Growth in corporate performance showed signs of sustainability as the 3QFY10/2QFY11 registered an unfettered QoQ growth of 39.7% to LKR37.0 bn. The resurge momentum of the economy after the end of the ethnic conflict continued taking the YoY performance of the corporates (normalised to exclude Dialog Axiata) to touch 163.6% during 3QFY10/2QFY11.
Meanwhile, the YTD corporate earnings rose by a near two fold to hit LKR86.7 bn.
Out of the 20 active sectors listed on CSE, only Information Technology had recorded a YoY dip of 86.4%, whilst the rest of the sectors exhibited strong performance.
Contributors banking, finance & Insurance companies made up a solid 67.5% of total market earnings whilst contributions to the total quarterly earnings from diversified, food, beverage & tobacco and the manufacturing sector stood at 7.2%, 4.8% and 3.1% respectively.
Despite being crowned as the world’s top performing equity market after recording an all time high of 7,147.8 points in October 2010, the market thereafter took a slippery road. During the 3 month period under review, ASPI shed more than 400 basis points to 6,453.2 point as at today.
Although, the corporate earnings proved to be in line with expectations, market remained stagnant even after the quarterly results flowed in.
With the lull sentiments continuing and the selling pressure on, market P/E declined itself to 20.0X from 25.0X, (Based on trailing earnings), on the back of September earnings.
The reason for the negative investor sentiment in the market is believed to be with the unnecessary fear psychosis on the more recently introduced ‘T+3’ regulatory measure. With the under-performing bourse coupled with the expected boost in earnings in the periods to come (emerging from avenues such as leisure, construction and many other related sectors) and with the positive revision on the tax structure falling into effect from Jan 2011, the P/E is expected to improve further.
This indicates that Sri Lankan equity market could re-position itself as an attractive frontier market in the eye of foreign investors. This was proven, with the most recent week recording a WoW net inflow of foreign funds into CSE at LKR3 bn.
Banks and finance sectorBanks and finance sector has grown by 181.1% during the quarter which has been majorly due to accelerated economic activities in the country. The same momentum can be expected going forward which would be backed by significant investment in branch expansion and investor-friendly policies imposed by the government.
The major contributors to this growth are Hatton National Bank, Commercial Bank and LOLC where LOLC recorded a growth of circa 346% YoY.
The sector PE has witnessed a high incline over the past due to the positive investor sentiment in the banking sector. Whereas the dividends yield projects a smooth decline together with a fairly stagnant price to book value.
The banking sector index stood above the ASI whilst the earnings index diverted over the last three quarters.
It is expected that the earnings would witness a higher growth in future with a strong backing from the pro-banking sector budget 2011.
Hotel and travels sectorThe sector was benefited during the quarter mainly due to improving foreign arrivals.
The sector shows a QoQ growth of 4,230% which would be a significant growth compared to the other sectors. Colombo city hotels such as Galadhari, Cinnamon lakeside and Cinnamon Grand were highly benefited due to increasing arrivals of business clients whilst resort hotels were able to improve their bottom lines with the seasonal foreign tourist arrivals.
Even though the Hotel Sector Earnings Index shows high volatility since June 2007 the Hotel Sector Index which was in line with the market seems to be trading at a discount to the All Share Index currently.
Further, the sector witnessed a high PE growth since the war ended together with the positive sentiment in the industry. However, in the recent past with the counters recording improved earnings the PE witnessed a dip.
The sector PBV and dividend yields have been stagnant over the years with a slight improvement in PBV during the last quarter.
Going forward with the positive industry sentiment together with the government initiative, the sector is proved to prosper.
The expected increase in tourist arrivals and the investment influx would further strengthen the growth in the industry.
Therefore, we expect the sector earnings to grow in the foreseeable future.
Beverage, food & tobacco sector
The food and beverage, one of the key sectors listed in CSE, registered a growth of 71.1% YoY during 2QFY11/3Q10 to LKR4.1 bn (making up 11.1% of total market earnings) whilst recording a 42.6% YoY growth for the period ending September 2010.
Poultry sector players (Bairaha Farms and Three Acre Farms) sustained their growth story benefiting from the increased chicken consumption in the country. Cargills (Ceylon) also contributed to the sector growth with the addition of the North and East markets to its customer base whilst momentum continued in liquor-oriented businesses (Distilleries, Lion Brewery and Ceylon Brewery).
