Profit windfall in first year of peace

Reaffirming the post-war rebound, listed companies in the first calendar year of peaceful Sri Lanka have reported a combined windfall profit of Rs. 123 billion, an exponential 140% increase over 2009, according to a compilation by TKS Securities.

This earnings figure was derived from a sample of 221 companies out of 247 listed on the Colombo Stock Exchange (CSE).

Of the Rs. 123 billion profit, Rs. 40 billion or 32% had come in the quarter ended 31 December 2010. It reflects a hefty 83% increase in comparison to the corresponding quarter of 2009. The Government forces valiantly crushed LTTE terrorism in May 2009 and the rebound began only in the last quarter of 2009.

TKS Securities analysis was to judge whether corporate Sri Lanka has lived up to post-war rebound expectations and how the corporate performance could translate to the fortunes in the Colombo stock market.

With the prolonged three-decade-long war ended having ended in mid 2009, TKS said Sri Lanka was now enjoying the benefits of peace and getting accustomed to the fresh environment.

“We believe that with the strong earnings performance, improving Return on Equities (ROEs) and strengthening financial position, while the broader economic picture continues to show improvement, Colombo bourse would regain its sanguinity,” TKS Securities added.

The comprehensive earnings research and analysis by TKS confirms the post-war rebound. Last week the Daily FT featured quoting John Keells Stock Brokers that 192 reporting companies had posted a Rs. 33.7 billion profit in the quarter ended on 31 December 2010, up by 84% over the corresponding period of 2009. NDB Stockbrokers, taking a sample of 15 companies to represent the overall market, saw their earnings rise by 74% to Rs. 69.3 billion (excluding non-recurrent gains) for the nine months ended 31 December 2010

TKS Securities following the analysis of 221 companies said that the Banking, Finance and Insurance sector contributed about 27% to overall corporate profits whilst the Conglomerates contributed 18% and the highest net profit growth rates were witnessed amongst the Hotel, Motors and Plantation sectors.

Since the end of the war, quarterly corporate earnings have grown at 28% CAGR, which was mainly driven from domestic consumption ahead of any benefits from the recently-commenced investments.

Correlating to market performance, TKS Securities said in hindsight the market has edged down to 18.6x current earnings by end 2010 down from the 20x plane which the stock broker believe is the sustainable multiple for the re-rated market since the end of war.

Nevertheless, the mid cap retail drive had swiftly taken up the market multiple to 20.2x in 2011 whilst the market experienced a circa 3% correction during the three consecutive days starting 7 March 2011.

“During the correction, positives such as corporate earnings growth, real GDP growth, improving reserves, monetary stability, deficit contraction, etc., were sidelined and retail debt recovery from brokering houses, foreign portfolio sales (following near 100% index gains over the past 12 months and though not direct relevance the Middle Eastern and Indian sub continent troubles) and monies locked up in recent IPO issues became the main driving forces,” TKS Securities said.

It pointed out that the positive implication for stocks, in its opinion, is that once investors refocus on fundamentals, the new data will provide a solid floor to the market.

“Further, a tangible market correction which we are undergoing at the moment (the market slid 3.4% during last week) urges investors to watch market action ever so closely and take cues from the broader marketplace and not from a handful of grim predictions and speculations,” TKS added.

The Daily FT will feature the full report by TKS Securities on Tuesday.