Featured Reports

 

Event Update

Chevron Lubricants Lanka – Wins three state lubricant tenders – 08 February 2019

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Chevron Lubricants Lanka (LLUB) has won three tenders to supply lubricants to state-owned power stations and transport services

We have revised up our 2019E volume forecast by +5% to 29.3 litres (+9% YoY), amid LLUB regaining the previously lost contracts. Meanwhile, 2020E local sales volume forecast at 30.5mn litres (+3% YoY)

LLUB’s net profit forecast revised up by +1% to Rs.2,434mn for 2019E (+9% YoY – off a low base) and 2020E net profit forecast at Rs.2,485mn (+2% YoY)

The LLUB share has declined -34% over the past 12 months (vs. the ASI’s decline of -9%). However, we expect LLUB’s gross dividend yield of 12% to limit any further near term material share price decline. On our current estimates, LLUB trades at PER of and 7.4X for 2019E and 7.2X for 2020E

Near term pressure on earnings to remain due to currency depreciation coupled with the volatility in crude oil prices, together with stiff industry competition

Whilst we view LLUB gaining the three state lubricant tenders as positive, a potential re-rating of the share would likely depend upon LLUB regaining volumes in a more higher margin retail segment

Event Update

Distilleries Co. of Sri Lanka – Product Price Revisions – 28 January 2019

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Distilleries Co. of Sri Lanka (DIST), Sri Lanka’s market leader in the (legal) hard alcohol segment, issued a statement indicating that it has revised alcohol prices w.e.f 28 January 2019, in response to escalating costs of production

Upward price revisions (especially in the higher margin quarter bottle segment) are expected to somewhat offset near term margin pressure due to higher imported raw material costs, stemming from continued currency depreciation

Full and Quarter bottle sales are however likely to face further volume pressure from the soft alcohol segment, consequent to excise-duty led price reductions of “strong” beer in Nov 2017

DIST’s current net profit forecast stands at Rs.4,946mn for FY19E (EPS Rs.1.1, +14% YoY) and at Rs.5,751mn for FY20E (EPS Rs.1.3, +16% YoY), primarily driven by GP margin expansion, stemming from a higher local spirit mix. Given the significant difference in price revisions on different product categories, and the lack of visibility with respect to the sales volume breakdown between ‘Extra Special’ full, half and quarter bottles, we will need to seek further clarification from DIST management prior to revising our volume and price per proof litre assumptions

The DIST share has underperformed the broader market since its re-listing on 03 Apr 2018, declining -36% (vs. the ASI’s decline of -7%), and trades at PER multiples of 14.9X for FY19E and 12.8X for FY20E

Any medium term re-rating of valuations is likely to depend upon measures taken by the Government of Sri Lanka (GoSL) to increase points of access of licit alcohol, especially in rural areas, and an improvement in current share liquidity levels – current estimated public float of DIST stands at ~3.3%, and the company has been provided a 20-month grace period (w.e.f July 2018) by the CSE to meet minimum public holding listing requirements of 7.5%

Event Update

Chevron Lubricants Lanka (LLUB – Rs.73.4) Market share falls to 37% in 3Q2018 – 23 January 2019

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As per the Public Utilities Commission of Sri Lanka (PUCSL), the shadow regulator for Sri Lanka’s lubricant industry, overall lubricant market volumes declined -3% YoY in 3Q2018. Consequently 1-3Q2018 market volumes grew +5% YoY to 50mn litres

LLUB’s volumes declined -6% YoY in 3Q2018, resulting in its 1-3Q2018 volumes growing +1% YoY. Meanwhile, LLUB’s market share declined to ~37% in 3Q2018 (vs. ~38% in 3Q2017), amid intense industry competition on the back of price pressure by competitors. Consequently, LLUB’s market share declined to ~39% in 1-3Q2018 (vs. ~40% in 1-3Q2017), with ExxonMobil’s market share increasing to ~8% in 1-3Q2018 (vs ~6% in 1-3Q2017)

LLUB’s local market share forecasts remain broadly unchanged at ~39-40% for both 2019E and 2020E