The QoQ performance by the sector was primarily shouldered by the improved earnings reported by Three Acre Farms, Convenience Foods, Nestle Lanka and Ceylon Tea Services.
Looking ahead, we believe this sector would sustain its growth as most of the counters that contributed to the sector’s performance to continue to capitalise on the post war scenario.
However, certain counters such the Distilleries, Lion Brewery and Ceylon Brewery despite increase in their top line, the sector would find their net earnings being squeezed with the increment of corporate taxes to 40% from 35% and the upward revision in the excise duty structure.
Manufacturing sector
The sector grew by 94%QoQ during the 2QFY11/3Q10 and it accounts for 4.9% of the total quarterly earnings of the market. Throughout the past, earnings of the sector had been highly volatile, which was mainly due to seasonal impacts and unfavourable macroeconomic outcomes in the global economy. Growth in Pelawatta Sugar in 2QFY11/3Q10 to LKR408 mn from a loss of LKR-197.7 assisted the sector in achieving a high growth level. Chevron Lubricants, Royal Ceramics and Tokyo Cement further strengthened the sector earnings
Both the manufacturing index and the All Share Index (ASI) have shot up after the end of conflicts in May 2009 but it is notable that the manufacturing index has outperformed compared to the ASI.
PER of the manufacturing sector rose drastically during last 1 1/2 years which was mainly backed by the influx of new investment to the Colombo bourse. But the sector’s dividend yield has dropped slightly irrespective of the improving PER. Price per book value (PBV) shows a gradual increment starting from end of 2009.
Telecommunications sectorThough the telecommunication sector includes only two counters, it contributed 5% to the total market during the 2QFY11/3Q10.The sector witnessed a 26.9%QoQ growth backed by the healthy earnings of the two participants.
Yet the trailing earnings of the sector have stifled due to the heavy losses made during December 2009 by Dialog Axiata.
The Sector Earnings Index which showed volatility has been on a growth run over the past few quarters.
The Telecommunication Index is now in line with the Earnings Index of the sector, yet it is performing below the Market Index.
The sector which has been recording losses over the past few quarters had a PE of 48X with the improved earnings during 2QFY11/3Q10. Yet the Price for Book Value has remained at low valuations and the dividend yields of the sector witnessed a dip.
Going forward, the sector has potential in the local context with the technological advances together with the high penetration levels in the island.
Further with government reducing the call charges, we expect the revenue to grow due to the high elasticity of the product coupled with the growing per capita income.
Diversified holdings sectorThe diversified sector recorded impressive growth rates of 186% YoY for the 2QFY11/3Q10.
The earnings growth was shouldered by the near LKR3bn profit derived by heavy weight John Keells Holdings with its capital gains through Asian Hotels and Property and Keells Hotels.
Few other diversified counters yet saw a QoQ dip in its earnings due to cyclical effects prevalent in the industry.
Even though the sector earnings show high fluctuations on a QoQ basis, the earnings has usually outperformed the sector and the market index. Further the Diversified Sector Index acts as a proxy for the market index due to the counters strategic holdings in a various segments.
The sector witnessed a rapid rise in the PE over the last few quarters with the market gaining over 100% during the year.
The dividend yield for the sector has remained on a low base.
Yet the Price for Book Value which has been stagnant over time is witnessing a minute upward momentum.
Going forward, we expect the diversified sector to report higher earnings on the back of the high geared local economy.
Further the sector would benefit with the low interest rates persistent in the island together with the high investment rate as the sector is prone to diversification.
Construction & engineering sectorThe sector was able to achieve a growth of 181.3% which was mainly backed by increasing generated through post war developments.
The growth would be further facilitated by reduction in income tax for construction companies and reduction in custom duties for raw materials and capital equipment. Therefore, improved earnings during the upcoming quarter are expected in the sector.
Colombo Dockyard shouldered the sector earnings by recording a net profit of LKR795m whilst Lankem Developments and MTD Walkers reported losses over 2QFY11/3Q10.
Sector shows overall increase in earnings after the end of the conflict, but significant fluctuation in earnings can be seen till the January 2010.
