JKSB recaps 2010 and provides sneak preview of 2011

John Keells Stock Brokers (JKSB) in a brief report has recapped some of the key developments of the Colombo stock market in 2010 in addition to providing a sneak preview of prospects for 2011. Here are excerpts:

Stemming from its remarkable performance in 2009 (ASPI growth of 126%), the ASPI and MPI rose 96% and 84% respectively during Calendar Year (CY) 2010, predominantly driven by expectations of strong corporate earnings growth in the medium to long term. The growth in indices was also supported by a stable macroeconomic environment.

In August 2010, the SEC took measures to improve liquidity at the Colombo Stock Exchange which included a reduction in the minimum brokerage along with a reduction to the tick size to 10 cents, both of which contributed to high trading volumes.

Average daily turnover amounted to Rs. 1,945 million prior to the application of new trading rules which improved to Rs. 2,998 million since August 2010.

A steady decline in interest rates and thereby lower yields on term deposits coupled with IPOs attracted a large number of first timers to the CSE, increasing local retail participation.

Heavy speculative trading was also witnessed during the 1HCY10 on second tier counters which was later on curbed through the imposition of price bands by the SEC.

During the year, nine new companies were listed on the CSE, increasing the number of listed companies to 241 from 232 in 2009.

Although net foreign participation for the year remained negative with a net outflow of Rs. 25 billion, a majority of it was purely due to profit taking with the market rallying 248% since May 2009.

Despite net selling, a number of new foreign funds entered the market on account of strong medium to long term growth prospects exhibited by the country and listed corporates, as well as a host of foreign funds seeing increased assets allocations for investment in Asian Emerging and Frontier markets.

Earnings released by the listed companies showed significant improvement with cumulative earnings for 1QCY10 recording a 137% increase to Rs. 22 billion (based on 181 reported results) while the 2Q and 3Q posted Rs. 26 billion at a yoy growth of 212% (based on 204 reported results) and Rs. 36 billion at a yoy growth of 144% (based on 197 reported results) respectively.

The Banking, Finance and Insurance sector was the largest contributor to cumulative earnings. Falling interest rates and narrowing margins led to loan book growth towards the latter half of the year while during the first half earnings were maintained through exceptional items.

The significant pick up in credit growth in the 2H is expected to result in strong earnings growth for the full year.

With the beginning of the winter season and increased tourist arrivals, the Leisure sector witnessed exponential earnings growth during the recently ended quarter.

 The currently available room supply continues to fall short of the rapidly rising demand which should see the sector posting even stronger earnings growth during the medium term.

Earnings posted by the Diversified sector too remained strong, especially those posted by companies such as JKH and SPEN which have heavy exposure to the Leisure industry. In addition, the Telecommunication sector rebounded sharply as call rates stabilized with the intervention of the regulator and minutes of use improved which saw DIAL return to profitability.

The manufacturing sector is witnessing increased capacity utilization on the back of rising domestic demand particularly on companies linked to the construction sector, with rising margins despite modest cost increases in raw material inputs.