SRI LANKA EQUITY ANALYTICS

Sri Lanka: Hayleys PLC (HAYL) makes news in leisure industry

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sat, 20 Mar 2010 15:11:00 +0000

Adding more spice to Sri Lanka’s booming leisure and tourism industry, the local conglomerate Hayleys PLC (HAYL: LKR223.00) acquired 51% of the issued share capital of Hotel Services (Ceylon) PLC (SERV, LKR24.75), the first five star city hotel in Sri Lanka last week and made a mandatory offer to acquire all remaining ordinary shares yesterday.

Hotel Services is the holding company of Ceylon Continental Hotel which is amongst the leading 5 star hotel operators in the capital of Sri Lanka with a total of 250 five-star rooms. The hotel is located in 4 acres of freehold land within the heart of Colombo in close proximity to the commercial hub of the country.

HAYL purchased 89.76 mn shares of SERV last Friday (12th March 2010) at LKR21 per share from three parties including Green Care International Limited (a company run by SERV’s chairman Mr Nahil Wijeysuriya) and East West Properties PLC.

HAYL, established in 1878 has its major interests in Global markets and manufacturing, Agriculture & Agri businesses, Transport & Infrastructure, and Consumer & Leisure. It is one of the local conglomerates which have a strong presence in manufacturing with +55% contributions to the top line. Hayleys Exports (HEXP: LKR39.50) is the global market leader in coir fibre manufacturing whilst Haycarb (HAYC: LKR169.50) is world's largest coconut shell based activated carbon producer with a 16% share of the global market. The company’s agri business varies from producing farm inputs to processed fruit & vegetable and the plantation sector which comprises of two plantation companies (KVAL: LKR54.00 and TPL: LKR32.00).

Furthermore the company has diversified into leisure sector through its subsidiary Carbotels Ltd (a strategic partnership with Jetwing group) and jointly owns a portfolio of hotels located at strategic locations in Sri Lanka. Going forward, HAYL management is keen to venture aggressively in the leisure sector making it one of the main sectors with properties under their own control and management whilst exiting from its minority stakes. As a part of the above strategy HAYL disposed its stakes in Vil Uyana (Sigiriya) and Sea Shells (Negombo) a few months back and yesterday (17th March 2010) sold a 26% stake in Light House Hotel (LHL: LKR62.50) for a total consideration of LKR726 mn resulting a total capital gain of LKR480 mn at a per share gain of LKR40. Furthermore according to the company they are willing to dispose its stakes in other hotels such as Tropical Villas (Bentota) and The Beach (Negombo) whilst retaining Hunas Falls (Kandy) where they have a controlling stake.

Entering the City hotel network of plus 3000 rooms HAYL has already hired expert hoteliers to make the Continental Hotel the best among the other players and reap benefits of the post war tourism boom. The company believes that their destination management arm along with the aviation sector would also provide added incentives in uplifting the hotel occupancy.

Despite the LKR41.9 mn net loss of SERV posted for 1-3QFY10, which could be mainly attributable to security restrictions around the hotel (which were removed recently) we believe this would be a win-win situation for both HAYL and SERV in the coming quarters.

Colombo Investment Trust PLC (CIT) - The Crown Jewel of CFLB

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sat, 13 Mar 2010 05:18:00 +0000

Colombo Fort Land and Building Company PLC (CFLB) is a fully diversified conglomerate with interest in many sectors. The CFLB group through it complex structure own and control many companies including its flagship listed companies Lankem Ceylon PLC, EB Creasy and Company PLC, Muller & Phipps (Ceylon) PLC, Colonial Motors PLC, York Arcade Holdings PLC, Kotagala Plantations PLC, Agrapathana Planations PLC, Sigiri Village Hotels PLC, Maravilla Resorts PLC. Please read our report on CFLB.
http://www.srilankaequity.com/2010/02/colombo-fort-land-building-company-plc.html

Group Structure of CFLB & CIT

Shareholdings of CFLB
As per the above shareholdings of CFLB the Colombo Investments Trust PLC (CIT) and Colombo Fort Investment PLC (CFI) owns 13.74% (4,947,517 shares) and 10.81% (3,890,076 shares) of CFLB respectively. Further in addition the above direct holdings in CFLB, there is a clear cross holdings between the two companies CIT and CFI. CIT owns 31.69% (1,584,571 shares) of CIT whereas CFI owns 12.95% (732,402 shares) of CIT.

The Top 20 shareholders of CFLB as at 31st December 2009 are as follows;

Net Asset Value (NAV) of Colombo Investment Trust PLC

Importance of CIT to CFLB Shareholders
Majority shareholdings in CFLB is vested between three unlisted companies namely Property Investments holdings Limited, Capital Investments Limited and Financial Trusts Limited. Jointly these three companies control approximately 33.10% and Mr Senthirajah the Chairman of CFLB directly owns approximately 6.22% shareholdings. The two Investment Trusts CFI and CIT approximately control 24.5% of CFLB and further 17.17% is held by the Public (Outside top 20 shareholders).

As seen from the above shareholdings of CFLB it is crucial for the majority shareholders to be in firm control of CIT& CFI. The control CFI can be achieved with the control of CIT as the latter owns approximately 31.69% of CFI. Therefore control of CIT is the most significant to the control of CFLB.

Who Controls Colombo Investment Trust PLC (CIT) ?

It is important to disregard the CFLB's and CFI's shareholdings in CIT when considering the ownership of CIT as shareholders cannot control CFLB and CFI without the control of CIT.

Majority of shares of CIT are presently held by two unlisted companies namely Financial Trust Limited, Property and Investment Holdings Limited. Jointly theses two companies control approximately 49.87%. This was as result of Financial Trust Limited increasing its shareholdings from 32% to current 35% during latter part of FY 2009.

Therefore we could determine that the shareholdings of Financial Trust Limited is the key to the control of CFLB. Financial Trust Limited is an unlisted company and the shareholdings are not available to the public. In the event if the control of Financial Trust Limited becomes unclear due some unforeseen reason then most important company within the CFLB group undoubtedly is the CIT. Therefore one could consider Colombo Investment Trust PLC (CIT) to be the Crown Jewel of the CFLB group.

Sri Lanka tourism reaches dizzying heights

info@srilankaequity.com (Sri Lanka Equity Analytics) — Fri, 12 Mar 2010 03:32:00 +0000

Tourist arrivals for February 2010 reached a high of 57,300, surpassing February 2009 arrivals by a resounding 67.7 percent. While certainly February has always been the peak month of the Sri Lankan Tourism calendar, this year it is not only the increase in numbers but also the relative increase in yields that is noteworthy. For many years during the conflict, hoteliers had to resort to discounting to fill their rooms, but not so this year. Hence earnings from tourism should also show a healthy increase (these figures are only available quarterly).

Several hotels reported 100 percent occupancy levels for the month, no mean feat under any circumstances. Resorts in the Negombo area had the highest overall occupancies of close to 90 percent occupancy, while most of the other areas also recorded a very high occupancy levels. In fact, there was a considerable overbooking in resort areas, and many hotels have now suspended forward sales for the next few months in an effort to manage the situation.

All markets show healthy increases for the month, with western Europe (71.7 percent YOY increase), Middle East (127.4 percent), east Asia (93.7 percent), and south Asia (66.6 percent) leading the growth.

Hence, as expected, 2010 has got off to a flying start with the first two months having 108,057 arrivals compared to 72,637 last year for the same period, a 49 percent increase.

In preparation for the next winter season (which is expected to be very good), several hotels have already planned refurbishing activities during the forthcoming summer months from May to October 2010. Information collected by the Tourist Hotels Association indicates that close to 1,000 rooms will be temporarily "out of stock" due to refurbishing/upgrading activities in several leading resort hotels. In the Negombo region alone, there will be refurbishing activities in Club Hotel Dolphin, Blue Oceanic Hotel, Sea Shells Hotel, and Goldi Sands Hotel. Other hotels undergoing various forms of upgrading/refurbishing are Airport Garden, Taj exotica, The Blue Water, Cinnamon Grand, Mt. Lavania, Club Oceanic, Palm Garden, Riverina, Coral Sands, Hotel Sigiriya, Cinnamon Lodge, Berjaya, and Saman Villas. It is estimated that close upon Rs 3.0 Bn will be spent on refurbishing and upgrading the product according to the survey.

This is indeed a very good sign. The Sri Lankan Hotel product has over the years lost out to its regional competition, because everyone was in a survival mode, not having surplus cash to plow back for refurbishing/upgrading activities. With price revisions in the offing, it is imperative, therefore, that the product offering is improved to guard against the destination losing its "value for money" proposition.

However, it also noteworthy that it is mostly the larger hotels that are taking this initiative. With much larger stakes in the industry and more "corporate muscle," they have better access to capital than most of the SME sector. The SME sector comprises almost 60 percent or more of the THASL membership, and it is this sector that needs urgent support right now. The government needs to come out with an urgent short-term plan to help refurbishing of hotels by way of incentives, including duty-free imports of capital items for refurbishing and also some form of preferential interest bearing loans for the SME sector.

Sri Lanka Insurance industry in good shape

info@srilankaequity.com (Sri Lanka Equity Analytics) — Wed, 10 Mar 2010 06:56:00 +0000

The insurance industry has performed well despite the global recession recording growth in the long term and general insurance sectors.

The first quarter of 2010 looks promising for the insurance industry with more investments generating economic activities due to establishment of peace. The country’s risk management is in a good shape where insurance companies are part of the financial market, Sri Lanka Insurance Board Chairman Udaya Sri Kariyawasam said.

Investment in Government Securities by insurance companies has recorded a growth in 2009 compared to 2008. In 2009, the long term insurance contributed for Rs. 62,078,117 million and general insurance Rs. 15,441,944 million.In comparison in 2008 long term insurance contributed for Rs. 48,405,115 million and general insurance Rs. 15,955,553 million.

The National Insurance Trust Fund has decided to reduce premium pertaining to terrorism cover by 75 percent from April 1 this year. This will be a boost to the insurance industry.

A Policy Holders Protection Fund has been created with the cess collected from the insurance companies.

The accumulated fund as at end December 2009 was Rs. 755 million.

There are 18 private insurance companies and a rating system will be introduced shortly based on a checklist to increase credibility. The overall gross written premium on insurance has not increased according to the growth in the per capita income.

The gross written premium from long term (life) and general insurance business in 2009 is added up to Rs. 57,919 million as compared to Rs 58,166 million in 2008 due to global recession.

The Insurance Board of Sri Lanka (IBSL) will carry out a modernization process to its supervisory system from rule based supervision to risk sensitive capital model.

With the implementation of this model it will enhance the ability of insurance companies and the supervisory authority processes to focus on risk rather than rules. “This will provide a more flexible framework for maintenance of the regulatory minimum capital regime,” the IBSL report said.

The risk sensitive capital model will contribute to strengthen the risk management system of insurance companies and to have a supervisory system in line with international standards which supports a risk oriented management of insurers, the report said.

The insurance industry penetration is 10 percent.

There is a thriving market in the North and the East. With the peaceful environment, nine insurance companies have set up 42 branches in these provinces and the insurance industry is making steady progress.

Performance of the insurance industry in 2009

The insurance industry is regulated in terms of the provisions of the Regulation of Insurance Industry Act, No.43 of 2000 (RII Act). The Insurance Board of Sri Lanka (IBSL) was established under this Act in order to develop, supervise and regulate the insurance industry in Sri Lanka.

Over the past year, the IBSL has embarked upon several activities to develop, supervise and regulate the insurance industry with a view to ensuring that the best interest of the policyholders and potential policyholders.

During the previous year, the IBSL has strengthened its monitoring process in order to ensure the financial stability of insurance companies and insurance brokers.

By virtue of powers vested in the IBSL in terms of Section 15 of the Act, eighteen (18) Insurance Companies (Insurers) registered with the Insurance Board of Sri Lanka (IBSL), are presently underwriting insurance business.

Eleven of them are composite companies, five of them engage in General Insurance business and two companies engage only in Long Term (Life) Insurance business. When a company is registered to transact in both Life Insurance and General Insurance business, those companies are recognised as composite companies.

The IBSL has granted registration to People's Insurance Limited and Continental Insurance Lanka Limited as insurers to carry on General Insurance Business with effect from 2 December 2009 and 18 December 2009 respectively.

With the entrance of People's Insurance Limited and Continental Insurance Lanka Limited in to the industry, the no. of companies which are engaged in General Insurance Business have risen to 16.

Ceylinco Takaful Limited has been temporarily suspended for a period of one year commencing from 9 December 2009 to 8 December 2010 by the IBSL in terms of Section 18 (2) of the Act.

During the period under review, 43 insurance broking companies were registered with the IBSL in terms of Section 82 of the Act. Samson Insurance Brokers (Pvt) Limited has been granted registration as a new broking company with effect from 24 April 2009.

Meanwhile, in terms of Section 84 of the Act, the registration granted to Insurex Insurance Brokers Co. (Pvt) Limited in respect of Life and General Insurance Business was cancelled by the IBSL with effect from 30th October 2009. Insurance broking companies and insurance agents as intermediaries have made a valuable contribution to the industry.

GWP of insurance companies
The Per Capita Income of Sri Lanka grew from $1000 in 2004 to $2200 in the year 2009 and the Gross Domestic Product (GDP) for the 3rd quarter of 2009 recorded a positive growth rate of 4.2 per cent.

This economic performance has to be considered as a very satisfactory achievement considering the global economic recession that was prevalent during the last year. However, the overall gross written premium on insurance has not increased accordingly.

The Gross Written Premium (GWP) from Long Term (Life) and General Insurance Business in 2009 is added up to Rs. 57,919 million. In the year 2008, the overall gross written premium was Rs. 58,166 million.

GWP of insurance broking companies
Forty-three insurance brokers operated during 2009, concentrating mainly on general insurance business. Their premium contribution of Rs. 8,867 million was lower than the previous year which was Rs. 8,975 million.

Total assets of insurance companies
Total Assets of insurance companies as at 31 December 2009 was Rs. 180,989 million. Assets of long term insurance business amounting to Rs. 120,899 million of the total, whereas assets of general insurance business amounting to Rs.60,089 million.

Investment in government securities by insurance companies

In terms of the RII Act, 20% of Technical reserves of General insurance and 30% of Life fund should be invested in government securities by the insurers. The IBSL has strengthened its monitoring process by collaborating with the Department of Public Debt of the Central Bank in order to examine the investments made by insurers in the government securities.

Complaints handling and Investigation
The number of complaints received by the Insurance Board of Sri Lanka (IBSL) over the last five year as indicated below has varied in number. In 2006 with the set up of the Insurance Ombudsman scheme by the Insurance Association of Sri Lanka (IASL) with the approval and concurrence of the IBSL encouraged the policy holders and other aggrieved parties to refer their complainants to the Insurance Ombudsman.

However, the IBSL entertained appeals from parties aggrieved by the decision of the Insurance Ombudsman, complainants relating to ambiguous wording in policy documents and matters relating to ethical conduct of the industry.

With the decision taken in September 2009 the policyholders now able to directly address their complaints to the IBSL for recourse, hence the number of complaints received by the IBSL has seen an increase in the year 2009. In this short period, the Investigation Unit has conducted numerous inquires and have been able to settle issues between parties.

Policy Holders Protection Fund
The CESS collected from insurance companies is deposited into the Policy Holders Protection Fund, established in terms of Section 103 of the RII Act. The amount lying to the credit of the Policy Holders Protection Fund is invested in Treasury Bills. The accumulated amount in the fund as at 31 December 2009 was Rs.755 million.

SRCC & T Fund
The SRCC & T Fund was created in order to provide insurance covers to the insurance policyholders who are exposed to risks arise due to strike, riot, civil commotion and terrorist activities within the geographical limits of Sri Lanka which could be obtained as an extension to the basic insurance policies issued by the insurance companies presently operating in Sri Lanka and which are members of SRCC & T fund.

On account of the end of war against terrorism, the National Insurance Trust Fund (NITF) has decided to reduce the premium pertaining to Terrorism Cover by 75% from 1 April 2010. As a result of this reduction in the premium the construction industry and other such projects may consider having insurance policies for their businesses and properties which in turn will be a boost to the insurance industry.

New Legal Enforcements

1. The new quarterly reporting formats for insurance brokers for gathering all information required to assist prompt intervention is finalised and will be effective from quarter beginning 1st April 2010.

2. The new solvency margin requirement for general insurance business is awaited by the legal draftsman department for gazetting very shortly.

3. Accepting insurance business in violation of the RII Act, only individual could act as insurance agents and the IBSL have observed that insurance companies accept insurance business from institutions who act as agents and pay commission. Therefore any violation of this would be looked at by the IBSL seriously.

Risk sensitive capital model for the insurance industry supervision
The IBSL after carefully analysing the international experience on insurance supervision has taken a decision to carry out a modernisation process to its supervisory system which focuses on the concepts of risk sensitive capital model for insurance industry supervision with the assistance of the World Bank.

The main objective of this project is to develop and support the implementation of a risk sensitive minimum capital regime which is consistent with the industry risk profiles, practices and market dynamics for the insurance industry in Sri Lanka in consultation with the industry and under the collaborative control of the IBSL.

The current supervisory system which is commonly known as the "Rules Based Supervisory System" is focused on establishing reasonable rules that scrutinise aspects such as the solvency margin, investments, minimum capital requirement, etc.

