Environmental Resource Investment PLC (ERI) has recorded a net profit of Rs. 510 million for the financial year 2010/11 compared to Rs 108 million for the previous year. This is a substantial increase of 369%. The revenue has increased to Rs. 2116 million from Rs.233 million which is a commendable increase of 805%.
The following analysis based on certain assumptions for the next 4 years period indicate recorded net profits of Rs. 510 million represents only 15% of the actual profits and the actual hidden unrealized net profits amount to around Rs. 4043 million annually with earnings per share of Rs. 13. It also shows staggering theoretical price of Rs.348 on the basis of PE of Rs.26.76 for the investment trust sector on 17.6.11.
Impossible task of determining a future sale price of a company coupled with the fact future sale price generally far exceed valuation based on present earnings/ net asset value due to other factors such as future value additions, good will etc. No present day accounting standard could show hidden profitability on the type of investment objective of the ERI.
Many financial analysts, stock brokers and investors have failed to realize that the substantial profits have been derived from an insignificant income source not the main income source which is the sale of companies. Unlike other quoted companies main objective of ERI is purchase of quoted and unquoted inefficiently run companies and those with other constraints such as inadequate finance and add value by rehabilitating and sell in the stock market with a good margin.
Unlike other quoted companies it is not possible to ascertain real profitability of ERI since it is extremely difficult to determine the date of sale of a company and purchase consideration. Accordingly traditional tools such as EPS, PE has no meaning to ERI since what has been quarterly shown represents profits of subsidiaries, stock broking company and short term investments which would be negligible compared to real income.
Therefore in order to make a fair assessment of income it is assumed that the net profit of 5 major investments have been arrived at by selling at a price 75% of the highest price recorded or to be recorded in the case of Pugoda Textiles as follows during a period of 4 years.
In this exercise, income to be derived from other 7 companies have been ignored. Similarly, future dilution of capital and income from future investments amounting to Rs.40055M have been ignored. It is assumed that only ERI owns subsidiaries fully and other income and expenditure are static.
The ERI makes a unique contribution to the economy and apart from providing further incentives to ERI, the government should obtain assistance and advice from ERI to restructure loss making state enterprise. Today ERI perform most difficult task of rehabilitating industries in the country.
In the recent past ERI has been the most popular share among investors after earning huge profits and was the envy of many high cap companies due to these reasons and its performance under a new business module. Rivalry intensified when ERI climbed as the 2nd highest cap company.
An undue prolonged inquiry into certain aspects of foreign investments of ERI centered on a matter of transparency has bought down the price to Rs.55 from a 12 month high of Rs. 141 due to sheer ignorance of many investors/ brokers and campaigns launched by rival quoted companies. What the investors/brokers should realize is that any shortcomings of ERI do not in any way affect its profitability, operations and future prospects in contrast to many massive privatization scandals and recent judgments on robbing of public wealth amounting to billions of rupees. Independent analysts believe the price of ERI should not have fallen below Rs.120 after discounting for ongoing inquiry. On the basis of above analysis of ERI should have a minimum price level of Rs. 250.
Hilariously the prices of Leather Products and Dankotuwa too started declining without investors/brokers realizing that these are separate entities to an absurd level of Rs. 80 for CLPL and Rs. 43.50 for Dankotuwa from a high of Rs. 144. Analysts are of the view that price of CLPL and Dankotuwa should not have declined below Rs. 110 and Rs. 70 respectively under the circumstances.
Today 90% of the investors/ brokers operate on herd instinct and not based on fundamentals. No wonder many shell companies with huge negative net assets have climbed even above Rs. 150. Ridiculous steep decline of prices of ERI and related shares should be viewed in this context.
ERI would have a further cash infusion of Rs. 40055M upto 2015 from warrant conversion and may have over 100 companies under its wings and the potential for ERI would not be matched by any other quoted company for a forceable future.
(The writer is an Independent Financial Analyst)
source - www.dailymirror.lk
No comments:
Post a Comment