Post-war profits windfall persists

Two leading broking firms are reporting strong corporate earnings forecast for December as well as March financial years, a development which is expected further to cement the post-war rebound and optimism.

John Keells Stock Brokers (JKSB) in its 2011 Sri Lanka Market Strategy Document said that corporate earnings growth has also been strong with expectations for a 108% year on year (yoy) growth in earnings to Rs. 33.78 billion for the current Dec/Mar financial year as businesses benefit from low finance expense and increased capacity utilisation.

“The increase in volume driven growth across most sectors has resulted in several listed entities crossing breakeven thresholds and returning to profitability.

Increased volumes are driving core earnings higher whether it is excess liquidity in the banks being mopped up by sharp growth in private sector credit, or increased capacity utilisation at manufacturing plants, higher occupancy levels at hotels or even a modest rise in minutes of use among mobile phone subscribers,” JKSB said.

It noted that the current December 2010 quarterly results for 192 companies reported filings thus far in the earnings season amount to 84% yoy growth.

According to JKSB earnings are also driven by lower finance expense which has helped drive increased private investment with private sector credit growth expanding by over 25% in 2010. Downward revisions in taxation will enhance earnings prospects further in tandem with increased volumes. Businesses will benefit from increased domestic demand in the medium but will also be required to invest in building scale and enhancing productivity in anticipation of new competition that is inevitably ushered in by an improved operating environment.

NDB Stockbrokers in a special report providing an earnings snapshot said that total profits of a sample set of companies selected to represent the overall market increased 74% YOY (excluding non-recurring gains) to Rs.69,357 mn in FY10/11 (9 months) from Rs.39,881 mn in FY09/10 (9 months).

It said results of 15 companies out of them were for 12 months (FY 10). Hotels & Travels recorded the highest profit growth (927%). Although Healthcare sector posted 901% profit growth, excluding exceptional gains it stood at 297%. Bank, Finance and Insurance, Diversified and Telecommunication were the other sectors which witnessed non-recurring gains/losses. Excluding the effect of those items the earnings growth rates were 28%, 36% and 805% respectively.

Banks, Finance and Insurance, Diversified and Beverage, Food and Tobacco were the sectors which contributed mostly to the profit figures in absolute terms, NDB Stockbrokers added.

Here for the long haul” says JKSB in its upbeat 2011 market strategy

John Keells Stock Brokers (JKSB) has released its 2011 Sri Lanka Market Strategy document titled “Here for the long haul” conveying an upbeat outlook for the economy, listed firms and investors in equities.

A highly useful document for investors as well as other stakeholders, the report has a quick Country Fact Sheet and an Executive Summary in addition to providing brief overviews on politics and economy. Its key highlight is its market overview and strategy in addition to featuring the investment case on 12 companies, namely Commercial Bank, HNB, Sampath Bank, NDB Bank, Tokyo Cement, Royal Ceramics, Colombo Dockyard, Distilleries Company, Aitken Spence Hotel Holdings, Dialog Axiata, Aitken Spence Plc and John Keells Holdings.

JKSB said that businesses will benefit from increased domestic demand in the medium but will also be required to invest in building scale and enhancing productivity in anticipation of new competition that is inevitably ushered in by an improved operating environment.

“We remain bullish on the medium to long term earnings growth prospects of construction related manufacturing, banking and leisure group stocks. A medium term outlook of sustainable normalised earnings of approximately 25% should see the index trend higher over the medium to long term,” JKSB opines in the 2011 Sri Lanka Market Strategy document.

Following is the executive summary of the report whilst highlights of it will be published in detail tomorrow.

With the peace dividend filtering in, the economy is expected to have grown at 8% in CY2010 having gathered healthy momentum with 5 consecutive quarters of accelerating growth from 2Q2009 to 2Q2010.

The economy has witnessed a significant improvement in business sentiment and business activity stemming from a benign interest rate regime and fiscal reforms resulting in a lower and simplified taxation and tariff structure. Furthermore overall macro level stability and an increased infrastructure spend together with an upturn in domestic demand have collectively underpinned a strengthened economy.

The resurgence of intra provincial trade with the reintegration of the North and East provinces to the main stream economy and the significant infrastructure spend across the island in road, power, port and rural infrastructure development together with the consequent multiplier effects feeding into increased domestic consumption underlie our medium term expectations of 8%+ GDP expansion. Sustaining this growth momentum beyond will however require a significant increase in FDI across a number of sectors to drive scale and productivity enhancements in the economy.

We anticipate the fiscal deficit would decline to 7% of GDP for 2011 stemming from lower interest expense on domestic financing, higher tax revenues and lower defence expenditure relative to GDP.

The loss of crop production due to the floods earlier this year will add further supply side pressure on food prices which we expect would push the CCPI up to 8.8% by end 2011. The property market is still relatively subdued and non-food and non-fuel inflation still remains under check although demand driven inflationary effects may begin to be evident towards the latter half of the year. The immediate concerns for this year on inflation remain on supply side shocks from food and more significantly the impact on oil prices from the recent events in North Africa and the Middle East. With inflation trending higher we believe that interest rates have bottomed out and prime lending rates may rise by 50bps by year end with prospects of strong credit growth remaining intact.

The ASPI has risen by 16.2% for the year to date on the back of a 96% increase in CY10 and a 280% increase since the end of the war. The recent upward movement in the ASPI is largely a result of strong retail and local HNI participation which has seen significant price movements in second tier and illiquid stocks not necessarily reflective of broad based healthy buying interest.

Sustained local retail buying interest in the market has pushed near term market multiples to 15.2x FY12E earnings, with aggressive buying on selected mid cap and speculative trading on illiquid counters having pushed the indices higher at an excessive pace thus far this year warranting a modest correction.

Businesses will benefit from increased domestic demand in the medium but will also be required to invest in building scale and enhancing productivity in anticipation of new competition that is inevitably ushered in by an improved operating environment

We remain bullish on the medium to long term earnings growth prospects of construction related manufacturing, banking and leisure group stocks. A medium term outlook of sustainable normalised earnings of approximately 25% should see the index trend higher over the medium to long term