Monday, November 5, 2012

Sept. earnings surprisingly strong

Cumulative figure of 29 firms which have reported results so far up 64% to Rs. 10.36 b; analysts expect more impressive numbers from select blue chips in Diversified and Banking sectors from this week onwards

Initial numbers coming out from corporates in the September earnings season have been surprisingly strong given the challenging economic and business conditions, whilst with that of select blue chips pending from this week onwards, analysts expect overall performance to be robust.

By last week, around 30 companies have reported earnings for the September quarter and according to John Keells Stock Brokers, the cumulative earnings for the September quarter of 29 companies were Rs. 10.37 billion, up by 64.3% over the corresponding period of last financial year. Other analysts said several top blue chips in Diversified and Banking sectors are slated to release their results from this week onwards with some expected to show impressive performance.

Most brokers have termed the results released so far as “positive” with a consequent re-rating on their stock valuations. Other analysts termed the impressive earnings as surprising given the fact that GDP growth has been downgraded this year due to external and internal shocks whilst relatively demand in consumer and commercial markets have remained lacklustre.

The forecast overall rebound in earnings is being flagged off as a key reason by some brokers for investors to take a more optimistic outlook on listed equities. Furthermore, with foreign investors remaining bullish with inflows being a record Rs. 34 billion plus, attractiveness of some of the blue chips based on improved earnings will rise among non-nationals.

Softlogic Stockbrokers, which described corporate earnings as “positive,” said Sri Lankan stocks would re-rate to a higher global valuation plane.

However, impressive earnings being ignored by investors thereby market remaining bearish was very much evident in broker comments.

“The pre-earnings season rally seems to have been forgotten as investor reaction to the already released data remained below expectations. Friday’s sudden buying for the earnings led counters can be taken as a hope for the upcoming weeks when earnings of many other key players would be released. The Plantation sector caught the eye, however, many hesitated to buy with the upcoming wage revision whilst those holding took the sun ray on the plantations as an opportunity to find an ideal buyer,” Softlogic said.

“We do not understand the rationale behind this sluggish investor move. However, we believe that some active play would emerge (this) week based on the calculation of Friday’s last hour trading and as the Bourse-Budget clock tick gets louder. A fresh round buying would definitely emerge as investors divert focus on sectors that are likely to see a positive impact after the Budget reading whilst foreign participation would accelerate on the announcement of an investor friendly 2013 Budget,” it added.

DNH Financial said it expects the market to trade sideways over the next few days as investors await the presentation of the 2013 Budget (on Thursday).

“While the 3Q2012 corporate results released so far have broadly surprised on the upside, we continue to advise investors to refrain from seeking short term trading opportunities but focusing on medium to longer term investments that require the assessment of a number of key parameters, most importantly the strength of the corporate top line and its sustainability,” DNH Financial added.

“While we do not rule out the importance of earnings as a strong indicator of growth, it is highly important to determine the source of 3Q2012 profits, whether a result of top line growth or an increase in other income or a dramatic cut in costs that could have a negative impact on future productivity. Of perhaps even more significance is the sustainability of such earnings. In this respect, while we advise investors to seek quality, both in terms of the top line and the bottom line, we accentuate the need to select stocks that may not only pass the quality test in terms of fundamentals but are also sufficiently liquid,” DNH added.

Asia Wealth Management said last week turnover remained below par during the first three days despite “the healthy earnings results being released by most of the companies”.

“It can be seen that the investors are remaining in the sideline awaiting the direction of the next week’s budget. The settlement of month end margin positions is also likely to squeeze the activity of the investors,” Asia added.

Asia said last week ASI and MPI dipped marginally during the week continuing previous week’s lacklustre market performance.

“In the face of this subdued level of activity, market turnover remained below desired levels, while few high net worth and foreign trades contributing heavily to the market turnover during the week. This was mainly on the back of investors adopting a ‘wait and see’ approach in the last few days of trading before the 2013 Budget proposals being announced with the hope of obtaining a clear direction to market activity and identifying favourable and less favourable sectors for investments going forward,” Asia opined.

In this backdrop, Asia said it can be observed that market forces which found it difficult to adopt a proper long term direction due to seemingly contrasting economic signals with diverse, are now attempting to achieve a coherent direction for trading activities through the general economic outlook drawn out by the much anticipated 2013 fiscal proposals.

“Hence, we believe that Sri Lanka’s equity trading activity is likely to settle itself on a proper long term rhythm and direction during the next few weeks of trading once the fiscal proposals are made public.

On the other hand, despite their thin overall participation except on Friday, foreign investors emerged net buyers during the week indicating the positive sentiment prevailing among them regarding the prospects of Sri Lanka’s stock market, leading into 2013 fiscal proposals with a positive note.

This is an indication that fundamentally-driven market analysis remaining attracted to the long term growth prospects of the economy in general while particularly favouring a selected group of blue chip counters benefiting from above ordinary growth profiles. Therefore, once the 2013 fiscal proposals are made public, we expect the market activity levels to recover and to adopt the direction which the expected fiscal proposals would indicate.

Further, in terms of interest rate expectations, long term T-bond yields are likely to remain stable on the back of higher yields offered by Sri Lanka compared with the region which scales down the possibility and necessity of T-bond yields increasing further. On the other hand, bond yields may also not tend to fall in the medium to long run owing to the higher presence of foreign portfolio investments in T-bonds relative to the T-bills market.

Thus, the monetary authority is likely to prevent any substantial fall in T-bond yields to prevent divestment by foreign bond holders. This would lead to a stabilisation of bond yields in the medium to long term, while short term bill rates are likely to fluctuate depending on the changing external position of the economy, Asia Wealth said.

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