Our current 2019E and 2020E net profit forecasts for LLUB are Rs.2,407mn (+8% YoY growth – off a low base) and Rs.2,432mn (+1% YoY) respectively

The LLUB share has risen +13% subsequent to falling to a nine-year low of Rs.65.0 on 28 September 2018 (vs. the ASI’s gain of +2% over the same period). However, the share price to be supported by a high gross dividend yield of 12%

Given the recent share price increase, we believe that benefits stemming from ongoing commodity price fluctuations have partly been factored in. Meanwhile, more sustainable growth in core earnings is likely to depend upon any strategies taken by LLUB’s management to regain a material portion of its previously lost market share

Outlook 2019

Sri Lanka Outlook 2019 – 10 January 2019

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The stock market is expected to face near term pressure from the anticipated upward movement in interest rates

Forward market valuation of 9.5X for 2019E is at a discount to a majority of regional peers, on the back of an expected earnings growth of +12% YoY. Select key stocks, particularly in banking, consumer and export-related sectors offer relatively attractive valuations, backed by strong earnings growth prospects

Given the current uneasy co-existence between political leaders and the major political parties, political risk continues to remain at elevated levels

Whilst the overall market performance is likely to remain subdued in 1H2019E, opportunities for possible M & A plays cannot be ruled out in the near term

A relative improvement in political stability in 2H2019E or 1H2020E would result in a clearer economic outlook over the medium term acting as a catalyst for attracting investments, and thereby would help re-rate market valuations

Event Update

DIAL becomes first in South Asia to launch 5G – 02 January 2019

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DIAL launches its fully-functional pre-commercial 5G transmission

Over 20% of DIAL’s base stations upgraded to “5G Ready Status”

Event Update

Hutch and Etisalat Merger – 04 December 2018

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Hutch Lanka to survive whilst Etisalat Lanka ceases to exist post-merger

Emirates Telecommunications Group to own 15% of Hutch Lanka

CK Hutchison’s Holdings Ltd Group to own 85% stake of Hutch Lanka

Economic Update

The CBSL reduces the SRR to neutralize the key policy rate hike impact – 14 November 2018

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The CBSL adjusted its policy rates in its Nov Monetary policy review as follows:

SLFR +50bps to 9%, SDFR +75bps to 8% w.e.f. 14 Nov 2018

SRR -150bps to 6% w.e.f. 16 Nov 2018

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Event Update

Programme for Economic Revival – 02 November 2018

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  • The Government of Sri Lanka (GoSL) on 01 November 2018, gave directions to implement a set of initiatives in an attempt to revive the local economy
  • Whilst the initiatives are expected to impact the fiscal account of the government, the government is confident that the primary surplus of 1.8% of GDP and the budget deficit of around 4.9% of GDP for 2018E could be achieved, with reduced capex and expenditure on Cabinet Ministers
  • The anticipated impact of these initiatives on key Colombo Stock Exchange (CSE) counters are summarised in the report.

Event Update

Impact from LKR Depreciation – 20 September 2018

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  • The Sri Lankan Rupee has depreciated –8.9% in 2018YTD to LKR166.47/US$, in line with currency weakening witnessed in regional countries, amid the strengthening of the US$
  • Foreign T bill and bond holdings in the domestic market were continuously impacted from the March 15 rate decision of the US FED – may continue in the near term due to anticipated rate increases by the US FED
  • The Central Bank of Sri Lanka (CBSL) reduced forex intervention during mid 2016 – but did intervene recently owing to the excessive depreciation
  • The CBSL has introduced restrictions on imports to ease the situation and may increase interest rates as a further control
  • The report also includes the potential impact on companies under coverage from LKR depreciation

