Acuity Stockbrokers has reiterated that the outlook for equities remains positive given the current macro conditions and is estimating Colombo Bourse to trade on a forward PE in the range of 14 to 16 times through March next year.
The upbeat forecast is contained in a research review on Sri Lankan equities and earnings titled ‘Road to Recovery’ by Acuity.
The broking firm said following analysis of 229 companies or 86% of listed entities total market earnings for Q2 2011 recorded a Year-on-Year (Y-o-Y) growth of 35.7%, up from the post-war market CAGR of 24.3% (i.e. between June 2009 and June 2011) and significantly higher than the -10.3% market CAGR between June 2007 and June 2009.
“Corporate earnings for the recently concluded June 2011 quarter indicate a levelling of the post-war boom witnessed in the comparable quarter a year ago. Nonetheless, corporate earnings have maintained its strong growth trajectory,” Acuity said. This was in the milieu of low interest rates, normalising inflation and steady GDP growth.
It said the Banking, Finance & Insurance sector continues to contribute the most to total market earnings; the Hotels & Travels sector has significantly increased contribution to overall market earnings.
“Our outlook for Sri Lankan equities remains positive given the country’s current macro-conditions and steady drive towards post-war growth; however, we concede that global macro conditions remain a risk.”
It said the current market PE reported as 19x is based on annual earnings as at FY2010 and FY2010/11. However when factoring in the June 2011 results on four quarter trailing earnings, Acuity estimates the current market PE to be 17x.
“Based on our earnings forecasts for FY2011/12, we estimate the market to trade on a forward PE in the range of 14x-16x through March 2012,” Acuity said. “Although this indicates a higher market PER relative to regional peers – particularly within frontier markets – we believe that in the post-war context, the Colombo bourse has strong medium to long-term potential amidst the increased political stability, the streamlined regulatory framework and consistent foreign exchange policy,” Acuity added.
The broking firm also continues to see value in the market given the strong future earnings potential of corporates particularly amid the positive macro-economic fundamentals within the country. “We believe that the market PE will rationalise in the quarters ahead and advise accumulating a portfolio of selected stocks which will generate value in the medium term,” Acuity added.