Tuesday, September 20, 2016

Interview: Sri Lanka stock earnings +6 pct in June quarter, valuations improve

Sept 20, 2016 (LBO) – Sri Lankan listed companies posted earnings of 49.9 billion rupees in the quarter to June, up six percent from the same quarter last year, according to Acuity Stockbrokers.

Together with a depressed market, this means valuations have improved. Lanka Business Online spoke to Chethana Ellepola, head of research at Acuity Stockbrokers, to get the inside scoop.

“If you compare current sector PEs to the Bloomberg consensus estimate for the market PE in 2016 (10.64x), then sectors such as Bank, Finance, Insurance, Land & Property, Manufacturing, Power & energy really stand out in terms of low PEs,” Ellepola said.

The potential for these sectors along with F&B, Healthcare and Construction is “strong especially as the country’s medium-term economic policies and strategies come into effect,” Ellepola added.

The island’s macroeconomy has begun to stabilize after a support program from the IMF mitigated the effect of capital outflows from the bond market, and a balance of payments deficit. In the last few months money has begun to flow back into Sri Lankan bonds and stocks.

The stock market is now primed for some careful investing.

According to Acuity, financial services has an attractive trailing PE of 7.7. So too does land and property at 8.4, manufacturing at 8.3, and power and energy at 7.7, all below a market PE of 12.8.

BFI valuations improve

In banking and finance, growth in the first half of 2015/2016 was driven by growth in the core leasing business, helped by lax import duties on small cars, low rates and higher disposable incomes.

Despite an increase in interest rates, depreciation of the rupee and tightening of import duties in the second half of the year, there was volume growth in other secured loans, particularly within the SME and micro-finance sectors.

“The fact that a number of the finance companies locked in lower rates via debenture issues meanwhile, helped trim funding costs and aided NII growth,” Ellepola said.

In terms of the construction industry, although an overall slowdown particularly in 2015 was evident, earnings in the sector are likely to rebound. Construction showed a 44 percent drop in earnings in the June quarter this year, and a 61 percent drop in earnings in the 12 months of FY15/16.

Resumption of key infrastructure projects such the Port City project, integrated development in Hambantota, completion of the Matara-Hambantota stretch of the Southern Expressway, the Colombo-Ratnapura expressway and phase IV of the Central Highway to Jaffna would support this rebound, Ellepola said.

Clear on power

“In terms of the power producers, there is long term potential in that the GosL has a clear policy mandate to capture the full potential of all renewable and other indigenous resources in order to allow the nation to be self-sufficient in energy by 2030,” Ellepola said.

Most of the power and energy companies are independent providers of power in the form of non-conventional renewable energy such as mini hydros, Ellepola said. The remainder of the sector, and majority of earnings, consists of Lanka IOC and Laugfs Gas.

“The initial target of 10 percent of total electricity generation via NCRE by 2015 was achieved but given the Mini-hydro and solar potential, wind power potential (particularly in Mannar, Puttalam and Jaffna), and untapped biomass resources in the country there are many opportunities for expansion in the sector.”

She said earnings are susceptible to weather patterns due to many of the companies investing in mini hydros. But more consistency in earnings is likely once the companies leverege on alternative energy such as wind and solar.

“With Lanka IOC and Laugfs, earnings growth will continue to be tied closely to the developments in global oil prices and related industries such as bunkering, lubricants etc.”

Although the manufacturing sector spans diverse products such as cement, textiles and glass, the sector benefited from sharp declines in raw material prices, and exporters benefited from a weaker rupee.

The manufacturing sector reported a 13 percent earnings growth in the June quarter this year, and a 30 percent growth in FY 15/16.

“The collapse of oil prices heralded the end of the commodity super-cycle, and declines in commodity prices across the board, has positively impacted raw-material, a majority of which are imported, costs.”

Diversifieds a mixed bag

Because of their exposure to a wide-spectrum of industries, the 7 percent decline in full year earnings for FY15/16 in the diversified sector reflects economic and policy uncertainty that dominated much of 2015.

Carsons’ performance was negatively impacted both by the increases in excise duties on liquor introduced late last year and the plant closure following the floods in May, Ellepola said. The preliminary loss due to the brewery not being in production for almost 50 percent of the 1st quarter was around 714 million rupees, although the total loss is expected to be significantly larger.

In the case of Aitken Spence, the end of a power purchase agreement with the CEB, at the group’s only thermal power plant, coupled with pressures in its Maldivian resorts and operational/exchange losses at its Indian hotel investment weighed on performance.

Slower growth at JKH was due to lower momentum in its two main segments Transportation & Leisure. Lower global oil prices impacted bunkering revenue, while volumes at SAGT declined due to the increasing use of deep-draft vessels currently available only in the CICT terminal.

 

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