With the implementation of this new risk sensitive capital model for the insurance industry supervision, it will enhance the ability of insurance companies and the supervisory authority processes to focus on "risk rather than rules" and to provide a more flexible framework for maintenance of the regulatory minimum capital regime.

Further, it will contribute to strengthening the risk management system of insurance companies and to have a supervisory system in line with international standards which supports a risk oriented management of insurers.

A comprehensive report on Market Analysis ensuring that the project is consistent with the local market conditions was handed over to the IBSL by the consultants recently.

Market development activities
During 2009, the IBSL conducted several awareness programmes on insurance island-wide in order to educate the general public, students and business community. IBSL made use of the print and electronic media on numerous occasions to disseminate important information to the public and the media and published a number of press releases, press notices, paper supplements, etc. in the press and uploaded them to the official website of the IBSL.

Further, IBSL has made available free of charge, a number of other publications such as booklets and brochures giving valuable information pertaining to the subject of insurance. The IBSL has focused on creating awareness in the subject of insurance among the public would be beneficial to the insurance industry which will in turn help increase the insurance penetration.

(Source: Insurance Board of Sri Lanka)

Asia seen as growth driver for voluntary CO2 market

info@srilankaequity.com (Sri Lanka Equity Analytics) — Tue, 09 Mar 2010 07:10:00 +0000

Fear of Western-imposed carbon tariffs on goods and services from Asia is likely to drive growth in offsetting emissions by large firms in the region, a voluntary carbon market executive said.

The market, worth USD 705 million in 2008 and likely much less in 2009, relies on businesses to voluntarily manage their carbon emissions, for example from the energy they use to produce and transport goods around the globe.

Western companies can buy carbon offsets from clean-energy projects in developing countries, which boast a high number of plants that capture methane from landfills or wind farms for example.

The offsets then allow these companies to cut their overall carbon footprint, or production of greenhouse gases, such as carbon dioxide.

While this concept is new to many Asian firms, there is a growing realisation that customers in the West will scrutinise the carbon content of goods and services, said Jonathan Shopley, managing director of The Carbon Neutral Company, a UK-based offset company.

"It's about requirements in Western markets," Shopley told Reuters in an interview in Singapore.

This was likely to prompt companies to make greater efforts to curb emissions arising from production, as well as a rise in offsetting, both to please their customers and differentiate themselves from the competition.

There are effectively two carbon offset markets. The compliance market, in which companies must buy offsets to keep their emissions below a certain cap, and the voluntary market.

Each offset set represents a tonne of avoided pollution from carbon dioxide, the main gas responsible for raising the temperature of the planet.

"I think the failure of Copenhagen to get to a binding target has fragmented the market into regional responses," he said of last December's UN climate talks.

"You're already hearing from the US that (it's) thinking about a carbon tax on the border. This is going to drive demand for product assessments," Shopley said.

Indian firms, in particular, understand the cost of carbon, as the country is the second largest source of UN-backed carbon offsets from clean-energy projects.

"They're manufacturing and exporting goods into Europe and the U.S., where there is a clear message the carbon content of your product going to become important. It's coming from Walmart, Tesco, Macy's, Marks & Spencer," he said.

Growth from low base

In Europe, the voluntary carbon market is driven by corporate social responsibility, while in the United States, it is more of a pre-compliance market ahead of mandatory national or regional regulation on curbing greenhouse gas emissions.

Overall, the voluntary market struggled last year because of the financial crisis and is estimated to have shrunk by over 60 percent in 2009, according to Bloomberg New Energy Finance.

Hurdles to a U.S. federal emissions trading scheme, continued uncertainty about the future of the global carbon markets and pessimism about clinching a global climate deal this year in Mexico has disappointed investors.

"If we look at our business as an indicator, it was just above level over 2008 and 2009. We didn't see any massive growth at all," Shopley said.

He forecast a rise in the number of Asian companies that measure their greenhouse gas emissions, before offsetting, as businesses around the globe join the fight against climate change.

"We're working with between 20 and 30 companies in Asia," said Shopley. Of these, five were offsetting at an average of about 5,000 tonnes per year.

These five clients had chosen offsets backed by the Voluntary Carbon Standard and UN offsets, called Certified Emissions Reductions, he said.

"In terms of the number of clients that we expect to be measuring and reporting greenhouse gas emissions (in Asia), I think that will increase ten-fold at least over a year or so."

He said interest in offsetting was emerging from South Korea, Sri Lanka, Malaysia and Indonesia.

Source - Reuters

Ceylon Theatres (CTHR) - inspired by the ingrained family values inherited over generations

info@srilankaequity.com (Sri Lanka Equity Analytics) — Thu, 04 Mar 2010 09:45:00 +0000

History

Ceylon Theatres PLC was established in 1928 for the purpose of exhibiting, importing and

distribution of motion pictures, with the late Sir Chittampalam A. Gardiner as its first Chairman
and Managing Director.

Under the guidance of the late Sir Chittampalam A. Gardiner, the Company acquired a
controlling interest in Millers PLC. in 1945, which in turn acquired a controlling interest in
Cargills (Ceylon) PLC in 1946. In 1971, the Company, after the demise of its founder Chairman,
made a decision to concentrate on the cinema industry and divested its controlling shareholding
in Millers PLC, thereby losing control of Cargills (Ceylon) PLC.

When the late Mr. Albert A. Page was appointed the Managing Director of Ceylon Theatres
PLC in 1980, the Company was facing grave difficulties due to the establishment of the State
Film Corporation which took over the import and distribution of motion films in the industry. To
counter the adverse business climate faced by the Company, Mr. Albert A. Page set out to regain
control of Millers PLC and through it Cargills (Ceylon) PLC. Under the stewardship of the late
Mr. Albert A. Page, a great visionary, the Group then further diversified into Food Processing,
Property Development, Financial Services, Ceramic, Tiles and Plantations sectors.

In 2008, the Group engaged in a restructure of operations, with Ceylon Theatres and Millers
merging into a single entity, and the operations of Millers being transferred to Cargills. The
restructuring, consolidated the operations into individual sectors, thereby bringing greater focus,
operational efficiency and flexibility for future growth and expansion.

Effective Holdings in Group Companies

Food and Beverage
Cargills (Ceylon) PLC is Sri Lanka’s largest modern retail player. Cargills Food City, Cargills Express and Cargills Big City modern retail outlets have above 50% market share in the sector. It is also a significant player in the FMCG sector with three of the fastest growing manufactured food brands in the island, Cargills Magic, Cargills Kist and Cargills Supremo. The company’s logistics arm distributes own - brands as well as international food and non-food brands across the 25 districts. Cargills also holds the franchise for KFC in Sri Lanka. The Cargills agribusiness model has gained global recognition for its inclusive and sustainable value chain.

Real Estate
CT Land Development and CT Properties are formidable players in Sri Lanka’s Real Estate sector. CT Land Development owns the country’s premier shopping and entertainment complex Majestic City, while CT Properties has just completed the development of ‘Empire’ of the tallest residential building structures in the island. Several other township and development projects are in the pipeline. Bandarawela Hotel, the only hotel in the Group remains a highly patronized get-away spot in the hill country.

Ceramics, Tiles and Wooden Flooring
The Group’s interest in the sector includes mining for ceramic raw material as well as retailing of ceramic and allied products through its subsidiary Lanka Ceramics. The companies in the sector are industry pioneers with Lanka Tiles being the first floor tile manufacturer in Sri Lanka for both domestic and export markets. Lanka Walltiles is the only wall tile manufacturer in the country. Parquet manufactures wooden flooring.

Plantations
Ceytea Plantation Management is the holding company of a Listed Subsidiary Horana Plantations. Horana Plantations has leasehold rights to 16 tea and rubber estates, constituting approximately 7,500 ha of land. Its newly refurbished plantation bungalows in Neboda and Lindula have expanded the Groups interests in the leisure sector.

Financial Services
CT Smith Stockbrokers is one of the leading brokering firms in Sri Lanka. CT Capital primarily engages in providing a diverse range of capital market solutions and financial advisory services. CT Fund Management manages Comtrust Equity Fund which is structured to yield optimum results for investors.

Entertainment
Ceylon Theatres has been associated with the Sri Lankan entertainment industry for over 75 years. CT Films operates the most patronized Cinemas in the country including the Regal and Majestic in Colombo along with Regal Cinemas in Negombo and Kandy.

Packaging
Uni Dil packaging offers a full turnkey packaging service from design to delivery. The company supplies both to the domestic and export market. Uni Dil caters to manufactures, retailers and end-users in Tea, Apparel, Food and Catering, Ceramics, Agriculture and Rubber industries.

Financial Position

Hatton National Bank (HNB) - Net profit up 58% YoY in FY 2009

info@srilankaequity.com (Sri Lanka Equity Analytics) — Thu, 04 Mar 2010 02:08:00 +0000

HNB income has grown by 6% YoY to LKR 40.5 Bn from LKR 38.5 Bn. The top-line growth of the HNB Group is supported by strong cumulative 1-3Q FY09 performance, which shows an 10% increase YoY where it has grown to LKR 31 Bn from LKR 28 Bn. This has offset the dip in 4Q top-line performance where it has dropped by 6% to LKR 9.6 Bn from LKR 10.3 Bn.Net profit for FY09 has grown significantly by 58% YoY to LKR 4.5 Bn from 2.8 Bn. The increment on bottom-line is primarily due to the impact by 4Q performance, which shows a 156% increase YoY to LKR 1.8Bn from LKR 0.7 Bn. Therefore 40% of FY 09 bottom-line is contributed by 4Q FY09 net profit whilst for FY08 the same percentage stands at 25%.The comparatively strong 4Q FY09 performance relative to total yearly earnings in terms of an increase in 15 percentage points can be attributed to improved NII and reversing of provisioning for bad/doubtful debts and loans written off.

An increase of 11% YoY to NII on 4Q FY09 is on the backdrop of 4Q interest income dropping by a relatively smaller percentage (7%) compared with the drop of interest expenses (18%) YoY basis. Reduction of policy rates as per Government directives in October 09 was the primary reason for the aforementioned.

Furthermore interest income was driven down by the marginal dip in performing loans and advances as at the end of FY09, which stands at 4% YoY.NII for FY09 show an increase by 16% YoY to LKR 14.5 Bn from LKR 12.5 Bn.

HNB has been engaging in banking activities in Sri Lanka for over 120 years and it has the widest coverage in terms of number of Branches Island wide, which stands at 186 customer centers. In terms of asset base amongst the banking sector it takes up the second position behind Commercial Bank Plc with an asset base of LKR 287.5 Bn as at end of FY09 .Total assets have grown by 9% YoY from LKR 263 Bn.HNB is present in both northern and Eastern provinces of Sri Lanka with a branch network of 20, which is a relatively strong presence compared with other entities in the Banking sector.HNB aims to improve its island wide branch network by increasing number of customer centers to 200 by the end of FY10. This will have a positive
impact on expanding credit and improving deposit base.

Deposit base of HNB has increased by 13% YoY in FY09 to LKR 213.8 Bn from LKR 189.8 Bn and 4Q growth is 5% from LKR 203.8 Bn. Even though the Government of Sri Lanka did reduce policy rates, the strong brand identity of HNB coupled with low levels of public confidence in deposit taking institutions within financial sector of Sri Lanka had contributed to the said improvements to the HNB deposit base. Further Savings and other Deposits show greater increases in percentage terms and are at 18% and 56% respectively.

Investments held for both trading and maturity show considerable growth YoY. Investments held to maturity show a growth of 102% YoY for FY09 where a change to positions on Government securities has primarily contributed to it. Government securities held to maturity have increased to LKR 53.5 Bn from LKR 25.1 Bn resulting in an increase of 113% YoY. Investments held for trading show a 745% YoY for FY09 where significant changes to both positions on Government and other securities can be observed ,where it is at 1061% and 176% YoY respectively.

Non Performing loans(NPL) show a greater drop i.e. 8% YoY for end of FY09 indicating that the bank has improved it’s efficiencies on loan recoveries. The provision of LKR 2.6 Bn that was made against the exposure to Kabool Lanka (Pvt) Ltd of approximately LKR 2.8 Bn has been recovered fully, with final payment being booked in FY09. This amounts to a majority of recoveries for FY09 out of total recoveries of
LKR 743 Mn. A reversal of provisioning for bad/doubtful debt and loan loss (in FY09 income statement LKR 35.3 Mn) has positively contributed to the bottom-line, which is a decrease of 104% YoY compared to provisioning costs of LKR 856.3 Mn for FY08.

An approximate decrease of loan loss provisioning by LKR 2 Bn for FY09 has resulted in current levels of loan loss provisioning to stand at LKR 7.38 Bn. Provision cover (provision/NPL ratio) has decreased by 10.1 percentage points to 59.1%. We expect this to be approximately the same for FY10 and FY11 forecasts.

HNB improved its total cost/income ratio for FY09 by 5 percentage points to decrease it to 79% from 84%.The growth in income by 6% YoY is the primary cause for the improvement of said ratio as Total cost has remained stable at LKR 32 Bn .The efficiencies that are expected to occur with the implementation of the new Banking Software System (Finacle© provided by Infosys) experience a lagging effect as personnel cost/income ratio is constant for FY08 and FY09 where it is approximately at 10%. Number of employees, which currently stands at 4302, will not be increased significantly even though HNB will expand its presence by opening more branches, especially in north eastern Sri Lanka resulting in greater levels of operational efficacy.

CASA Ratio of HNB has been consistently improving over FY09. For end of 1Q FY09 it was at 41% which has improved to 45% at the end of 4Q FY09 yielding in greater operational efficiencies. CASA for HNB is approximately identical to banks of similar size but it is significantly better when compared with other institutions within the banking sector albeit with a smaller asset base giving HNB a competitive advantage.
(CASA ratio is the sum of current and savings deposits as a percentage of total deposits)

HNB has maintained adequate capitalization requirements.CAR (Tier 1) is at 10.85% and CAR (Total) is at 12.92% as at 31 Dec 09 for the group. Bank CAR (Tier 1) is 11.1% and CAR (Total) is 13.16% .Both Bank and Group CAR show YoY increases.

HNB voting stock is fairly valued and currently trades at 10.49X and nonvoting stock, which is more attractive, trades at 7.79X on 2010 EPS. PBV is at 1.63X.Maintain BUY

Nations Trust Bank (NTB): The young and the dynamic...

info@srilankaequity.com (Sri Lanka Equity Analytics) — Tue, 02 Mar 2010 13:05:00 +0000

Nations Trust Bank was established in July 1999 through the acquisition of the Colombo Branch of Overseas Trust Bank Ltd and it has grown in leaps and bounds using acquisition and mergers as its primary growth strategy.

Today the bank is considered as one of the most customer oriented financial institutions where it operates 38 branches, 9 leasing centers, 41 ATMs, 6 Personal banking centers and internet banking as well. The bank accounts for an asset base of LKR71 bn which has enabled them to enjoy a market share of near 3%. The young and dynamic financial institution offers a wide range of services in terms of Personal Banking, Corporate Banking, SME Banking and American Express Credit card.

Overview
Nations Trust Bank’s (NTB) net profit has grown by 5% YoY to LKR181.2 mn in 4Q2009, broadly inline with our forecast supporting 2009 net earnings to grow by 16% YoY to LKR 686.1 mn. The net profit growth in the last quarter was driven by a 23% YoY increase in net interest income and a 8% YoY reduction in operating cost. With interest rates on the decline the banking sector outlook remains positive with loan growth expected to gather momentum from 1Q2010 on-wards, NTB’s net interest margins is expected to be intact at around 4.9%. We are maintaining our forecast 2010E net profit at LKR969.7 mn and projected 2011E net earnings at LKR1,296.9 mn. Thus the share is attractive on 8.9X forecast 2010E net profit, 6.6X projected 2011E net earnings, 1.2X PBV.

Interest income has dipped 23% YoY. NTB’s interest income has dipped 23% YoY toLKR2,706.3 mn in 4Q2009, mainly due to a 41% YoY dip in interest income from other interest earning assets to LKR881.3 mn. Though the fixed income portfolio (held to maturity) has grown by 104% YoY, the dip in Treasury bill rates has impacted the income from fixed income securities. Further interest income was also negatively impacted by 11% YoY drop in interest income from loans and advances mainly due to the contraction of the loan book.

Interest Expenses has dipped 38% YoY to LKR1,685.7 mn. Interest expenses has dipped 38% YoY to LKR1,685.7 mn mainly on the back of a 61% dip in fixed income security expenses due to reduction in government treasury bill and bond rates but the interest expense on deposits grew by 10% YoY to LKR990.0 mn.

Net interest income has increased by 22.5% YoY to LKR1,020.6 mn. Despite interest income having dipped by 23% YoY interest cost has dipped at a faster pace by 38% YoY and has weathered the negative impact from reduction in interest income.

Further it is noteworthy that NTB has managed to grow its zero cost demand deposits by 23% YoY to LKR4.7 bn, whilst the low cost CASA deposit base accounts for 24% of total deposits where the high cost time deposits account for 76% of the total deposit base.

Non interest income has dipped by 20.2% YoY. Non interest income has dipped by 20.2%YoY to LKR360.9 mn in 4Q2009 due to forex earnings having fallen by 63.3% YoY to LKR50.6 mn and other income also fell marginally to LKR310.3 mn.

Operating cost has decreased by 8% YoY in 4Q2009. Operating costs have fallen by 8% YoY to LKR1,381.5 mn, mainly due to a 8% YoY decrease in personnel costs to LKR813.4 mn. (which could be attributable to the reduction in number of employees) Further the overhead costs have also dropped by 9% YoY which has supported the overall operating cost reduction. Presently operating cost per branch stands at
LKR21.2 mn per quarter.

