Tuesday, December 18, 2012

CB’s prediction for CSE over-ambitious

 A Euromoney report suggests caution in interpreting foreign inflows into bourse

‘Given the mixed performance of some of Sri Lanka’s recent IPOs, the Sri Lankan central bank’s prediction that the stock market is set to grow to a value of 70% of GDP by 2016 could be seen as over-ambitious,’ says Euromoney Institutional Investor PLC in its Euroweek December 2012 issue titled ‘Sri Lanka in the Capital Markets.

"While the Sri Lankan bond market has very clear growth potential (see The Island Financial Review December 15), one of the more striking predictions made in a recent presentation by the Central Bank of Sri Lanka is that the stock market is projected to grow to a value of 70% of GDP when GDP reaches $100bn by 2016," the Euromoney report said.

"That is quite a statement, given that even after the explosive performance of Sri Lankan equities in 2009 and 2010, the market capitalization still amounted to just $16.3bn as of October 2012. At the end of 2011, market capitalisation was a modest 33.8% of GDP, down from 39.5% at the end of 2010.

"The chances of doubling the size of the equity market in the next four years also look ambitious in light of the chequered performance of some of Sri Lanka’s recent IPOs," the report, sponsored by HSBC, said.

"The largest of these, in November 2011, was the Rs. 7bn sale of a 25% stake in People’s Leasing, Sri Lanka’s biggest leasing company, which generated demand of Rs. 9.5bn. By November 2012, however, the shares were trading at Rs. 12.40, sharply down from the IPO price of Rs18 a share.

"Investors say that this disappointing performance was a product of external influences rather than a commentary on the fundamental strength of the company.

" ‘I don’t think the IPO was overpriced,’ says Niloo Jayatilake, fund manager at the Sri Lanka Fund.

‘The problem was that soon after the listing, interest rates rose, which made it hard for the company to meet its earnings targets. We believe the long term prospects for People’s Leasing remain bright."’

Euromoney said there are a number of promising indications to suggest potential for further growth at Colombo Stock Exchange: authorities taking stops to encourage new listings, improve free floats and improve investor awareness, the launch of the S&P SL20 and a pick up in foreign investments were listed among the positives.

"According to data published by the CSE, in the year to October 2012, foreign investors accounted for 22.7% of turnover, compared with 18.5% in 2010 and

10.9% in 2011. This year’s positive inflows need to be interpreted with caution, however, given that much of the total is accounted for by a single transaction in March. This was the acquisition by Malaysia’s state investment arm, Khazanah

Nasional, of an 8.9% stake in the conglomerate, John Keells Holdings (JKH), which is comfortably the largest and most liquid quoted Sri Lankan company.

"Khazanah paid just under $120m for the stake in JKH, which gives it exposure to a group with interests in areas ranging from food and beverages to financial services, hotels and leisure, IT, property, transportation and plantations," Euromoney said.

source - www.island.lk

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