Sri Lanka Banking Sector

Banking on Fundamentals: August 2018

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  • Sri Lankan banks remained relatively strong with better asset quality and higher ROEs during the past decade. The regulatory environment also has been more accommodative given the leeway provided on adjustment of new IFRSs and Basel III regulations.
  • Whilst GoSL banks may need capital to remain relevant in the economy, top three Private LCBs (T3PL) were increasingly used as GoSL’s project financiers during past five years, whilst also reducing dependency on GoSL’s owned banks. Meanwhile DFI root LCBs in the Mid-Size Private LCB segment struggled in increasing their leverage, whilst pure LCBs in this segment remained competitive with T3PL at the ROE level, driven by their improved strategies to mobilize deposits, usage of analytics in lending and acquisition of high yielding credit cards.  A majority of Relatively Smaller Domestic Private LCBs remained under capitalized compared to Jan 2020 absolute minimum capital requirements.
  • Internet banking transactions grew 3X during FY2010-16, lowering the need of the domestic cheque-clearing system by a fifth. Whilst SL accounts for a smart phone penetration above 50% as at mid-2018, a notable increase in mobile transactions have been utilized only for utility allied regular settlements, which may likely follow a growth phase in the medium term. Implementation of a bio metric ID system by the GoSL (if introduced) could however fast track the current banking facilities as proved by some of the regional counterparts.
  • SL banks have seen their valuations fall during the past few years amidst high earnings, creating a strong entry point for investors. Listed BFI sector accounts for ~50% of the overall CSE earnings whilst accounting for a good third of the CSE market cap. The fundamentally strong sector offers decent dividend yields that could now be reserved as the currency hedge by overseas investors. While SL bank forward EPS growth slows on recent and anticipated CET 1 injections, it’s hard to see a scenario where they have to cut their dividends. SL banks now offer “relative” valuation appeal and we recommend moving back to market over-weight on this sector.

Sri Lanka 

Strategy Report – May 2018

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  • The Sri Lankan economy is forecast to report 4.7% real GDP growth for 2018E (vs. 3.1% in 2017) and 5.4% in 2019E
  • The GoSL is expected to continue its fiscal consolidation into 2018E, in line with the IMF’s extended fund facility agreement thresholds, with a focus on strengthening macroeconomic fundamentals and implementing structural reforms
  • The GoSL forecasts budget deficit to GDP at -4.8% in 2018E and -3.5% by 2020E, in accordance with its medium term macro fiscal framework
  • General price levels likely to remain between 4-6% levels (vs. 6.6% in 2017), though potential weather related supply side shocks remain as a key risk
  • The LKR is expected to be under pressure in the near term, with the Central Bank expected to intervene less in defending the currency at the expense of external reserves
  • The Sri Lankan stock market witnessed an increase in 2018YTD, with the ASPI rising +3%, whilst the more liquid S&P SL20 remained broadly unchanged (vs. +2% and +5% respectively in 2017)
  • Forward market valuation of 10.1X for 2018E is at a discount to regional peers, on the back of an expected earnings growth of +12% YoY
  • Select key stocks, particularly in banking, finance & insurance, export related and consumer sectors offer relatively attractive valuations, backed by strong earnings growth prospects

Sri Lanka 

Outlook 2018 – January 2018

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  • The GoSL is expected to continue its fiscal consolidation, in line with the IMF’s extended fund facility agreement thresholds, with a focus on strengthening of macroeconomic fundamentals and implementing structural reforms
  • Forward market valuation of 9.6x for 2018E is at a discount to regional peers. The local equity market has been a laggard amongst regional peers, primarily due to relatively high interest rate pressures and lack of clear policy direction over the past two years, though both aspects seem to be shifting now. Consequently, the market is expected to witness gains in 2018E
  • After a considerable delay, Local Government elections are being held island wide on 10 Feb 2018. Though a relatively minor election with low voter turnout, the outcome of same will indicate the strength and standing of the current coalition Government
  • GoSL has also set its sight on attracting US$50bn worth of investment in the next five to ten years and is focused on accessing bigger markets through free trade agreements with India, China and Singapore
  • The Megapolis development project, Colombo Financial City and development of Hambantota port to open up greater investment opportunities for both domestic and foreign investors.  Further, the GoSL called for a request for proposal (RFP) to find investors for two state-owned hotels, Grand Hyatt Colombo and Hilton Colombo, with potential partial listings of other SOEs also in the pipeline