Operating profit has risen 36% YoY to LKR409.3 mn in 4Q2009. NTB’s operating profit has grown by 36% YoY to LKR409.3 mn in 4Q2009, where this was supported by the 23% YoY growth in net interest income and 8% YoY reduction in operating cost.

Provisioning cost has increased 55% YoY to LKR 158.9 mn in 4Q2009. Total provisioning cost increased 55% YoY to LKR 158.9 mn mainly due to a 64% increase in specific provisions. Further the gross NPL ratio for NTB is at 8.5% and the net NPL ratio is at 4.7%.

Total tax bill has risen 78% YoY to LKR228.1 mn in 4Q2009. Value Added Taxation on banking income has increased by 94% YoY to LKR57.9 mn whilst tax on consolidated profit has also increased by 73% YoY to LKR170.2 mn pushing up the total tax bill by 78% YoY to LKR228.1 mn in 4Q2009. Thus the effective tax rate in 4Q2009 is near 55%.

Net profit up 5% YoY to LKR181.2 mn in 4Q2009. Consequently a 22% YoY increase in net interest income and a 7% YoY reduction in operating costs NTB’s net profit has risen by 5% YoY to LKR181.2 mn in 4Q2009 whilst 2009 net profit is up 16% YoY to LKR686.1 mn.

Forecast 2010 net profit maintained at LKR969.7 mn. With interest rates on the descend (3 month Treasury Bill rate having fallen to 8.33% from 21.3% in January 2008) the banking sector outlook remains positive with loan growth expected to gather momentum1Q2010 onwards, NTB’s net interest margins is expected to be intact at around 4.9%, whilst the young and dynamic bank is set to grow in the coming years. Therefore, we are maintaining our forecast 2010E net profit at LKR969.7 mn (up 41% YoY) and projected 2011E net earnings at LKR1,296.9 mn (up 34% YoY).

Share is attractive on 8.9x forecast 2010 net profit. The share is attractive on 8.9X forecast 2010E net profit, 6.6X projected net 2011E earnings, 1.2X PBV. BUY.

Colombo Dockyard (DOCK): the Odyssey of Excellence….

info@srilankaequity.com (Sri Lanka Equity Analytics) — Tue, 02 Mar 2010 02:16:00 +0000

Ship builder and repairer, Colombo Dockyard (DOCK), has improved its cumulative net earnings by 48% YoY to LKR2,156.6 mn in 2009, albeit the net earnings for 4Q2009 has dipped by 24%YoY to LKR336.5 mn. DOCK’s 4Q2009 net profit has been lowered by 390% YoY increase in depreciation, amortisation and impairment costs. Further DOCK boasts of strong outlook with its order book being full till 2012, ship repairing business is expected to recover in 2010E with the recovery of the world shipping recession and the heavy engineering division is expected to make strong contribution to the bottom line in the coming years.

Company Overview
DOCK was initially incorporated to repair vessels calling at the Colombo Port by the Government of Sri Lanka (The national carrier, Ceylon Shipping Corporation owned 75% of the company whilst the balance 25% was held by Ocean Shipping Enterprises of Singapore). Due to critical financial issues faced by the company in the 1980s the Government privatised the company where the majority stake (51%) was transferred to Onomichi Dockyard Co Ltd of Japan.

Today the company is a total marine solutions provider in ship repairs industry whilst being recognised as one of the best small scale shipbuilding yards in the world, which has recorded a continuous earnings growth for the past 05 years. At present the company conducts its operations in four broad arenas, namely;

Ship repairs
This is the core business of the company with a contribution of 50% to the top-line and the highest yield generator. DOCK has the capacity to provide total marine solutions in ship repairing for all types of commercial vessels. It has 4 dry docks ranging from 9,000 to 125,000 Deadweight tonnages (DWT), where the largest caters to tankers, bulk carriers and offshore drill rigs.

Ship building
Ship building is the second highest contributor to the group’s revenue and earnings. At present DOCK is recognised as one of the world’s best ship building yards having started three decades ago as a tug and speed boat manufacturer. The company has the ability to manufacture diverse vessels, meeting the stringent requirements stipulated by International Classification Societies, while surpassing the expectations of its
clientele.

DOCK’s ship building arm mainly caters to India, where +50% of the revenue is generated and Singapore with a revenue contribution of +18% followed by Sri Lanka, Japan and Maldives etc. According to industry sources the Company’s order book is full up to 2012 with majority of the orders placed by India. We have learnt that DOCK’s order book stands confirmed without any cancellation enabling it to maintain its current
ship building momentum till end 2010.

DOCK, which is renowned for its efficient services and on time deliveries, continuously searches avenues to improve its processes to extend capacity. In addition, the company plans to change its focus from mass production towards complex tailor made vessels, to achieve better margin through a competitive advantage over their technical expertise.

Heavy engineering
This is a fairly new business to DOCK but it has been successful in capturing several landmark projects in Sri Lanka as well as in the Republic of Maldives. A few services provided by this segment are; Petro Chemical Installations, Power Station Installations, Heavy Steel Structures & Other Specialised Services. We believe the company has a huge potential in this area especially for their expertise in steel structure with the large number of infrastructure development projects in the North and East coupled with power station installations. DOCK re-launched its heavy engineering arm Dockyard General Engineering Services (Pvt) Ltd (DGES) to exploit the potential opportunities utilising their highly skilled work force, led from the front by qualified and vastly experienced engineers. DOCK has already undertaken heavy engineering projects in power and other sectors to be completed during 2009/2010.

Off shore engineering
Recently DOCK ventured into offshore engineering, a higher-end repair and maintenance projects such as repairing Mobile Offshore Drilling Units etc. The company has successfully completed many projects for Sri Lanka, India and the Maldives. Backed by the strategic partnership with Saudi Arabia, the company is in a position to win orders and cater to the offshore oil drillers of the Middle East. In addition, the company would benefit if Sri Lankan oil explorations become a success.

Fourth quarter net revenue slid marginally to LKR3,768.4 mn. DOCK’s net revenue has slid marginally to LKR3,768.4 mn in 4Q2009 albeit cumulative2009 net revenue surged by a sharp 21%YoY to LKR13,498.1 mn. Ship repair revenue has dipped 12% YoY 7% QoQ on the back of the recession in the shipping industry which we deem to appease by end 2010. However ship building revenue has soared and the re-launch of DGES the heavy engineering arm has also immensely supported the top line.

Gross profit decreased by a moderate 4% YoY to LKR506.8 mn in 4Q2009. DOCK’s cost of sales have remained static YoY at LKR3,261.6 mn in 4Q2009 and a large portion of costs recognised relates to the ship building segment which was a revenue driver during 4Q2009. Further, prices in the commodity market have stabilised, which negatively affected the cost of sales as DOCK had already procured and also entered into agreements to purchase steel. Consequently, gross profit decreased by only 4%YoY to LKR506.8 mn in 4Q2009 whilst cumulative 2009 gross profit surged by a sharp 35%YoY to LKR3,513.6 mn. However gross margins contained from circa 14% in 4Q2008 to circa 13% in 4Q2009. Notwithstanding the decrease in the quarterly margins the yearly gross margin has surged by 3% YoY to 26% IN 2009.

EBITDA up by a staggering 57% YoY in 4Q2009. EBITDA has increased by 57% subsequent to the circa 270% YoY decrease in operating costs/income. Further the cumulative 2009 EBITDA has improved to LKR2,683.1 mn supported by the static operating costs/income reported for the year. Furthermore the EBITDA margin has increased to 20% from 16% the year before.

4Q2009 net profit down by 24% YoY to LKR336.5 mn. The net profit for 4Q2009 has slid 24% YoY to LKR336.5 mn on the back of realization of depreciation, amortisation and impairments during the quarter which are attributable for the whole year. Albeit the cumulative 2009 net profit has recorded a staggering upturn of 48% YoY to LKR2,156.6.

Forecast 2009E net profits are in line with the actual with a moderate variance of 6%. Considering the increased ship building activities supported by heavy and off-shore engineering projects, we forecast 2010E net profit to LKR2,508 mn (up 16%YoY on the back of scheduled delivery of three Multi Purpose Platform Supply Vessels (priced at circa USD30 mn each).

The company is well reputed for the timely delivery of orders where in most occasions it delivers before the specified timeline. However with the capacity constraints of the dry docks in the Colombo Port the company is looking to venture more into offshore docks to overcome this bottleneck. Furthermore, with the appointment of the new Chairman, who is the former chief of Mitsui Cement, we believe there could be further improvements in processes where the company could be able to accept more orders and service them effectively. (The order book for ship building is full up to 2012).

The share is attractive and trading on 8.5X forecast 2010E earnings and just 2.7X pro
jected 2010E PBV - maintain BUY

SRI LANKA: ASI LEAPS A STEP FORWARD…

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sat, 27 Feb 2010 14:58:00 +0000

With the extended bull run witnessed during this week, we believe the market would consolidate at current levels whilst continuing to generate healthy turnover levels during the coming weeks. We further expect the market to be driven by local high net worth; retail and institutional participants where the primary interest would be on mid cap stocks in the short run.

Going forward, with the positive macro developments and anticipated increase in economic activity coupled with the gradual recovery of global economy trickling down to the corporate sector, we believe the corporate sector earnings would rise by circa 30% YoY from 2010 onwards . This would be further strengthened by the policy decisions of the Central Bank to ease off foreign exchange controls, maintaining low interest rates, development of North and East etc.

Whilst the recent gains on most of the counters have been based on company fundamentals, a few others have gained more on speculations and rumours. Thus we strongly recommend investors to focus on companies with sustainably high ROCEs and earnings growth potential.

The market currently trades on trailing 4 quarter earnings multiple of 20.4X. However, given our expectation of higher corporate earnings from 2010 onwards we believe further long term upside is inevitable with the micro and macro changes taking place in the environment.

Our favourites would be the banking, hotels and consumer sectors, whilst diversified and manufacturing sectors could become secondary market movers. We see pockets of strong growth in key sectors such as Banking (Hatton National Bank, Commercial Bank, National Development Bank, Sampath Bank, Seylan Bank), Hotels (Asian Hotels & Properties, Aitken Spence Hotel Holdings, Keells Hotels, Stafford Hotels, Serendib hotels), Consumer (Hemas Holdings, Distilleries, CW Mackie), Manufacturing sector (Lanka Tiles, Royal Ceramics, Chevron Lubricants) and Diversified Sector (John Keells Holdings, Aitken Spence, Colombo Fort Land).

Sri Lanka Policy rates not lowered because banks won’t lend’

info@srilankaequity.com (Sri Lanka Equity Analytics) — Wed, 24 Feb 2010 05:13:00 +0000

The Central Bank could have reduced policy rates further but were adamant that caution was best in keeping inflation low but an IMF official in Sri Lanka says another reason not to reduce rates could have been the reluctance of commercial banks to pass on the benefit in terms of lower borrowing rates.

"When the IMF assists a country, one of the first things we do is to look at inflation and the interest rate environment. In most cases, their monetary polices are either too loose or too tight and we have to tell countries to either tighten policy interest rates, or to relax them. But in Sri Lanka, things were different," Dr. Koshy Mathai, IMF Resident Representative in Sri Lanka, told a recent forum.

"We told the Central Bank that there was a little more room for policy rates to be loosened but the bank told us ‘No’. The Central Bank said they preferred to be cautious in what they did, not wanting to do anything that could have inflationary pressures.

"But another reason for not wanting to reduce policy rates further may have had to do with the fact that commercial banks were not prepared to reduce their lending rates. The Central Bank may have thought there was no point in doing things to benefit commercial banks if these benefits were not passed on to the public," Dr. Mathai said.

Sri Lanka was holding talks with the IMF when the country was on the brink of balance of payments crisis towards the end of 2008 and the first few months of 2009.

By the time the IMF finally approved the US$ 2.6 billion standby facility in July 2009, Sri Lanka’s economy was already showing signs of improving because of the end of the war in May, which saw an increase foreign investor sentiment.

Headline inflation, which peaked at 28.2 percent in June 2008, a year where global food and oil prices reached never-before-seen heights, declined throughout 2009 and the Central Bank began to reduce policy rates and also relax penal interest rates on commercial bank borrowings with the intention of stimulating economic activity in the post-war economy.

But the banks were slow to respond.

"When we first came to Sri Lanka, banks were telling us that investors were not demanding credit from the banking sector. But now, they tell us that investors are practically begging for credit to invest in new projects.

"Since these borrowings are not for consumption, but are big investments they are not inflationary," Dr. Mathai said.

Policy interest rates are set at 7.5 percent (repurchase rate) and 9.75 percent (reverse repurchase rate). A year ago these rates stood at 10.25 percent and 11.75 percent respectively.

The average weighted fixed deposit rate of commercial banks last week stood at 10.46 percent. A year ago it was 16.92. The average weighted prime lending rate of commercial banks was 10.80 percent last week; a year ago the rate was 19.18 percent.

Dealers told the Island Financial Review that private sector credit was beginning to pick up but most investors were still cautious, adopting to wait until general elections are over by April this year.

Inflation expectations are picking up some dealers said.

"Global commodity prices are expected to pick up later this year and so inflation is expected to increase like the Central Bank said it would, but headline inflation is expected to remain in single digit levels. But the problem is in the fiscal front.

"We already see short term Treasury bills inch upwards for past several weeks, an indication that the government is thirsty for cash. Without a proper budget until May or after, it is going to be difficult to see how fiscal policy is going to make it easy for the Central Bank to conduct its monetary policy," a dealer said.

The Central Bank said last week it would keep policy rates as they were so as to stimulate economic activity through credit growth. It said it would continue to monitor inflation closely.

By Devan Daniel

Sri Lanka may miss 2010 IMF deficit goal

info@srilankaequity.com (Sri Lanka Equity Analytics) — Wed, 24 Feb 2010 05:03:00 +0000

COLOMBO, Feb 23 - Sri Lanka's 2010 budget deficit target for 2010 set by the International Monetary Fund as a condition for a $2.6 billion loan will be challenging to meet due to high post-war government spending, the central bank chief said.

Sri Lanka, which ended a 25-year war in May last year, promised to cut its fiscal deficit to 6 percent of gross domestic product this year.

"It's challenging." Governor Ajith Nivard Cabraal told Reuters on Tuesday. "The commitment is there. At the same time there may be areas where have to recognise that there is huge expenditure because we are in a post-conflict era."

He said the extra spending will help to achieve political stability.

"Long-term political stability is essential for us and sometimes we may have to sacrifice short-term gain. So that's the trade off."

The central bank has already acknowledged that the $40 billion economy has likely missed last year's budget deficit goal of 7 percent set by the IMF.

Since the end of the war, Sri Lanka has attracted more than $1.6 billion in foreign investment into government securities and $500 million into a sovereign bond. However, foreign direct investment is down close to 2006 levels.

"Last year the FDIs were in the range of around $600 million. In the context of the global situation we shouldn't get discouraged by that," Cabraal said.

The central bank is not considering to increase the limit of foreign investments in government securities from 10 percent, but foreigners can invest in more than $400 million worth of development bonds, which are likely to be rolled over this year, he said.

http://news.alibaba.com/article/detail/markets/100251244-1-interview-sri-lanka-may-miss-2010.html

Source: Reuters

CW Mackie PLC (CWM) - Good Times Ahead!

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sat, 20 Feb 2010 13:26:00 +0000

Salient features

Share is worth approximately Rs 65/= on the basis of varied valuations.
One of the largest Exporters of Natural Rubber and Desiccated Coconut in Sri Lanka. Company exports approximately 3,500MT of Crepe Rubber, 4,000MT of Tech.Sp.Rubber and 3,000MT of Desiccated Coconuts.
Strong Local Distribution Network for branded consumer products.
Valuable land base which include a Long Term Leasehold ownership of prime property in Colombo ideal for development.
State of the art bottling plant for Bottling of renowned “Sun Quick” range of products under franchise and “Scan” Drinking water. Company bottle and distribute approximately 2mn liters’ of “Sunquick” and 3mn liters’ of “Scan” bottled water per annum respectively.
Importer and wholesale distributor of approximately 15,000MT of Sugar.
Import and resale of Industrial and Light Engineering products.
Agent for “Hempel” marine paint and protective coatings.

Company Profile
The CW Mackie was founded in 1900 by the late Mr C.W.Mackie a Scotsman, who carried on the enterprise as Merchants and Commissions Agents under the name of ‘CW Mackie & Company’. In 1922, the business was incorporated as a private limited company. In 1946, a consortium of Ceylonese and Indian Businessman bought over the shares of the company and converted it to a public company.

The year 1971 marked a significant change when Ceylon Trading Company Limited, the Sri Lanka based subsidiary of Aarhus United A/S of Denmark, bought a part of the Indian shareholding and took over the management of the company. In late 1994, shares equivalent to 25% of the total shares in the company were issued to the public so as to broad-base the ownership of and give the Company greater access to the capital market of Sri Lanka to raise capital funds for the future diversifications and expansions.

The Group consist of CW Mackie PLC and three subsidiary companies engaged in a diversity of activities such as export of primary and manufactured products, ranging from all types of natural rubber and coconut products to rubber based products; import, manufacture and distribution of sugar; import and resale of branded marine paints and protective coatings, welding equipment and consumables, refrigeration and air-conditioning and light engineering products.

Market Prices
The price movement of CW Mackie shares during the period from 18th February to 19th February 2010 are depicted in the graph below.

