence future movement in tea & rubber prices will be decisive factors in determining capability of the plantations to generate adequate cushion in maintaining their existing profitability.

Power & Energy Sector (P&E)

Sector earnings collapsed to Rs.346.6mn by -65.2% YoY due to the heavy losses made by LIOC. Company saw a -117.8% YoY drop in profits due to the high volatility of petroleum products in the international market while being incapable to revise selling prices in the domestic market accordingly. Along with LGL (+144.8% YoY) hydro power companies recorded attractive earnings given the power plants being operated at near full capacity.

Services Sector (SRV)

On account of the jump in earnings of 67.4% YoY & 78.0% YoY of the biggest players in the sector CTEA (78%) and JKL (22%), sector earnings recorded a growth of 70.3% YoY to Rs.346.6mn. OFEQ recorded a significant jump in earnings while KZOO, LPRT and PARA reduced losses. Accordingly MSL, CPRT, KZOO and PARA failed to positively contribute to the sector earnings.

Stores & Supplies (S&S)

EBCR which almost control sector earnings single handedly recorded a 64.3% YoY increase in profitability while pulling up sector earnings by 60.4% YoY to Rs.396.2mn. Despite GEST recording positive growth in earnings other companies made disappointing dip in profits.

Telecommunications Sector (TLE)

Being entirely made up of telecomm mammoths SLTL & DIAL, sector experienced an overwhelming 87.7% YoY to Rs. 2.5mn versus the comparative period where the telecommunication industry started recovering after the self-destructive pricing strategies used by the industry peers. SLTL almost two folded earnings (+114.4% YoY) by beating DIAL (+64.4% YoY) for the sector dominant position. As the dark years of substantial losses due to heavy competition is long behind we expect sustainable growth in earnings of these companies given the expansion of the market in new directions and technology advancement.

Trading Sector (TRD)

Sector saw a major drop in earnings (-118.1% YoY)owing to poor quarterly earnings of BRWN (-287.9% YoY) due tosoaring operating costs (+177.6% YoY). Valiant performance recorded by SINS (+48.6% YoY) was able to hinder the impact of slide in sector earnings. While CFT (+1,843.2% YoY), RGEM (+999.6% YoY) made atypical evolution in earnings, OFEQ (-1181.5% YoY) showed dip in profits. Trading sector which is highly sensitive to the prevailing economic conditions had demonstrated highly volatile performance in terms of earnings. Yet given the positive sentiment over the economic & social environment we anticipate growth in future earnings.

source - www.island.lk

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