Construction and Engineering sector has done well compared to the market, which is evident by significant increase in Construction and Engineering index over the ASI.
Although there were some fluctuations, overall PER has gone up starting from year 2009.Dividend yield shows severe fluctuation till around June 2009 and thereafter it shows a gradual decline. Irrespective of the dip in February 2010 the PBV shows a gradual increment starting from end of 2009.
Land & property sector
The demand for land & property has increased with the significant investments in the construction and engineering sector. This has ultimately resulted in an increase in the earnings for the quarter by 31.7%. Cargo Boat spearheaded the sector earnings with a net profit of LKR115m generated through other incomes.
Further, though few of the counters in the sector reported a dip in earnings QoQ basis, the sector recorded a growth shouldered by the land and property heavy weights such as Overseas Realty and Property Developers.
The sector which previously witnessed a peak in its PE based valuations had a drop in the earnings levels on the back of the improved profits.
The PBV of the sector which was stagnant on a low base gained over the last quarter whilst the dividends yield remained flat.
The sector earnings have grown parallel to the Land and Property Index with a slight discount on the sector index.
Further, we could see a high correlation with the ASI movement and the sector movement.
With increasing demand for more housing apartments and office complexes in the Colombo city, it is expected that the sector would continue the same growth in the upcoming quarter.
Further, the healthy rental yields and the low interest rates would shoulder the growth in the sector.
Motors sector
During June 2010 government reduced import duty for vehicles by 50%.
This has immensely helped the stagnant industry to move ahead resulting in 72.2%QoQ increase in earning.
With the new budget proposals, government has reduced import tax on heavy vehicles.
This would positively impact on the earnings of counters like Lanka Ashok Leyland, Dimo, Sathosa Motors and United Motors during the upcoming quarter.
Earnings index of the motor sector shows a drastic reduction during June 2009.
This was mainly due to significant increment of the fuel prices in the country and the adverse impact of the global economic meltdown.
But the sector has outperformed the market index with a high level of growth.
PER of the motors sector has perked during October 2009 and February 2010 period, thereafter the sector witnessed a drop. Going forward, it is assumed that PER would further reduce with the improving earnings of the sector which would be majorly backed by the significant reduction of import duties for motor vehicles.
Furthermore dividend yield has shown a slight reduction from October 2009, while PBV shows a slight increment during the period.
Plantations sectorPlantation sector earnings which accounted to 1.8% of total market earnings, have dipped by 27.2% during the previous quarter mainly on the back of the slowdown in both tea and rubber production with the adverse weather conditions prevailing during the quarter.
Kegalle Plantation (KGAL) which recorded 456% YoY growth in earnings during 2QFY11/3Q10 contributed up to circa 32% of the sector earnings.
Despite increased contribution from counters such as Kegalle and Namunukula Plantation, sector earnings dipped mainly on the back of losses made by several counters.
Plantation sector, despite witnessing high volatility in earnings over the years, has notably outperformed the market index on a continuous basis.
On a valuation perspective, sector has witnessed considerable fluctuation in PER where it reached its highest levels in April 2010, whilst witnessing a drop thereafter till June 2010 with improved overall earnings.
The sector PBV depicts a slight growth since April 2010.
Going forward, the plantation sector counters, which have a greater exposure to rubber, would witness stronger growth in earnings provided that the current high levels of rubber prices would sustain. Furthermore, sector earnings would further enhance with number of counters moving in to palm oil, which generates considerably high margins.
Chemicals& pharmaceuticals sector
The sector contributed 1.6% to the total earnings during 2QFY11/3Q10. Further the earnings has increased by 78%QoQ which was mainly due to the improvement in agricultural activities throughout the country and the north & east markets opening up.
J L Morision recording a profit of LKR189mn (up by 711%YoY) together with Chemical Industries reporting an impressive earnings growth of 19%QoQ to LKR218mn shouldered the sector earnings incline.
Chemical Sector Index has outperformed the market index whilst the volatile earnings index of the sector has settled between the ASI and the Sector index.
Going forward with the emphasis on the agricultural industry in Sri Lanka, the Chemicals and Pharmaceuticals sector is posed to grow. The relaxation of taxes on raw material and equipment would shoulder the growth of the industry further.
(This is a special report prepared by Asia Securities)
source - www.bottomline.lk
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