The highest traded price (year to date) - Rs. 43.25

The lowest traded price (year to date) - Rs. 11.00
The current trading price (19/02/2010) - Rs. 41.75

The share price does not reflect the true value of the company as the liquidity of the share is less than 10%. Three largest shareholders namely Lankem Ceylon PLC, Kotagala Plantation PLC and high networth investor Dr Thirugnanasambandar Senthilverl owns approximately 90% of the issued share capital of the company.

Price Earnings (PE) Multiple Valuation
Net earnings of the current year ending 31st December 2009, are estimated considering the earnings made by the Company up to 30th June 2009 and assuming the past trend of earnings to continue for the balance period while accounting for recent market conditions.

The current Market PER of the Colombo Stock Exchange is around 18 times. However, for the purpose of valuation we have assumed a realistic PER of 15.0 times. Accordingly the FY 2009 PER based valuation of the Company is approximately Rs. 62 per share.

Dividend Yield Based Valuation
Dividends based valuation is determined on the basis of 15% annual rate of Dividend growth and Terminal value derived through an exit price calculated linked to the current market dividend yield. Average dividend growth rate of 15% assumed as a against the Company’s forecast dividend growth rate of 33%. Also Cost of Capital/Discount Rate of 20% is assumed for the purpose of discounting future dividends and exit proceeds. No Dividend tax is considered.

Net Asset Value / Price to Book Value
The Net Asset Value is estimated based on the Balance Sheet of the Company as at 30th June 2009. Net Asset Value considers the market value of the assets after deducting the total liabilities divided by the number of ordinary shares in issue.

Considering the Net Asset Value per share computed above, we have estimated below the value per share based on the Price to Book Value (P/BV) ratios of the market as well as the Trading Sector Stocks of the Colombo Stock Exchange. Accordingly the FY 2009 PBV based valuation of the Company is approximately Rs. 76 per share.

* above valuation include adjustment of Rs 800mn assuming that the 253 perch property of CW Mackie PLC located at # 34, 36 DR Wijewardena Mawatha which is leased from the Urban Development Authority (UDA) is extended for a further period. Adjustment assumes the market value of the freehold property .

Why CW Mackie PLC is a strategic fit for Lankem Group?

Lankem owns Rubber Plantation Companies such as Kotagala and Agarapatana and ownership of CW Mackie being one of the largest exporters of rubber will enhance the value chain of the group in a typical forward integration.
EB Creasy and Darley Butler and Company would benefit through the integration of Distribution arm of CW Mackie and the "Scan" and "Sun Quick" product range. This will allow better market penetration and lower cost of distribution.
CW Mackie leasehold ownership of property located at DR Wijewardena Mw, is considered to be valued over Rs1bn. This property is facing the road frontage from one side and Beira Lake Frontage from the other. This is an ideal location for mixed development or a recreation facility under a selected theme.
Lankem group is a net importer whereas CW Mackie is a net exporter, which is expected to provide an ideal scenario for hedge against the foreign currency risk of the group.

Estimated Value per Share
In terms of the valuations carried out with regard to the earnings potential, dividend yield and the asset base of the Company and with due consideration of the current market price, liquidity of the stock and the potential of the trading sector in the country and other concerns with regard to the industry, country and global market as a whole, it is estimated that the value of Ordinary Shares of C W Mackie Co. PLC would be in the range of Rs. 65 per share.

Distilleries Company of Sri Lanka (DIST) - Outlook remains positive

info@srilankaequity.com (Sri Lanka Equity Analytics) — Fri, 19 Feb 2010 01:33:00 +0000

Originally set-up as a pioneering distillery, Distilleries Company of Sri Lanka (DIST) has pursued a policy of planned growth which has resulted in its transformation from a cash rich beverage play to a diversified company with exposure to key sectors of the economy. However, the company's primary focus remains on liquor products.

DIST has secondary interests spanning into diverse industries such as Telecom, Plantation, Textiles and through an associate stake in Aitken Spence in fields ranging from leisure to power.

The loss of Sri Lanka Insurance to the state subsequent to the Supreme Court ruling, coupled with the reduced earnings from Lanka Bell has curtailed DIST's 3QFY10 net earnings. DIST's core hard liquor business has contributed 88.5% of the group's PBT during the quarter however the sectoral PBT dipped 14.2%YoY to LKR1,086.8 mn, whilst Lanka Bell recorded a loss of LKR132.6 mn (vs a loss of LKR112.0 mn). The plantation earnings improved significantly with the sector posting a PBT growth of 224.8% to LKR80.6 mn.

Quarterly performance at a glance
Net turnover dipped by 48.9%YoY in 3QFY10. Consolidated 3QFY10 net revenue has dipped by 48.9%YoY to LKR5,088.1 mn. This is mainly on the back of the lost earnings from SLIC and Lanka Hospitals (previously known as Appollo Hospital). However, net revenue has been spearheaded by the growth in the core distilling operation (up 9.0% YoY to LKR8,200.9 mn) amidst stringent laws passed to reduce liquor consumption.

However the contribution from Lanka Bell (down 20.4% YoY to LKR1,207.9 mn) and diversified sector (down 53.1%YoY to LKR314.6 mn) have dipped during the quarter under review mainly the on back of slow down in incremental subscriber growth in the fixed line segment coupled with the price war amongst the operators and the lost dividend income from SLIC received by the companies under diversified sector.
Gross profit down 28.8% YoY in 3QFY10. DIST's cost of sales has dipped by 60.2%YoY to LKR 2,528.3 mn in 3QFY10 due to reduced level of activity (on the back of losing SLIC and Lanka Hospitals). Whilst cost of sales of DIST's core liquor operation too has dipped by 2.5%YoY to LKR1,559.7 mn. DIST posted a gross profit of LKR2,559.8 mn, down 28.8%YoY in 3QFY10 whilst gross margins have improved to 50.3% in 3QFY10 (vs. 36.1% in 3QFY09).

Operating profit has dipped by 32.7%YoY to LKR1,160.7 mn in 3QFY10. Income from investments has fallen by a sharp 95.5%YoY to LKR80.1 mn in 3QFY10 largely due to the lost interest income earned by SLIC. Administrative expenses have dipped by a sharp 45.7%YoY to LKR764.5 mn whilst distribution cost has increased by 9.4%YoY to LKR714.8 mn in 3QFY10. The consolidated 3QFY10 operating profit has dipped by 32.7%YoY to LKR1,160.7 mn whilst the operating margin has improved to 22.8% in
3QFY10 (vs. 17.3% in 3QFY09).

Consolidated 3QFY10 pre tax profit dipped 27.0% YoY to LKR1,227.4 mn. DIST's finance cost has dipped by 22.6%YoY to LKR147.9 mn in 3QFY10 where the borrowing have halved to LKR4,282.6 mn on the back of losing SLIC. Further, the share of profit from associates has grown by 43.5%YoY to LKR214.6 mn largely on the back of improved performance from conglomerate Aiken Spence (SPEN, LKR1,230) despite DIST's current reduced stake in it. Consequently, DIST has posted a pre tax profit of LKR1,227.4 mn, down by 27.0%YoY in 3QFY10.

Consolidated 3QFY10 net profit records LKR841.4 mn (down 37.4% YoY). Income Tax expense has dipped 11.7% YoY to LKR338.2 mn due to reduced earnings. Consequently, DIST has posted a net profit of LKR841.4 mn, down by 37.4%YoY in 3QFY10.

The net profit margin has improved to 16.5% in 3QFY10 (vs. 13.5% in 3QFY09). Forecast FY10E net profit to reach LKR2,802.9 mn (down 17.2% YoY). The loss of SLIC coupled with the anticipated slowdown in returns from Lanka Bell and affected earnings of plantations due to the drought prevailed during the first half of the year drags down the anticipated profit for FY10E to LKR2,802.9 mn (down 17.2% YoY). On the back of the anticipated strong performance from the core distilling operation with the previously war affected North and East opening up and reduced losses from Lanka Bell, we expect DIST to post LKR3,349.1 mn (up 19.5% YoY) in FY11E.

Fundamental outlook remains healthy. Despite the temporary setback caused by the Supreme Court ruling on SLIC we believe future prospects for DIST are promising in the medium run, given the sustained growth in the beverage sector and with the purchase consideration being paid provides the company the opportunity to capitalize on future lucrative investment opportunities (however the nature of the bonds is still not known).

If the company would hold the bonds till maturity then the interest payment (circa LKR635 mn, assumed @10.5% coupon rate) would cushion the lost earnings from SLIC (On average SLIC has been contributing a near LKR600 mn to the bottom line).

Further, DIST has ventured into the Insurance business with the Insurance Board of Sri Lanka approving the registration of "Continental Insurance Lanka Ltd" as a fully owned subsidiary of DIST. DIST has planned an initial investment of LKR500 mn and if necessary the provision will be increased to LKR1.0 bn. We believe the Insurance Company is planned to start up as a Greenfield project and is deemed to have exclusively the
General Insurance business.

Given its proven ability to sustain robust earnings through new acquisitions, coupled with the favourable macro environment and cash rich liquor business, the share is attractive at present trading on 10.4X forecast FY11E net earnings and 1.3X PBV. Maintain - BUY.

Sri Lanka: Plantation Sector Report

info@srilankaequity.com (Sri Lanka Equity Analytics) — Mon, 15 Feb 2010 03:36:00 +0000

Investment Summary

Sri Lankan tea prices at record high levels: Sri Lankan tea prices marked a strong recovery from 2QFY10 onwards where it touched the highest ever prices in mid September which was recorded at LKR456 per kg (up 70% YTD). The upswing was mainly attributable to the global supply shortage created by the production deficit in Kenya, India and Sri Lanka due to unfavourable weather conditions. Furthermore, strong demand from the Middle East for Sri Lankan low grown teas and rising demand lead by slowly reviving global economy also strengthened the price increase. Going forward we expect the tea prices to stabilise at current levels and ease by mid 2010 with the production recovering globally. We forecast the prices to remain at LKR360 in 2009 and to reach LKR 389 (up by 8%) in 2010E.

Natural rubber prices on the rise: Local rubber sector suffered severely since FY08 owing to the global economic downturn where synthetic rubber was preferred by the buyers due to lower cost. Natural rubber prices have now started picking up on the back of rising fuel prices which will make synthetic rubber more expensive. Sri Lankan rubber prices which were at the lowest in December 2008 (LKR120 per kg) have now reached LKR350 per kg. We believe the upward price trend would sustain with the rising crude oil prices (now closer to USD80 per barrel) which would further strengthen the demand for natural rubber. Therefore we forecast the rubber prices to be at LKR211 per kg for 2009 and grow by a sharp 30% YoY to LKR274 per kg in 2010E.

Sector profitability to recover: The sector was poised to mark strong earnings in FY10E owing to high commodity prices. But the growth was hindered by the estate labour wage hike which increased the cost of production by a near 20% with effect from April 2009. However we believe the +70% rise in tea and three-fold rise in rubber prices would be able to wither the negative effects of the cost of production to a certain

extent. With tea prices stabilising at current levels and rising rubber prices which would be sustainable in the long run, we forecast the sector to record a strong earnings during the coming quarters.

Our key recommendations would be Malwatta (MAL), Kegalle (KGAL), Kotagala (KOTA) and Namunukula (NAMU) mainly on the back of strong earnings potential (where most of the companies have recorded results above expectations) coupled with strategies to strengthen the bottom line through aggressive cost management policies.

Tea Sector

Tea prices on a secular uptrend. Sri Lankan tea prices are at an all time high, despite the impact of the global financial crisis. The Net Sales Average (NSA) of tea at the Colombo Auction has risen by 74% YTD to LKR440 per kg, underpinned by continuing healthy demand from the key buying regions of the Middle East and Russia/Central Asian countries and also a shortfall in supply in the major growing regions of Asia and

Africa.

Prices of low grown teas, mostly consumed by markets in the Middle East have risen by 70% YTD to a record LKR456 per kg in September 2009 whilst those of high grown teas have soared by a similar percentage to LKR413 per kg.

Tea prices have been rising strongly over the past three years underpinned by increasing income levels in key markets in the Middle East, Russia/Central Asian republics, India and China. Prices at the Colombo Auction rose by 40% YoY to LKR 279 per kg in 2007 and surged further to a record high of LKR342 per kg in July 2008 before falling to LKR302 per kg at the end of the year following the impact of the global credit crisis.

Nevertheless, average tea prices were up 8% YoY in 2008 to LKR302 per kg.

Global tea prices in 2009 have been underpinned by a shortfall in output following drought conditions in the key growing regions. Nevertheless, strong underlying demand (despite the global economic slowdown) in the major consuming markets has also contributed to the positive price trend. We are of the opinion that tea prices are on a secular long term uptrend due to;

a fundamental global shortfall in supply, as very little new planting has taken place,
rising income levels in key consuming markets, and
a switch in consumption from other beverages to tea as the health benefits of the product is recognized.

Consequently, we forecast the NSA of tea at the Colombo Auctions to rise by 20% YoY to LKR361 per kg in 2009, by a further conservative 8% YoY to LKR390 per kg in 2010 and by 10% YoY to LKR429 per kg in 2011.

Low grown tea prices to rise on demand from Middle East. The stronger flavored low grown teas are primarily consumed in the Middle Eastern and Russia/Central Asian markets and we expect demand from these regions to continue to improve as crude oil prices recover in the years ahead. Whilst new supplies of similar flavored and colored teas have come to the market from Vietnam, much of this output is being consumed by China. Consequently, we expect demand for Sri Lanka’s low grown teas to improve strongly.

High grown tea prices to increase on switch to tea from other beverages. The lighter colored and flavored high grown teas have been the bedrock of the tea industry. High grown teas are essentially demanded by the more discerning markets in Europe, which have traditionally preferred Coffee. However, with the increasing trend towards consumption of healthier beverages, we expect demand for high grown teas to improve.

Tea production to recover in 2010. Sri Lanka’s tea production rose by 4% YoY to 317.7 mn kg in 2008 following favorable weather conditions, uninterrupted factory operations and the cumulative impact of good agricultural practices.

In 2009, severe drought conditions have caused tea output to fall sharply in the first half of the year. Whilst tea production was down 41% YoY to 48.7 mn kgs in 1Q2009, 2Q2009 witnessed only a modest decline of 5.8% to 83.5 mn kgs as weather conditions improved. Further, wage related industrial action resulted in output being curtailed in 3Q2009, resulting in output falling by 8.2% YoY to 48.9 mn kgs in the first two

months of that quarter. The cumulative impact of the above was a 19.5% YoY decline in tea output to 181 mn kg in the first eight months of 2009. However, with improved weather and record high prices inducing higher leaf intake, total production for 2009 ended up with 289.8 mn kg which is down 9% Y0Y.

Looking ahead, assuming favourable weather conditions, continuing strong prices and the positive impact of replanting of higher yielding varieties, we believe that yields would revert to around the historical average of closer to 1,400 kgs per hectare. And given the fact that the area under cultivation is unlikely to change from the current 222,000 hectares, we are projecting tea output to rise by 4.2% YoY to 301.92 mn kgs in

2010 and further by 2.9% YoY to 310.8 mn kgs in 2011.

Increase in Cost of Production to be muted. Although non-wage costs (especially fertilizer and energy related expenses) rose by over 50% in 2008, the average Cost of Production (COP) of Sri Lankan tea increased by only a moderate 10.8% YoY to LKR262.60 per kg in the absence of a wage hike (wages account for around 55% of total cost of production of tea). This was also due to strong growth in output of over

4% YoY.

Sri Lankan plantation workers’ wages are reviewed every two years according to a collective agreement between the unions and the companies. The previous collective agreement, where the wage per worker per day was fixed at LKR290 expired in March 2009. However, following mounting pressure over rising cost of living, a fresh collective agreement was signed between the Plantation Companies and the Trade Unions

which fixed the daily wage of plantation workers at a maximum of LKR405 per day.

Whilst the hefty wage increase of around 40% has been implemented effective April 2009, an approximately 15% decline in non-wage costs (mainly on account of around a 30% decline in energy and fertilizer expenses) the COP in 2009 increased by a significant 17% YoY to LKR 307.6 per kg. However, with the full impact of the wage increase being accounted for in the year and the likely increase in non-wage costs on the back

of global inflationary pressures, we estimate COP to rise by another 5.7% YoY to LKR 334.8 per kg in 2010. We also project COP to rise by a further 12% YoY to LKR 385.8 per kg in 2011 on the back of an equivalent rise in wage and non-wage costs.

Gross margins in tea to remain positive. Despite increasing wages and other input costs, margins in tea have remained positive due to rising prices on the back of buoyant demand. In 2007 and 2008, gross profit of in tea reached LKR42.0 and LKR39.0 perkg respectively, converting to a gross margin of 15% and 13%.

Looking ahead, despite the impact of higher wages, we expect rising tea prices to enable tea plantations to

maintain healthy margins of 14.8% in 2009 (LKR53.58 per kg) and +15% in 2010 .

Rubber Sector

Rubber prices have bottomed out. Natural rubber prices (RSS1 -Ribbed Smoked Sheet) have risen strongly by 104% YTD to LKR318.60 per kg in December 2009 in line with recovery in crude oil prices. As natural and synthetic rubbers (the latter derived from crude oil) are substitutes, the price of natural rubber naturally tracks that of crude oil.

In addition, with Sri Lanka being a relatively small producer of natural rubber, much of the output is consumed by local industry (a near 60% being locally consumed), leaving little of the commodity for export, thus effectively soaring up prices.

In the two years prior to the global financial crisis, natural rubber prices at the Colombo Auctions rose sharply by 25% YoY to an average of LKR234.22 per kg in 2007 and a further 15% YoY to LKR 269.51 per kg in 2008 in tandem with the price of crude oil. In 2008, the price of RSS1 rose to a high of LKR 360 per kg in June, before collapsing to a low of LKR111.10 per kg in December following the global financial crisis.

However, some recovery was witnessed in December itself, with the price of RSS1 closing the year at LKR 150 per kg, enabling the price of the commodity to average LKR 269.51per kg in 2008, due to the severely affected last quarter.

In 2009, natural rubber prices have been buoyed by the recovery in crude oil prices, in addition to tight local supply on account of drought conditions. Further, with global recessionary conditions easing in 2H2009 and crude oil prices continuing to rise, further gains in natural rubber prices appear inevitable. With the price of RSS1 rising strongly by 104% YTD to December 2009, we expect the price of the commodity to average LKR 210.99 per kg in 2009, down 22% YoY on the back of volatile first nine months.

Approximately two thirds of global natural and synthetic rubber production is utilized in automobile manufacture and hence the demand for the commodity is inextricably linked to the fortunes of that industry, in addition to the price of crude oil. Consequently, with the likely recovery in global economic growth in 2010 and further gains in crude oil prices, we are projecting the price of RSS1 to rise strongly by 30% YoY to

an average of LKR274.29 per kg in 2010 and further by 20% YoY to LKR 329.14 per kg in 2011.

Rubber production to rise steadily. Underpinned by remunerative prices, natural rubber output in Sri Lanka has risen strongly over the past five years, from 92 mn kgs in 2003 to a record 129.2 mn kgs in 2008, a CAGR of 7%. With prices rising steadily over the years, replanting and new-planting of rubber land has also continued to increase with the cultivated area being tapped for rubber rising from 86,000 hectares in 2003

to 95,500 hectares in 2008, a CAGR of 2%. Higher prices have also resulted in improved agricultural practices (such as proper and timely application of fertilizer, use of rain-guards, improved tapping techniques etc.) enabling yields of rubber plantations to rise from 1,068 kgs per hectare in 2003 to 1350 kgs per hectare in 2008, a CAGR of 5%.

In 2009, national rubber output has increased to 113.8 mn kgs during the first nine months of the year which has increased by 3.6% from year ago. We believe the full production for 2009 to be around 140 mn Kgs recording a growth of 8% YoY.

With the BRIC economies demanding higher volumes of natural rubber coupled with the East Asian plantations switching from rubber to less labour intensive oil palm, the global natural rubber industry is experiencing a supply deficit which is expected to last beyond 2011. We believe this would further strengthen the demand for Sri Lankan rubber with the recovery of BRIC countries from the global economic downturn.

Looking ahead, we believe that Sri Lanka’s rubber plantations are well placed to reap the benefits of replanting and new-planting programmes and the good agricultural practices adopted over the past few years, enabling yields to rise strongly. Consequently, we are projecting rubber output (weather permitting) to rise by 10% YoY to153 mn kgs in 2010 and by a further 5% YoY to 161 mn kgs in 2011.

Cost of production of rubber is less onerous. The use of fertiliser and energy is much less in the manufacture of rubber relative to tea and therefore, despite the sharp increase in the costs of such inputs, the cost of production of the commodity rose by 9% YoY to LKR114 per kg in 2008. Further, the lower intensity of labour usage also contributed to containing the rise in COP of rubber as no wage increase was affected during the year.

However, following the hefty 40% wage increase in September 2009, COP of rubber is forecast to increase by a slower 4% YoY to LKR118.2per kg in 2009, with the approximate 30% decline in fertiliser and energy costs dampening the impact of higher labour costs. Nevertheless, with the full impact of the wage increase being accounted for in 2010 and the likely increase in non-wage costs on the back of global inflationary pres-

sures, we estimate COP to rise by a further 4% YoY to LKR123.02 per kg in the year. We also project COP to rise by a further 13% YoY to LKR138.8 per kg in 2011 on the back of an equivalent rise in wage and non-wage costs.

Hefty margins in rubber. Given the relatively lower COP of rubber, the gross margin of the commodity has been significantly positive over the past few years. In 2007 and 2008, gross profit of in rubber reached LKR129.4 and LKR155.5 per kg respectively, resulting in gross margins of 55% and 58%. With the recovery in rubber prices, despite the impact of higher wages, we expect rubber plantations to maintain margins of 45% in 2009 (LKR94.9 per kg), 57% in 2010 (LKR155.30 per kg) and 58% in 2011 (LKR181.4 per kg).

Oil Palm Sector

Oil palm to generate healthy margins. Cultivation of Oil Palm is carried out in Sri Lanka only on a very small scale, with just 4 of the 22 regional plantation companies operating a few small estates totalling 2876 hectares. The Crude Palm Oil (CPO) production of these estates is purchased by AEN (Private) Limited, a palm oil processing centre which manufactures Refined Palm Oil (RPO). AEN is a joint venture between Namunukula Plantations, Agalawatte Plantations and Elpitiya Plantations. However, palm oil manufacture is an important revenue and profit source for these companies as the commodity yields significant and stable gross margins/profits. Total output of CPO in 2008 increased by 32% YoY to 29.4 mn kgs.

In 2007, the price of CPO averaged LKR20 per kg whilst cost of production was at LKR8.30 per kg, yielding a gross profit of Rs. 11.6 per kg. This converted to a hefty gross margin of 58%, a remuneratively high level by any industry standard. But the prices fell to LKR16 per Kg in mid 2008 which continued for nearly a year (till August 2009) on the back of decline in global demand created by recessionary pressures.

However by the end of 2009, the companies were able to get back to normalcy with prices ranging between LKR19 – 20 per Kg. With a lower cost of production of LKR6 –8 per Kg, oil palm has given a gross margin of a near 50% for the planters and we believe the margins would further improve in the coming years with increasing prices and declining cost of production.

Opportunities in the green

Apart from the strong earnings potential (backed by the sustainable rubber prices coupled with high tea prices), the sector with its massive land mass has many more opportunities which are mostly untapped.

Tourism would be an ideal opportunity, where the greenery full of magnificent sceneries and soothing climate would be an unmatched competitive advantage over the competitors in the leisure business.

Forestry management is another lucrative business the sector could look into. At present this is restricted by stringent regulations and the sector collectively has proposed ways of sustainable forestry management to the regulatory bodies.

Furthermore, power generation using hydro, dendro and wind power to source its own electricity requirement would be another opportunity the sector could look into. This would result savings on the electricity expenditure (where 1 unit of electricity is consumed to produce 1kg of made tea) which would lead to reduce the cost of production significantly.

Investment Recommendation

Having recorded fluctuating profits during the past two years, prices of tea have picked up sharply since mid 2009 resulting better profit margins despite the wage hike pressure. In addition, rubber which experienced the lowest ever prices in December 2008 recovered during the last quarter of 2009 which is now enjoying LKR350 per kg on the back of rising global activity levels.

Island wide gross margin for tea in 2008 stood at 13% (2% dip from 2007) where as it is now at 15%. The margin was somewhat limited by the near 20% hike in COP resulted by the wage hike with effect from April 2009. However we believe the margins would be sustainable in the coming quarters giving a healthy margin of +15% for 2010E.

Rubber which used to generate the highest margins, faced the worst ever times ever on the back of global economic downturn which made the synthetic rubber (a by product of oil) cheaper and reducing the demand for natural rubber. This made the +50% margins enjoyed over the past years (since 2006) erode to 40% levels. Even though the prices picked up in the later part of 2009, backed by the slow recovery of

global activity we believe the year round margin to stabilize at 40% and to increase to 56% in 2010E.

The sector, which comprises of 18 listed companies, has posted LKR682.7 mn of net earnings during the last four quarters. It is currently trading at 28.3X on trailing 4 quarter earnings whilst trading at 1.2X PBV. The sector as a whole has marked a significant improvement from a week ago where the four quarter trailing PE was at 41.7X.This is directly attributable to the strong earnings released by a few counters during the week.

Looking at the above chart it is evident that sector has traded between 0.9X - 18.9X during the past four years. Going forward, we believe the sector may reach a target PE of 18X in the near future, making the sector more attractive.

When considering individual companies, our key buys would be Malwatta (MAL), Kegalle (KGAL), Kotagala (KOTA) and Namunukula (NAMU) mainly on the back of strong earnings potential (where most of the companies have released results above expectations) coupled with strategies to strengthen the bottom line through aggressive cost management policies. In addition we would also rate Banalangoda (BALA), Horana

(HOPL) as secondary buys considering their earnings which is below the earnings of the key buys but far above the rest of its peers.

Colombo Fort Land & Building Company PLC (CFLB) the fully diversified conglomerate

info@srilankaequity.com (Sri Lanka Equity Analytics) — Mon, 08 Feb 2010 09:53:00 +0000

COMPANY PROFILE
The Colombo Fort Land & Building Company PLC is a public limited liability company incorporated and domiciled in Sri Lanka and listed on the Colombo Stock Exchange.

The Company was incorporated on 30th April, 1895 for the purpose of acquiring the premises known as Leyden Bastian located in Fort of Colombo then, occupied by the Wharf & Warehousing Company Limited, and to develop this site to meet burgeoning demand for high quality office accommodation in the city.

Over the years, the Company has expanded by organic growth as well as strategic acquisitions and has evolved from a passive property owning company into a dynamic conglomerate with diverse interest in real estates, chemicals and paints, consumer products, distribution, manufacturing, construction, leisure management, plantations and investments.

GROUP HOLDINGS STRUCTURE

LATEST RESULTS - 31st December 2009

ASSET VALUE

REAL ESTATE AND PROPERTY MANAGEMENT
The freehold land and building located at the Sir Baron Jayathilaka Mawatha is owned by the Colombo Fort Land & Building Company PLC and the Company has rented out the building to tenants at market rates.

York Arcade Holdings PLC, a subsidiary owns a building equipped with modern office facilities and has rented out the premises to tenants at market rates.

CHEMICALS
Lankem Ceylon PLC, a Group subsidiary started its agrochemical business in in 1973. hey represent companies such as Syngenta, Dupont, Kumiai, Nissan, Sumitomo, Mitsui and Algea.

The Company manufactures markets and distributes agricultural products, namely Weedicides, Insecticides,
Fungicides and Foliar Fertilizers.

Lankem Ceylon PLC holds a strong position in the chemical sector solvent market. The Company imports all its raw materials from reputed companies such as Exxon Mobil, Sasol, CKG Chemicals.

The Company is an island-wide distributor for Ceylon Petroleum Corporation and continues to be the largest private sector distributor making the entire range of bituminous products to the road constructions industry.

PAINTS
Lankem Paints has been in operation from 1984 and is the pioneer coatings manufacturer in the country. The Company currently owns the international brand name Robbialac and markets all the coatings under the same brand.

CONSUMER PRODUCTS
The Consumer Products Division of the Group subsidiary Lankem Ceylon PLC specialises in manufacturing and marketing of domestic detergents, household insecticides and general purpose cleaners. The Company also imports washing powder.

PLANTATION
Kotagala Plantations PLC and Agarapatna Plantations are owned and managed by the Group.

LEISURE MANAGEMENT
The Group owns and manages three resort hotels. Hotel Club Palm Bay in Marawila is owned by Marawila
Resorts PLC and The Palms at Beruwala is owned by Beruwala Resorts Limited. Sigiriya Village Hotel, which is located in an ancient city is owned by Sigriya Village Hotels PLC.

CONSTRUCTION
The Group’s construction subsidiary, Lankem Developments PLC continues to focus on its core operating activities, namely water proofing and road construction.

DISTRIBUTION
E.B. Creasy & Company PLC, a subsidiary of the Group has an island-wide dealer network, which distributes hardware and automotive accessories, imported from well-known foreign principals as well as locally manufactured items. Darley Butler & Co. Limited has one of the most extensive distribution system in Sri Lanka has one of the largest team of professional Sales Representatives backed by a modern feet of vehicles and long establish network of financially sound goods.

Muller & Phipps (Ceylon) PLC and its subsidiary company Pettah Pharmacy Limited both are serving as agent representatives in Sri Lanka for foreign pharmaceutical companies and are engaged in importing, wholesaling and distribution of pharmaceuticals.

MANUFACTURING
Laxapana Batteries PLC quoted on the Colombo Stock Exchange is the pioneer manufacturer of dry cell batteries in Sri Lanka. The Company manufactures two types of dry cell batteries under the Laxapana brand name.

Creasy Foods Limited is the manufacturer of a range of medicated confectionery under licence from Cadbury Schwepps PLC of UK. The Company has diversified its activities and now produces falaovured sweets as well under the brand name of Candyman.

IMPORT AND MARKETING OF MOTOR VEHICLES & SPARE PARTS
Colonial Motors PLC is engaged in import and marketing of motor vehicles, spare parts and providing maintenance services. The business is highly competitive and continues to face severe competition.Carplan Limited, a subsidiary of Colonial Motors Limited, which holds the Agency rights for KIA Motors in Sri Lanka is engaged in import and marketing of motor vehicles and servicing of vehicles.

INVESTMENTS
Colombo Fort Investments PLC, Colombo Investment Trust PLC and Capital Investments Limited are associate companies in the Group engaged in holding and managing investment portfolios.

KEY SHAREHOLDERS

Sri Lanka: AHUN records 20% top-line growth despite the off season in tourism

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sun, 07 Feb 2010 14:10:00 +0000

Aitken Spence Hotel Holdings' (AHUN) has recorded a net profit of LKR210.5 mn in 3QFY10 from a loss of LKR105.8 mn in 1HFY10, which is directly attributable to the reviving domestic tourism with higher occupancies and earnings from Maldivian hotels.

AHUN, a 71.7% owned subsidiary of local conglomerate Aitken Spence PLC (SPEN, LKR1379.00) currently operates 9 hotels in Sri Lanka, 7 in Maldives, 5 in Oman and another 5 in India. Company operates its resort portfolio under three brands; namely "Heritance", the premier brand with 5 star luxury properties, "Adaaran", the Maldivian resorts and "Aitken Spence Hotels", comprising of all managed properties. As a part of their asset light strategy, the company is continuously searching avenues to expand its presence regionally and globally using its expertise in hotel management with minimal capital participation .

Gross revenue up 20% YoY to LKR1,985.5 mn in 3QFY10. AHUN's top line has grown by a sharp 20% YoY in 3QFY10 and the result for cumulative 1-3QFY10 is also up by 8.8% YoY despite 6 months of the year falling into the off season of the tourism industry. The Sri Lankan sector recorded an improvement of 10.2% YoY whilst the South Asian sector has grown by a sharp 21.7% YoY during the quarter in concern,
mainly on the back of reviving domestic tourism and Maldivian contributions which were above expectations.

Operating costs have increased by 16.1%YoY in 3QFY10. The company's operating costs have increased by 16.1% YoY to LKR1,541.6 mn in 3QFY10 where as the cumulative growth for 1-3QFY10 was a slower 8.3% YoY. Staff costs and direct operating costs have risen by 7% and 33% YoY respectively during the quarter, on the back of increased activity in hotels whilst depreciation and amortization costs increased by 35% YoY owing to the increased asset base. Other indirect expenses has increased by a marginal 5% YoY in 3QFY10 resulting a dip of 0.8% YoY for the first nine months of the year as a result of the successful cost rationalization exercises implemented in its hotels .

Operating profit of LKR385 mn in 3QFY10. AHUN has converted its marginal profit of LKR69.8 mn in 1HFY10 into a profit of LKR385 mn just in three months due to the reviving local tourism which has shown signs of turnaround in the near future. This was further supported by the Maldivian sector earnings where the occupancy of AHUN's properties has gone up to 70% - 80% except a few resorts catering to niche up market segments.

Pre-tax losses year ago, converted into a profit in 3QFY10. AHUN's Sri Lankan resorts and hotels has posted a pre tax profit of LKR5.32 mn in 3QFY10 from a loss of LKR44.34 mn year ago, reducing the cumulative 9 months loss to LKR154.5 mn (vs a loss of LKR243.3 mn last year, down 36.5% YoY) mainly driven by the growing domestic tourism.

Furthermore, AHUN's associate earnings (Hotel Hill top and Browns Beach hotel) have also grown by stunning 106.5% YoY during the quarter in concern. However, the South Asian sector which comprises of Maldivian properties recorded a 39.3% YoY dip in its pre tax profits on the back of a slower recovery of the global economy (where the occupancy is still at 80%) and the downward pressure on the rates.

With the recovery of the global economy coupled with the company's world class hotel chain, we believe the sector will rebound and get back to its lucrative ways in the near future.

AHUN recorded a net profit of LKR210.5mn for 3QFY10. Backed by the local and Maldivian tourism which have already created signals of turnaround, AHUN has recorded a net profit of LKR210.5 mn (against the loss of LKR105.8 mn in 1HFY10) despite 6 months out of 9 months falling into the tourism off season.

However when comparing the bottom line with the same period in the previous year, AHUN has posted a significant dip of 41%. (Profit of LKR210.5 mn in 3QFY10 Vs profit of LKR357.8 mn in 3QFY09). It should be noted that the previous years net earnings includes the profit of LKR219 mn (included in Other operating income) which was gained from the disposal of Bathala Island Resort in FY09. Therefore, looking at the numbers excluding the capital gain, AHUN has posted a bottom line growth of a staggering 52% YoY for 3QFY10.

Future outlook
With the complete end to the 3 decade long terrorist conflict coupled with the positive macro economic outlook, tourism sector would be one of the first sectors to rebound. AHUN is positive on strong growth in local tourism, and as a part of their expansion strategy the company is planning to build one or more hotels in Trincomalee (where they have 100 acres) whilst seeking prospects in Jaffna and Kalpitiya. Also they are looking in to fill in its long lasting need for a City hotel in Colombo through acquisition or development of a new property.

Furthermore AHUN is refurbishing Neptune Hotel, one of its beach properties down south to be rebranded under its premier brand “Heritance”. Once refurbished, it will be a wellness resort and a spa specialising in ayurvedic treatments which will be opened in winter 2010.

According to their regional expansion strategies, plans have been finalised to add more properties in India (Under Heritance Brand) which would be operational in the coming years.

Forecast FY10 earnings revised down to LKR350 mn. Backed by the slower recovery of the South Asian sector which accounts to a plus 80% of the top line, we revised down our forecast net profit to LKR423.5 mn (down by 28.5% YOY) in FY10E and LKR851.8 mn (up by 101% YoY) in FY11E.

Share is fairly valued on 37.7X forecast FY10E earnings. The share has gained three fold (246%) since the end of war on 18th May 2009 whilst we believe further upside possible with growing earnings materialising in the coming quarters. Furthermore AHUN would be one of the prime beneficiaries of the revival of local tourism (with the complete end to the 3 decade long terrorist conflict and opening of the eastern coast which is rich of tourist hotspots such as Arugam bay, Nilaveli beach etc) which has 09 properties in all strategic locations in the island which are upgraded and ready for the boom (It would need 2-3 years to develop a new hotel).

AHUN is fairly valued on 37.7X forecast FY10E net profit and 18.7X projected FY11E earnings whilst it is trading on a PBV of 3.2X, we maintain – BUY

Sri Lanka: Lanka Tiles (TILE) has recorded a staggering 71% YoY growth

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sun, 07 Feb 2010 08:17:00 +0000

Lanka Tiles (TILE: LKR71.75) has recorded a staggering 71% YoY growth in its 3QFY10 net earnings, resulting in an increase in the cumulative 1-3QFY10 net profits by a sharp 27% YoY. This is mainly attributable to the increase in the level of revenue due to the high demand triggered by the international market resulting in an increase of 97% in export sales for the 3QFY10.

TILE, the pioneer floor tile producer in Sri Lanka was incorporated in 1984 to manufacture Ceramic Glazed Floor Tiles as its core business. At present this is the second largest floor tile producer of the country with an approximate market share of 35%.

TILE is operating with a per day production capacity of approximately 9,500 square meters. Approximately 90% of the output is sold locally while the remaining 10% of the output is exported to countries such as Canada, USA, Middle East, Maldives, Australia, New Zealand, Japan and Singapore.

With the favourable economic conditions prevailing in Sri Lanka especially with the downward trend in interest rates coupled with the reconstruction boom in the North and East resulting in an overall improvement in the economy, we project earnings for the FY10E to reach LKR320 mn (up by 11.5%YoY).

Net sales up by a sharp 23% YoY in 3QFY10. TILE's gross revenue has increased by 20% YoY to LKR875.3 mn in 3QFY10 where the export sales (8% of total sales) recorded a growth of 97% whilst the local sales increased by a moderate 16% YoY. The top line increased by a marginal 2% YoY to LKR2,240.5 mn during the first 3 quarters of FY10 mainly on the back of low sales volumes experienced in the first 5 months which resulted a dip of 6% YoY in 1-2QFY10. After deducting a tax of nearly 10%, the

net sales of the company increased by 23% YoY during the quarter in concern to LKR787.1 mn, resulting a moderate growth of 5% YoY in cumulative 1-3QFY10.

37% increase in 3QFY10 gross profits. Cost of sales of the company has increased by 17% during 3QFY10 whilst the cumulative figure has recorded a dip of 1% owing to cost rationalization exercises coupled with the lower operating levels in the first two quarters of the year. Therefore TILE has marked 37% YoY increase in gross profits in 3QFY10 resulting an 18% YoY growth for cumulative 1-3QFY10 reaching LKR612.4mn.

3QFY10 Operating profit up by 49% YOY. The company has recorded an operating profit of LKR179.7 mn in 3QFY10, up by 49% YoY whilst the cumulative 1-3QFY10 profit has also increased by 23% YoY to LKR386.5 mn. This is directly attributable to the strong contribution from improved gross profits margins coupled with the threefold growth in other operating income as a result of charging interest for delayed payments from dealers and distributors. Even though the total expenses of TILE has increased by 26% YoY during 3QFY10, going forward we believe this would come down significantly owing to the merging of front office operations of TILE and its parent Lanka Walltiles (LWL).

Net earnings of 3QFY10 up by a stunning 71% YoY. Backed by the strong top-line growth, the company has posted a net profit of LKR107.9 mn in 3QFY10 (up 71% YoY) whilst the cumulative 1-3QFY10 net earnings are also up by 27% to LKR227.8 mn despite the lower earnings recorded in 1-2QFY10.

Forecast net profit to grow by 11% YoY to LKR320 mn in FY10E. Backed by the improved economic conditions coupled with the construction boom in the North and East, we project FY10E earnings to reach LKR320 mn (up by 11%YoY). This significant growth in earnings would be mainly from the sale of stocks that were built-up in the FY09 due to adverse economics conditions. Further with the commencement of the developments in the previously war torn North and East and with the revival of the construction industry together with the downward trend in the interest rates, we believe that the earnings of TILE would increase significantly.

Furthermore, with the actions initiated by government to increase the tariff on imported tiles would enable the local producers to gradually acquire market share from the imported tile companies, where TILE would be one of the prime beneficiaries.

In FY11E the earnings of TILE would continue to increase over earnings of FY09 however we project it to be lower than FY10E level. We expect earnings in FY10E to be significantly high as a result of the sale of stocks which were piled up in FY09 due to adverse economic conditions. Therefore, in FY11E the earnings of TILE is projected to reach LKR302 mn (down by 5.9%YoY compared to significant profits
generated in FY10 as a result of the sale of built-up stock).

Future Plans. The Company is considering to expand its current production capacity of 9,500 square meters per day to 11,500 square meters per day, where its factory is operating at 100% capacity at present. This expansion is not expected to be initiated in short-term but will be considered to be implemented in the FY12E
once the economy would be politically stabilized.

Share offers good value on 9.5x forecast FY10E earnings. The share remains attractive on 9.5x forecast FY10E net profit and 10.09x projected FY11E earnings whilst trading at 1.6xPBV. Maintain - BUY

Sri Lanka: Ceylon Tobacco's (CTC) net profit has increased by a stunning 60% YoY

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sat, 06 Feb 2010 02:45:00 +0000

CTC's 2009 net earnings grow by a staggering 49% YoY Ceylon Tobacco's (CTC) net profit has increased by a stunning 60% YoY to LKR2,020.6 mn in 4Q2009 whilst total earnings for 2009 are also up by a strong 49% YoY to LKR4,114.6 mn. Despite a marginal decline in volumes, earnings have been boosted by a high margin brand mix coupled with aggressive cost management initiatives.

CTC enjoys a monopoly market for manufacturing, marketing and importing cigarettes in Sri Lanka. The company segregates the market based on income levels and markets Dunhill and Bensons for high income category along with Gold leaf for the middle income category, followed by Four Aces, Three Roses and Capstan for the low income category and Pall Mall as a value for money product.

Faced with slowing revenue growth CTC has focused more on its cost structure in order to improve the profitability. Thus the company has reduced its operating expenses by 52.4% YoY during 2009 resulting with the total expenses decline by 17.6% YoY despite a 47.6% increase in raw material cost and managed to grow its bottom-line by 49% YoY to LKR4,114.6 mn.

Net revenue up by a sharp 10.5% YoY to LKR12,353.9 mn in 2009. Gross revenue has increased by 9.5% YoY to LKR15,238.5 mn in 4Q2009 resulting a total of LKR58,079.5 mn for the year (up 6.1% YoY). This is mainly attributable for the improved sales mix, grabbing market share from illegal distributors and excise led price increases despite a moderate drop in volumes, which was a result of the ban on smoking in public areas coupled with change in smoking habits amongst the general public. However, the government’s continuous efforts in curbing the presence of smuggled and counterfeit cigarettes provide some optimism for volume growth in future.

Government levies accounted to 76% of gross revenue, which grew 5.3% YoY to LKR11,529.6 mn during 4Q2009. Consequently, net revenue has grown by a sharp 25.2% YoY to LKR3,708.9 mn in the quarter in concern and resulted an increase of 10.5% YoY to LKR12,353.9 mn for the year ended 31st December 2009.

Total operating costs have declined by 17.6% YoY in 2009. Operating costs have dipped 52.4%YoY to LKR2,002.8 mn during 2009 mainly on the back of aggressive cost rationalization initiatives implemented in all areas of the organization which was sufficient to weather the rising cost of tobacco leaf. During the first half of the year, company faced a shortage in the supply of tobacco leaf and had to source it at a higher cost which increased the raw material cost by 47.6% YoY.

With sales volumes on the gradual decline, the company will continue to focus on productivity enhancement and cost saving techniques as the key means of boosting earnings.

Net profit has risen by a staggering 49% YoY to LKR4,114.6 mn in 2009. Net interest income has fallen by 52% YoY to LKR73 mn in 4Q2009 owing to the falling interest rates. Nevertheless backed by the strong performance coupled with cost rationalization techniques, the company has recorded a net profit of LKR2,021 mn for 4Q2009 (up by 59.9% YoY) whilst recording a net profit of LKR4,114.6 mn for

the year 2009 (up by 49% YoY).

Forecast 2010E net profit to reach LKR4,367 mn. We are forecast 2010E net profit to grow by a conservative 6.1% to LKR4,367 mn whilst projecting 2011E net profit up by 5.3% to LKR4,600 mn on the back of the company's continued focus on improving its brand mix coupled with successful cost rationalization exercises.

Good value on 9.3X forecast 2010E net profit. The share is attractive on 9.3X forecast 2010E net profit and 8.8X projected 2011E net earnings. Further given the historical dividend payout ratio of a near 95%, we believe the share would continue to be a dividend play - Maintain BUY

Sri Lanka: Chemical Industries Colombo (CIC) record an impressive growth

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sat, 06 Feb 2010 02:15:00 +0000

Originally set-up as a Trading House for ICI - UK, Chemical Industries Colombo (CIC) has pursued a policy of planned growth which has resulted in its diversification into a number of fields over the years. The company grew into agriculture, paints, pharmaceuticals, industrial raw material and packaging dwarfing the chemical business.

CIC Agri Businesses, the biggest contributor in terms of revenue and earnings to the group (a near 70%), comprises of companies that provide inputs to the agricultural sector. The construction sector is effectively CIC's paints and surface coatings business (includes the flagship brand Dulux) which is under the group's associate Akzo Nobel Paints Lanka. CIC's quoted subsidiary Chemanex is a manufacturer and marketer of chemicals and industrial intermediates. The pharmaceutical business markets products from principals like Johnson & Johnson, Hilton Pharma and Solvay Pharmaceuticals and sells products from prescription drugs to diagnostic equipment to hospitals.

CIC reported a 1,635.2% YoY growth in net earnings to LKR327.2 mn during 3QFY10
whilst the 9 months too has grown 20.9% YoY to LKR478.3 mn. CIC's 3QFY10 profits
have been driven predominantly by the key agriculture and livestock sector (EBIT up
242%YoY) coupled with 658.9%YoY increase in other income and improved contribution from the construction sector (EBIT up 180% YoY). The consumer and pharmaceutical sector along with packaging segment has weathered a challenging period where the EBIT contribution from these segments dipped 37% and 5% respectively whilstthat of the industrial raw material sector grew by 57% YoY.

Quarterly performance at a glance
CIC's turnover grew by 45.1% YoY to post LKR4,816.02 mn in 3QFY10, boosted by higher turnover in the key agriculture and livestock segment(up 62% YoY) mainly due to improved performance in the seed and livestock business. The paints segment (inputs to Akzo Nobel Paints Lanka) (up 41% YoY) witnessed a substantial improvement with previously cash strapped consumers now gradually willing to spend on non-essentials. Revenue from consumer and pharmaceutical segment has grown by 21% YoY whilst that of industrial raw material dipped by 21% YoY due to the global economic downturn where demand for paints related raw materials, rubber and textile binder related materials was still sluggish. The packaging sector dipped (1% YoY) marginally signalling the improvement in the previously deteriorating market conditions.

Cost of sales (up 30.9% YoY to LKR3,827.9 mn) have also increased inline with the rise in turnover levels whilst Gross Profit increased by an impressive 150.1% YoY to LKR988.1 mn. Further, the gross margins have improved to 20.5% in 3QFY10 (vs 11.9% in 3QFY09) due to the group's efforts on retooling the value chain.

Consequently, despite a rise in administration expenses by 38.9% YoY to LKR361.5 mn and distribution costs by 15.2% YoY to LKR235.8 mn, operating profit grew to an impressive LKR391.6 mn (vs a loss of LKR131.5 mn in 3QFY09). CIC's main operational counters witnessed a significant growth in operating earnings. Accordingly, operating profit from the Agriculture segment grew 242% YoY to LKR275.6
mn whilst the construction sector posted LKR24.9 mn (vs a loss of LKR31.3 in 3QFY09).

The Other income has grown to LKR292.5 mn vs LKR38.5 mn posted in 3QFY09 mainly due to LKR250 mn released by the government as subsidy payments for Fertilizer sales during November'08 - March'09.
On the back of a flat macroeconomic milieu the Packaging sector too dipped 5% YoY to LKR20.7 mn. Meanwhile operating margins grew to 8.1% during 3QFY10 compared to -3.9% during the corresponding previous quarter.

CIC's share of profit from associates has dipped 16% YoY to LKR56.5 mn in 3QFY10 on the back of the dip in profitability of construction sector (Akzo Nobel Paints Lanka).

Overall, CIC's EBIT has witnessed an unprecedented growth to reach LKR740.5 mn in 3QFY10 (vs LKR(21.2) mn in 3QFY09).

Finance cost during the quarter dipped by 20.4%YoY to LKR139.2 mn mainly on the back of dip in interest rates. Subsequently, the Profit Before Tax has rocketed to LKR601.3 mn in 3QFY10 vs a loss of LKR196.1 mn in 3QFY09.

3QFY10 net earnings have reported a sharp increase to reach LKR327.2 mn (vs a net loss of LKR21.3 mn in 3QFY09) where net margins are at 6.8% in 3QFY10 compared to -0.6% in 3QFY09.

Agri business to propel growth?
CIC Agri Businesses, the biggest contributor in terms of revenue and earnings to the group (circa 70%), weathered a challenging period where the off take in crops was slow. Looking ahead, revival in agriculture is expected to propel earnings growth in the future. Whilst agribusiness remains the company's key sector, CIC has acted to diverse its agri-revenue streams thereby reducing exposure to weather shocks. CIC
is positioned to successfully reap benefits from the changing macro environment of the country where we believe the company is to benefit significantly from an anticipated revival in the agribusiness sector specially stemming from the previously war torn North. CIC has already ventured into the recently liberated Eastern province with two large dairy farms. The expansion projects in the sector (banana export project
in the Eastern Province, 2,200 acre large scale dairy complex at Mutuwalla in East, Rice exports, etc) would be an added bonus, once the benefits materialize.

With the much anticipated economic integration of the previously war torn North & East and the untapped potential in these areas along with an extension to its out grower network we believe CIC agri business is prime to benefit in future.

The Construction business is effectively CIC's paints and surface coatings business which comes under the group's associate company Akzo Nobel Paints. CIC is into decorative, vehicle refinishing and industrial paints segments where 80% of the revenue comes from the decorative sector. CIC has a near 40% market share with paints under the brand names such as Dulux and Glidden targeting different income levels.The paints and coatings business had a turbulent period with circa 5% to 10% volume dip due to harsh market conditions. However, once fresh investments, rehabilitation activities and infrastructure developments commence in the North and East there would be enormous scope for growth.

The Consumer & Pharmaceutical and Industrial Raw Material businesses are also expected to witness a turnaround in FY11 with improved global economic environment.

Positive Outlook
Forecast FY 10E net profit to rise 42.9% YoY to LKR583.0 mn. On the back of improving economic conditions and anticipated payoffs from the new projects we revise the FY10 (which had a poor 1HFY10- net earnings LKR151 mn)) forecast upwards by 11.3% to LKR583 mn (up 42.9% YoY). With the group’s plans for growth, retooling of value chain and diversified risk we expect CIC to enjoy a 32.5%growth in earnings to reach LKR772.5 mn in FY11E.

The voting counter trades at 10.4x FY10E earnings (7.9x FY11E) and the non-voting counter trades at 6.5x FY10E earnings (4.9x FY11E) whilst trading at discount to market. Despite the current economic turmoil domestic growth would be observed from the vast potential in the North & East especially in the agriculture and paints sectors.On the back of prospects of steady growth along with growth stemming from agriculture in the long term and untapped potential in the North & East, we maintain- BUY.

SRI LANKA - PLANTATION SHARES MOSTLY UNDERVALUED

info@srilankaequity.com (Sri Lanka Equity Analytics) — Mon, 01 Feb 2010 16:45:00 +0000

SECTOR     -   PLANTATIONS

SECTOR P.E. -    12.50

MARKET P.E.   -    17.75

Plantation companies in the Colombo Stock Exchange are mostly undervalued at present. Specially if you take past couple of months, Plantation companies as a Sector substantially under performed to the Overall market.

WHY PLANTATION SECTOR IS NOT ATTRACTIVE ?

High Cost of Sales [ Labour cost,Fertilizer cost. etc]
Volatility in Commodity prices in the market.
Unpredictable weather conditions.

WHY PLANTATIONS ARE ATTRACTIVE NOW?

Increasing Oil prices in the world market paved the way to increase the demand for Natural Rubber Products & Palm Oil products.
Commodity prices are on the rebound presently.
Most of Plantation companies are diversified.
Sector which is substantially under performed to the market.
Most of other sectors in the Colombo Stock Market are over heated now.
Best strategy is to move away from heated speculative counters & to invest in plantations.
Most of the share prices of other companies in the Colombo Stock Market are @ their highest levels reported for the past 5 to 7 years. But not the Plantations.

There are 18 plantation companies listed in Colombo Stock Market up to now.

Main income generating crops are

Tea
Rubber
0il palm

Apart from these core income generating sectors, many of listed plantation companies have diversified their business interest to the following areas as well.
* Hydro power * Tourism * Forestry *Investments *Other cultivations [Coconut, Perennial crops etc.]

BEST BETS IN THE MARKET

Balangoda Plantation
Malwatte Plantation
Watawala Plantation
Kotagala Plantation
Namunukula
Kegalle
Kelani Valley
Agalawatte
Hapugastanne
Maskeliya

Sri Lanka CW Mackie bought by Lankem group

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sat, 23 Jan 2010 08:29:00 +0000

Sri Lanka's Lankem group gained control of C.W.Mackie PLC one of the oldest companies in Sri Lanka through the purchase of 56.4% shareholdings on Friday. Lankem and its group company Kotagala Plantations purchased 20.89 mn shares from Aarhus United A/S and its local subsidiary Ceylon Trading Company at a sale price of Rs 35 per share. The transaction was valued at 712 million rupees.

The above purchase is likely to trigger the mandatory offer required under the Takeover and Merger Code of Sri Lanka and purchasers/its partners are expected make an announcement shortly with regard to their manadtory obligation to purchase balance shareholdings of C.W.Mackie PLC at a price of Rs 35/= share.

Mr Anushman Rajaratnam the Managing Director of Lankem PLC, Mr Tom Ellawala Managing Director Ceylon Trading Company and Mr Johnny Andersson Partner Mannheimer Swartling representing Aarhus United A/S executed the agreement between companies which followed the trade of 20.89 mn shares on the Colombo Stock Exchange (CSE).

This transaction was facilitated by Mr Nishan Sumanadeera well known investment banker and a founder director of Sri Lanka Equity Analytics (www.srilankaequity.com) a company specialized in equity research and cutting edge investment banking solutions together with Sahan Kulatunga of Incapita Investments. Trade was executed by the Taprobane Securities (pvt) Limited one of the premier stock brokering company in Sri Lanka

The CW Mackie was founded in 1900 by the late Mr C.W.Mackie a Scotsman, who carried on the enterprise as Merchants and Commissions Agents under the name of ‘CW Mackie & Company’. In 1922, the business was incorporated as a private limited company. In 1946, a consortium of Ceylonese and Indian Businessman bought over the shares of the company and converted it to a public company.

The year 1971 marked a significant change when Ceylon Trading Company Limited, the Sri Lanka based subsidiary of Aarhus United A/S of Denmark, bought a part of the Indian shareholding and took over the management of the company. In late 1994, shares equivalent to 25% of the total shares in the company were issued to the public so as to broad-base the ownership of and give the Company greater access to the capital market of Sri Lanka to raise capital funds for the future diversifications and expansions.

The Group consist of CW Mackie PLC and three subsidiary companies engaged in a diversity of activities such as export of primary and manufactured products, ranging from all types of natural rubber and coconut products to rubber based products; import, manufacture and distribution of sugar; import and resale of branded marine paints and protective coatings, welding equipment and consumables, refrigeration and air-conditioning and light engineering products.

Lion Brewery : Set to roar again

info@srilankaequity.com (Sri Lanka Equity Analytics) — Wed, 20 Jan 2010 14:28:00 +0000

Investment Summary

Lion Brewery (Ceylon) PLC (LION) is the leader in the soft alcohol market in Sri Lanka. LION has held market leadership since inception of its brand, “Lion Beer” by its parent, the Ceylon Brewery PLC (BREW) in 1881. Currently, LION commands 86% of the soft alcohol market in Sri Lanka, which despite difficult economic and security conditions has grown reasonably strongly by a CAGR of 3.6% over the past three years. LION’s beers are also exported to over 50 countries.

Strong links to Carlsberg. LION also brews, bottles and markets “Carlsberg” beer under license from the Danish brewer and is also 25% owned by that multinational. The links to Carlsberg has also enabled LION to acquire world class brewing technology, thus enhancing its operating efficiency.

Soft alcohol/beer market poised to grow. With the end of the military conflict,we expect strong revival in demand for beer, underpinned by opening up of new markets in the northern and eastern provinces, the likely sharp increase in tourist arrivals, improved security conditions which will prompt increased demand for recreation activity and of course rising disposable incomes underpinned by economic expansion.

Low per capita consumption of beer points to upside potential. Per capita consumption of soft alcohol/beer in Sri Lanka at 2.45 litres per annum is low by regional standards and thus offers tremendous opportunity for improvement as disposable incomes rise and inflation is maintained at sustainably low levels.

LION ventures into India with Carlsberg. LION has also begun to invest in a number of new breweries in India together with Carlsberg in order to exploit the vast untapped market in the sub-continent. LION has effective ownership of 22.5% of South Asian Breweries Limited, which has already constructed five breweries in India.

Earnings to grow by a near eight fold in FY10E. Underpinned by lower raw material costs and improved market conditions, LION’s net profit has grown by nearly a ten fold YoY in 1H10 to LKR 237.1 mn. We are projecting LION’s full FY10E earnings to grow by a further eight fold YoY to LKR 437.0 mn. As demand improves, we are projecting LION’s net profit to grow strongly by 30.1% YoY to LKR568.6 mn in FY11E.

Share attractive on 11.4X forecast FY11E net profit. Having hit a low of LKR42.75 in 7th January 2009, LION’s share price has risen strongly by 75.4%. Following this gain, LION trades on a relatively heady 13.7X projected FY10E net profit.

But given our expectation of a sharp increase in FY11E earnings to LKR568.6 mn, LION is attractive on a PER of 10.6X, given the expected strong growth in demand for soft alcohol/beer, the company’s near monopoly status, likely gains from the foray into India and high ROE. We rate LION a BUY

The LION's story

Lion Brewery (Ceylon) PLC (LION) is by far Sri Lanka's dominant manufacturer and marketer of soft alcohol. The company produces the highly popular "Lion" brand of beers and stouts and also "Carlsberg" beer (under licence from Carlsberg International of Denmark). LION commands a near monopoly share of the soft alcohol market in Sri Lanka and also exports its Lion brand of beers and stouts to Maldives, UK,Japan, Australia, France, Canada and West Africa, although export volumes are still small.

Owned by the Carsons Group. LION is 50.4% owned by Ceylon Brewery PLC [BREW:LKR112.00], which in turn is 66.63% owned by the diversified investment group Carson Cumberbatch [CARS: LKR90.00). CARS is owned and managed by the Selvanathan family, one of the oldest business families in Sri Lanka. The other major shareholders of LION are Carlsberg Brewery Malaysia Berhad (24.6%), HSBC Intl.Nom. Limited - BBH Genesis Smaller Companies (9.86%), HSBC Intl. Nom. Limited - SNFE-Arisaig India Fund Limited (5.95%) and Ceylon Guardian Investment Trust PLC (2.68%).

Pedigree of over a century. The Lion brand is owned by BREW and has a history of over 100 years. BREW was established in 1881 by British entrepreneur Sir Samuel Baker with the brewery being set up in the hill country town of Nuwara-Eliya (175 kilometres east of Colombo). The location of the brewery had apparently been influenced by a water fall that produced crystal clear water which gave Lion beer a unique flavour and hence its legendary popularity.

However, with expanding demand and age, the Nuwara-Eliya brewery had clearly reached the end of its life span by the late 1980s, as capacity and efficiency constraints (and of course high government taxes) began to be a drag on the financial performance of BREW. Consequently, a major re-organisation of the company was undertaken in the mid 1990s with LION being established to construct a brand new brewery and takeover the manufacturing and marketing of Lion beer.

However, the Lion brand continues to be owned by BREW and hence, it is recorded to have paid a royalty of LKR53.98mn in FY09 to BREW for its use.

State-of-the-art brewery. LION's brewery was constructed in Biyagama (25 kilometres east of Colombo) and began commercial production in early 1998. The modern brewery with an initial capacity of 300,000 hectolitres p.a. cost LKR 1.8 bn to complete in 1997 and was funded by equity of LKR 1 bn and bank borrowings of LKR 0.5 bn.

BREW took up 50.4% of the initial equity and Carlsberg Brewery Malaysia invested 24.6%. The balance 25% of the equity was raised via an IPO, which listed LION on the Colombo Stock Exchange in 1997. Capacity of the brewery has subsequently been increased to 500,000 hectolitres p.a. funded largely by retained earnings.

Links to Carlsberg of Denmark. LION also brews, bottles and markets beers under the world renowned "Carlsberg" brand with licensing from Carlsberg International of Denmark. Its strong relationship with Carlsberg gained evidence with its tie up to float South Asian Breweries in 2006, and now its present foray into India.

Background

Strong Management. Being part of Carson Cumberbatch group has enabled LION to assemble a highly competent management team in addition to being able to draw on the expertise of the parent. CARS is a diversified group with investments in oil palm plantations (in Indonesia and Malaysia), property, insurance underwriting (Union Assurance), listed equities, hotels and beverages. LION's Chief Executive, Suresh Kumar Shah has been with the Company for about 18 years and was instrumental in setting up the new brewery. Further, the senior management of the company have extensive experience in the retailing industry.

BEER MARKET POISED FOR GROWTH

Demand for soft alcohol/beer has been dampened by inflationary pressure and hence lower disposable incomes, relatively high government taxes (which also deflected demand towards illegal and illicit hard liquor), negligible levels of tourist arrivals, security conditions that have curtailed recreational activity and the ban on media advertising. Despite the tough market conditions, demand for soft alcohol/beer has grown over the past two years with sales/production volumes reaching 57.3mn litres, as per the Administrative Report of the Commissioner General of Excise for the year 2008, up by 15% YoY. We also estimate that sales/production volume to remain stagnant at 57.3mn litres in 2009.

However, with the end of the military conflict, we expect strong revival in demand for beer, underpinned by opening up of new markets in the northern and eastern provinces, the likely sharp increase in tourist arrivals, improved security conditions which will prompt increased demand for recreation activity and of course rising disposable incomes underpinned by economic expansion.

Further, per capita consumption of soft alcohol/beer in Sri Lanka at 2.45 litres per annum is low by regional standards and thus offers tremendous opportunity for improvement as disposable incomes rise and inflation is maintained at sustainably low levels.

Against the above backdrop, we are projecting demand for soft alcohol/beer to grow by 18% YoY to 67.6mn litres in 2010 and further by 19% YoY to 80.5mn litres in 2011.

Lower relative prices likely as inflation eases
The biggest deterrent to the growth of the soft alcohol/beer market in Sri Lanka is the high incidence of Government Taxes. The final retail price of a typical 625 millilitre bottle of beer has risen from Rs. 60.00 in 2004 to Rs. 110.00 in 2009, roughly at a CAGR of 10.8% p.a. And the major part of this increase has been due to Government Taxes. Currently, 40% of the retail price of a bottle of beer is accounted for by Government Taxes. The high incidence of Government Taxes coupled with the historically high level of general price inflation in the country has put the relative price of soft alcohol/beer beyond the reach of the average consumer. This has compelled consumers to shift to consumption of hard liquor and more so to illegal and illicit hard liquor (with high content of alcohol), which are perceived as providing a “greater kick per rupee spent”.

However, we believe that as general price inflation in the country falls to sustainably low levels, the relative price of soft alcohol/beer will decline vis-a-vis hard liquor. This will also provide greater space for soft alcohol/beer producers to negotiate tax increases with the Government that could be absorbed by the market/consumer, making the products more affordable. A further step by the Government to ease its policies on the soft alcohol segment, would contract the vast illicit portion constituting approximately 60%-90% of the alcohol market. Thus giving room for LION to further utillize its potential outlay.

Lion is king of the market
LION is the undisputed leader of the soft alcohol/beer market in Sri Lanka and commands a composite 86% share of the market. The second largest producer, Asia Pacific Brewery, has only a 15% share, whilst McCallum Brewery holds approximately 2%. Imports account for a very minute portion of the market but locally manufactured soft alcohols are protected by lower Government Taxes and hence imports are unlikely to be a significant threat.

One of LION’s key competitive advantages is also its extensive distribution network.LION distributes its products across the length and breadth of the country via a network of 2,500 retail distributors. This strong retail chain has enabled LION to overcome the Government’s ban on advertising its products in public media and continue to dominate the market.

LION also exports its Lion brand to Maldives, UK, Japan, Australia, France, Canada and West Africa, with Maldives being the largest destination. LION expects export sales volumes to continue to grow at around 50% per annum over the next three years as global economic recovery takes hold.

We are also projecting LION’s export sales revenue to grow on the underpinned by global economic recovery.

The brand strength of a lion
LION’s key strength is its legendary product brand “LION BEER”. The Lion brand has been nurtured for over a hundred years and is one of Sri Lanka’s oldest and most recognised brands. Lion beer’s legendary popularity is apparently derived from the location of the original brewery in the salubrious climes of Nuwara-Eliya. The story is that the brewery was constructed adjacent to a water fall that yielded pristine clear water, which when used in the brewing process gave Lion beer an apparently distinct flavour. Over the years, Lion beer has also won many international accolades further augmenting its brand image/equity.

Strong brands are a significant asset in Sri Lanka’s consumer market place as customer loyalty once earned is not easily swayed by competitors, not even by multinationals. The prevailing restrictive market in the country also deters competition allowing LION to continue its roar as the king of the leading brand.

Lion lager leads the way
LION brews, bottles and markets three beers under the Lion brand – Lion Lager, Lion Strong Beer and Lion Special Brew, a stout also under the Lion logo – Lion Stout and Carlsberg beer under licence from its original Danish brewer.

The most popular product by far is “Lion Lager” accounts for majority of LION’s sales volume. The second largest seller is Carlsberg, accounting for the next largest.

A bulk of LION’s products are packed in 625 millilitre bottles. LION also sells beers in smaller 300 millilitre bottle aimed at the impulse market and now even in cans. Further, in FY2009, the company set up a brand new canning plant in order to pack it products in aluminium cans. The canned beers are an important addition to LION’s product line in the light of revival of the tourism industry, likely growth of the impulse and convenience segments of the market and also the company’s export ambitions.

Raw material costs can rise
LION’s gross margin has come under pressure over the past years falling from a 35% in FY07 to 32% in FY09. The decline in gross margin has been inline with the increase in global prices of raw materials. However, LION’s gross margin is on a recovery phase in FY10E, reaching 32.2% in 1H10 following lower commodity prices. The costs will be continue in the same phase with the falling prices of raw material in the year 2010 and will remain static afterward avoiding the prevailing inflationary impact. Successful research to back up the management’s thinking of using cheaper materials, with no impact on the quality or taste, has been largely accepted in the past years and would do so even in the future.

However, a gross margin of about 33%-34% has been maintained over time. EBITDA margins at 9.9% for FY09 is expected to reach 13.8% in FY10 and 15.2% in FY11 The main raw material used in the brewing process has been Malt, which is derived from Barley. Hops and Wheat (used in the brewing process), ox and Yeast (used in the fermenting process) are the other inputs.

We estimate that the raw material costs accounts for nearly 67% of LION’s production cost. However, in recent times LION has been substituting rice for malt given the fact that the commodity is abundantly available in the home country with no impact to taste or quality. This has been largely accepted by the consumers.

A major internal strength of LION would be its sophisticated manufacturing plants which is highly technical driven proving it to be a highly capital intensive manufacturer. This indicates its high reliance on electricity as a major source of energy, although gas plants have been set up within the premises as pilot experiments to cut down on the future reliance on Ceylon Electricity Board’s supply.

India, the new hunting ground
Having successfully marked its strong presence of the ‘Lion Brand’ in the First World regions such as UK, Canada, Australia, Japan, West Africa and Maldives, it has now successfully tapped the vast Indian Beer market. The Indian beer industry, with the third largest market in the world for alcoholic beverages, is savouring significant growth and is attracting large investments from brewing giants across the world. The Indian beer market is pegged at 13mn hectolitres, which is 26 times of Sri Lanka and is expected to double in the next few years. LION’s investment in Carlsberg India through South Asia Breweries (LION has an effective ownership of 22.5% of the joint venture brewery in India whilst the remainder is held by Carlsberg and Industrialization Fund for Developing Countries [IFU]). We see huge potential in that investment over the medium long term with the expansion into their fifth brewery at Andhra Pradesh.

This move had been identified as one of the fastest growing ventures exhibited by an international brewer. Carlsberg now operates 4 breweries in India. First one in Aurangabad Maharashthra, Kolkata, then in Himachal through the acquisition of small breweries in that region and a more recent one which began operation in 2008 in Alwar- Rajasthan. Each of these has a combined capacity of 825,000 hectolitre or nearly 10 million cases (of 7.8 litre each) annually. Carlsberg had also reported to have started off with its fifth brewery in Andra Pradesh. Sale of alcohol has been growing steadily at 6% and is estimated to grow at the rate of 8% per year.

Beer sales in India is forecasted to grow at a CAGR of 17.2% to 2011. So, with the Indian beer industry seeing steady growth, Carlsberg had proved to have been able to capture about 10 per cent market share in Delhi and Kolkata and about five per cent in Western India in just 6 months after initiation. Carlsberg’s claim of 450,000 hectolitre of domestic sales in 2009 has surprised industry watchers, who have tracked the global beer maker’s investments into manufacturing keenly. While the beer market is growing at a YoY rate of about eight to ten per cent, Carlsberg had also planned to capture about 15 per cent of the total market share in two years and increase its current capacity of 15 mn hectolitres p.a with the loosening of Quantity Restrictions.

All these ensure substantial capital gains in the future though this investment had proven to have a prolonged pay back period.

Profit Outlook
LION has a strong medium term profit outlook on the back of recovery in market conditions. Its established position in the market will enable it to maintain its share and is not likely to be seriously threatened.

Strong growth expected in the upcoming years
Revenues are expected to grow by over 28% YoY in FY10E with the opening up of the war zone areas and the economy at large recovering carrying forward higher levels of celebrations during the festive seasons, when compared to only a 17% YoY in FY09.

A close to eight fold YoY increase in net profit at LKR437.0 mn for the next FY10E is forecasted, having the festive and high peak seasons in mind, reporting a PBT of LKR470.7 mn with a YoY increase of close to four fold. A further increase in profits by 30.1% YoY to LKR586.8 mn with a PBT YoY increase of 31.6% at LKR619.3 mn is forecasted with the North and East markets gain momentum by FY11E.

However 2Q10 revenue had increased by 12.9% QoQ to a near LKR1,880.5 mn and a QoQ decrease of 23.4% finance cost to LKR77.1 mn relieves the gearing level of the Company and broadens the financing scope of the highly aggressive investment theme of the present management.

A huge portion of the FY09’s profits were offset by the finance costs which is expected to ease in the next year with decreasing interest rates and thus providing LION to extend its capacity more easily with its current safe gearing.

It is evident that LION would recover from its fluctuating profit levels and report a more stable and upward moving profit figures shooting up the reported half year earnings of LKR237.1 mn with an EPS of LKR4.30, assuming that the policies of the nation remains favourable.

Despite the unsatisfactory global conditions, LION had been able to remain strong and mark satisfactory contributions. With the recovery from the global economic slowdown coupled with the company’s continuous efforts in new product development (canning facility) and its market penetration strategies as we believe set opportunistic boundaries.

Valuation
LION is on the course of a sharp revival with earnings expected to grow by CAGR of 61.7 % over the next three years. Underpinned by lower raw material costs and improved market conditions, LION’s net profit has grown by nearly a ten fold YoY in 1H10 to LKR 237.1 mn. We project LION’s earnings to grow by a further eight fold YoY to LKR 437.0 mn in FY10E. As demand improves with the North and East markets gaining momentum, we project LION’s net profit to grow by a strongly 30.1% YoY to LKR568.6 mn in FY11E.

Share attractive on 10.6X forecast FY11E net profit. Having hit a low of LKR42.75 in 7th January 2009, LION’s share price has risen strongly by 75.4%. Following this gain, LION trades on a relatively heady 13.7X projected FY10E net profit. But given our expectation of a sharp increase in FY11E earnings to LKR568.6 mn, LION is attractive on a PER of 10.6X, given the expected strong growth in demand for soft alcohol/beer, the company’s near monopoly status, likely gains from the foray into India and high ROE. We rate LION a BUY.

Source - Asia Securities Research

Sri Lanka Keeps Rates at Five-Year Low to Spur Growth

info@srilankaequity.com (Sri Lanka Equity Analytics) — Tue, 19 Jan 2010 04:00:00 +0000

Sri Lanka’s central bank Governor Nivard Cabraal kept benchmark interest rates unchanged at a five-year low to spur investments and aid economic growth after the end of a 26-year civil war.The Central Bank of Sri Lanka left the reverse repurchase rate at 9.75 percent, the Colombo-based bank said. The repurchase rate was also maintained at 7.5 percent. The economy will expand more than 6 percent this year, Cabraal said in a Bloomberg Television interview today.

“The rate is sufficient to stimulate growth as well as ensure that any risk of inflation is also curtailed,” Cabraal said. “We need not have any fear” of inflation now, he said.

The island’s biggest companies including John Keells Holdings Plc and Aitken Spence & Co. are expanding their hotel and shipping businesses to take advantage of a rebound in the $41 billion economy. President Mahinda Rajapaksa is holding an election two years before his mandate expires after the defeat of the Liberation Tigers of Tamil Eelam rebels in May helped push growth above 4 percent in the third quarter.

“The central bank wants loan books to grow and money to flow into the economy,” Saminda Weerasinghe, research manager at Acuity Stockbrokers Pvt. in Colombo, said before the report. “Inflation pressures aren’t that great.”

Inflation Forecast

Sri Lanka’s inflation rate was 4.8 percent in December, less than half that in January 2009. Today’s rate decision took into consideration a potential pickup in inflation, Cabraal said in the interview before the central bank policy statement.

“Projections of inflation for 2010 indicate benign inflationary pressures, enabling inflation to be in single digits by year end,” the central bank said in the statement.

The economy may grow 7 percent in 2010, the fastest pace in four years, spurred by company investments and construction of new roads, ports and power plants, Cabraal said Jan. 4.

John Keells, Sri Lanka’s biggest diversified company, said in November it will invest about $100 million to build new resorts to benefit from a tourism revival after the war.

Aitken Spence, Sri Lanka’s biggest operator of resorts, plans to expand its hotel and shipping businesses while Commercial Bank of Ceylon Plc, the nation’s biggest private lender by assets, aims to extend more loans in the northern and eastern regions, which were recaptured from the Tamil Tigers.

Presidential Polls

Rajapaksa scheduled presidential elections to be held on Jan. 26, betting the economy’s recovery will boost his popularity.

Cabraal has kept interest rates unchanged for two straight months. He lowered the central bank’s reverse repurchase rate by 75 basis points and the repurchase rate by 50 basis points in November. A basis point is 0.01 of a percentage point.

“We have seen a sharp increase in lending during the past month which indicates to us there is stimulation taking place,” Cabraal said. “If we find there is a bubble being formed or too much liquidity being created, then we would think it’s time for us to increase the rates. But we haven’t seen any such danger right now.”

Sri Lanka’s benchmark stock index, the Colombo All-Share Index, jumped 125 percent last year, outperforming the rest of Asia and trailing only Russia worldwide, on prospects of an economic rebound in the Indian Ocean island.

The International Monetary Fund, which granted Sri Lanka a $2.6 billion aid package in July, expects the island’s economic growth and credit demand to pick up.

By Anusha Ondaatjie and Susan Li - Bloomberg

Behind The Numbers…Beneath The Surface !

info@srilankaequity.com (Sri Lanka Equity Analytics) — Sun, 17 Jan 2010 01:43:00 +0000

Recovers from BOP crisis but economy slowing due to imports contracting
Though LTTE was defeated peace building yet to take off
Private sector corruption gets exposed
Stock market buoyant but corporate health in question
Inflation reported low but brand penetration declines

Being responsible for different facets of the Sri Lankan economic agenda in the last couple of years and having travelled to Jaffna a number of times on military flights together with the soldiers going for war, gave me a very good sense of the ground reality. There are two themes that emerge in my mind that captures Sri Lanka in 2009 — the first being the words of the former World Bank economist Ejaz Gharni who said God is a Sri Lankan.

When I initially heard this I laughed, but when I analysed the economic reality that unfolded in 2009 and the response that Sri Lanka has thrown back to the world, I now agree with the sentiments that God is a Sri Lankan! The second theme that captures my attention is from the Indian Foreign Minister Pranab Mukherjee. He commented that in a country, economics, the corporate sector and politics are interlinked. He went on to say that If people do not understand this reality and want these three areas to work in isolation then, a country’s growth trajectory will be stunted. I fully endorse this when I look back at 2009. Let me now highlight the key events that shook Sri Lanka last year.

Sri Lanka – The new Miracle of Asia

Private sector corruption
After having worked for almost 15 years in a multinational culture where honesty and integrity are required traits, when I decided to work for the government during the time I was pursuing a doctoral study programme the one question that I got bombarded with from my private sector friends was how do I work in a system that is so corrupt. My answer was easy – it is the private sector that corrupts the public sector.

I did not have to explain more as the Golden Key saga unfolded later on where corruption was in excess of Rs. 30 billion. This was the first shock for Sri Lanka in 2009. It was the first time in the history of the country that private sector corruption surfaced with over 10,000 witnesses that ultimately led to the biggest philanthropist in the country being remanded for almost nine months. I strongly believe that this is only the tip of the iceberg.

The sad fact is that the public sector is tainted with a peanut butter approach of being corrupt when the reality is that ninety five percent of the public sector consists of honorable and committed people who have come from the university system after topping their batch. The best case in point is the ‘Upahara’ scheme of Mobitel targeting the public sector which has zero bad debts. Hence the challenge in 2010 is strong reforms in the public sector and ensuring that corruption is curbed.

However, the reverse is currently happening in Sri Lanka with the public sector getting bloated with more recruitment and also consuming over 50% of the tax revenue for salaries and pensions which needs to be corrected in 2010. Public Sector reforms have to come in and curbing of corruption at all levels must take place if we are to drive Sri Lanka to a strong growth. However, a point to note is that this begins with me. Each of us needs to ensure corruption is not resorted to, to get things done in Sri Lanka.

Stock Market Reflection
Post May 18, Sri Lanka’s stock exchange was the golden light that kept Sri Lanka shining in the world stage. In fact when it was ranked as the fourth best performing stock exchange of the world, it did shake little Sri Lanka with this news as we as a nation were yearning for some good news post war. But the key question that needs to be asked is if this is an indicator of strong corporate health based on fundamentals or is it more to do with market sentiment?

Another point that needs our focus in 2010 is that, market capitalisation in Sri Lanka is lower than 30 percent hence the stock market indicator in Sri Lanka is not a real indicator of an upward movement of the economy. Hence in 2010 this needs to be corrected with the big boys in the private sector like Dilmah, Brandix and MAS attracted and listed in the Colombo Stock Exchange. It is only then that we can say the Sri Lanka stock exchange is a reflection of the Sri Lankan economy. If not, we are living in a make believe world that will not get us very far.

The reality of Inflation
Sri Lanka is currently showcasing to the world that inflation is at a low ebb of 3.4%. It may be the reality but when we analyse the panel data either by the trusted consumer panel from LMRB or the Retail Panel data of AC Nielsen we see that in many key consumer categories brand penetration has declined considerably. In fact the only reason that some categories are kept alive is due to the small packs that have been launched.
This fact is shaking Sri Lanka’s private sector as a typical brand health index throws off the brand momentum index declining not only of the brand but in the total industry. The best case in point is Sri Lanka’s banking industry in 2009.

I feel we need to get a grip of this issue in 2010 mainly because the January issue of LMD reports that a top management survey among a representative cross section of organisations reveals that 64% of them stated that the key barrier to growth was inflation. Hence comes the contradiction of how a reported 3.4% inflationary indicator can drive consumer behaviour away from a brand. One argument can be that the 3.4% inflation in 2009 is on top of a 22.6% inflation registered in 2008 in Sri Lanka. But I feel this issue has to be addressed as a priority if we are to support the private sector that accounts for over 75% of Sri Lanka’s economy.

LTTE and world pressure
During the time of the conflict — in my previous responsibility attached to the government — I used to be a frequent traveler to the north-east. Whenever I had to board a Sri Lanka Air Force flight to Jaffna I used to travel with soldiers who were going for war and the thought crossed my mind that I might never see them again. The interaction was so honest and genuine that some used to ask me if the war will really end.
However the unthinkable happened where the total hierarchy was wiped out ending the saga of terror that engulfed our nation for the past 30 years, that costed the country over two hundred billion dollars or more. The political leadership that saw this through ably supported by the strong military sure shook Sri Lanka in 2009.

However sadly post this great victory Sri Lanka has not seen a robust peace building initiative that many envisaged. Even though we are closing on to year I feel it’s not too late to begin this journey. However, the challenge is the political will to actually do this. My worry is that if this is not done fast another group similar to the LTTE can emerge and that has to be avoided at any cost.

Private sector reforms
Focusing on the private sector, when the financial crisis started spinning work economies the sector that was first effected in Sri Lanka was the apparel industry given that over ninety percent of its export markets are in the EU and US. However, this great industry went through some painstaking internal reforms and made itself competitive in the world stage that sure shook Sri Lanka. As we speak it is likely that the industry will taper out to maintain its financial delivery of the previous year. This demonstrated to the world the resilience of the people of Sri Lanka to changing market conditions.

The best names of the industry that came to the country for the first ever Sri Lanka Designer Festival were astonished to see world class manufacturing facilities like the Brandix Green Factory as well as the skill set of the workforce on the ethical tag. I guess the challenge in 2010 is for the telecommunication industry to take a few best practices from the apparel industry and make the industry financially strong. Reports coming in say that the industry is bleeding due to the price war.

Reserve scare
In March 2009, when Sri Lanka’s reserves dwindled down to a dangerously low ebb Sri Lanka was heading towards a BOP crisis which shook Sri Lanka at that time. However, Sri Lanka recovered and exited 2009 at a commanding $5.2 billion in foreign reserves. Even though this achievement was fuelled by foreign inflows through debt instruments and IMF loans, rather than export proceeds, the fact of the matter is that we came through this crisis.

Now the challenge is to strengthen our export marketing strategies in apparel, tea and the BPO business by directing the savings from the war towards these industries. We also need to drive up the R&D investment from the current 0.14% to at least 2% of GDP so that we can give leadership to the world in our exports. Believe it or not the tea industry in Sri Lanka has been operating in the international market without having any protection to the ‘Ceylon Tea’ name. What this means is that any packer in the world in any country can market products under the Ceylon Tea name. If we are to secure legal protection it would cost 25-30 million which has not been done and that explains the R&D gap that exists in the country. The good news is that plans are in place to correct this in 2010 but, the fact of the matter is that this should have happened 100 years ago, before we became a dominant player in the word market.

Political reality
With the war coming to a close and the capture of KP the administration’s popularity reached a peak but the subsequent events that unfolded resulted in a tussle for power where now the country is now bracing for a mega presidential election showdown. It sure shook Sri Lanka that was looking very positively to a stable political environment where the only focus will be economic and business growth. The reality right now is a nation where the productivity of people are at the bottom of the pyramid as the topic at any forum is ‘Who is in the lead?’ The challenge right now is for Sri Lanka’s private sector to focus on business growth and let the politicians do their bit but in reality this becomes a tough task.

Global crisis
Whilst there was much rhetoric that the global economic downturn will not hit Sri Lanka the fact is that no country could be insulated. The first quarter of 2009 saw the Sri Lanka economy contracting to 1.5% and it did shake Sri Lanka. Even though the economy grew by 4.2% in the third quarter of 2009 the latest data reveal that 89,000 people lost their jobs in the industrial sector and another 240,000 in the farming sector which is alarming.

Hence, Sri Lanka needs a new wave of investments in to the country. Latest research reveal that the country’s labour force has increased by only 1% in the period 1990 to 2008 whilst the projection as at end 2020 is that the labour force will grow by only 0.3%. These numbers will not do justice to Sri Lanka as other Asian countries are estimating a 2% increase. This can lead to severe social issues in the future that policy makers must address today.

But in a political economy like today there are bigger issues that push these critical issues into the back burner. This is the challenge for Sri Lanka. We require a change in policy making so that the economic landscape can be changed and if Sri Lanka’s private sector does not drive this together with the public Sri Lanka will get lost once again in the new economic order that is emerging post the financial crisis.

If we take Tamil Nadu for instance their very focused economic reforms have resulted in 27 of the top 100 companies having production facilities in the state and the latest information is that the Tamil Nadu government wants to have its own ranking on the ‘ease of doing business’ in the WTO report. This portrays the opportunity that Sri Lanka is fast losing.

Conclusion
Whilst Sri Lanka’s private sector has withstood the global storm in 2009, we need be cognizant of the fact that the trade deficit contracting is not a very healthy sign for corporate Sri Lanka. The reason being that this indicator means that the country’s performance is not driven by exports increasing but, imports contracting. In other words the Sri Lankan economy is slowing down. This needs to be corrected. A study done recently has revealed that unless 4 billion dollars in new investment come in annually Sri Lanka cannot target 8% GDP growth which tells us the policy reforms required to attract investments and drive growth. For this to happen the public sector reforms become a must which gives us the challenge ahead. If we do not drive for fast track economic growth, every time the world sneezes Sri Lanka will shake.

By Rohantha Athukorala
(The author is a former Chairman of the Sri Lanka Export Development Board and the National Council for Economic Development (NCED) when the country achieved 7.4% GDP growth. He is currently in the international public sector – United Nations Operations (UNOPS) as the National Portfolio Development Manager for Sri Lanka and Maldives. The thoughts are strictly his personal views based on his Doctoral Research Studies.)