Updates & Earnings Previews

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IPO

Ex-pack Corrugated Cartons Limited (EXPK)

21 October 2021

  • Ex-pack Corrugated Cartons (EXPK) is one of Sri Lanka’s leading corrugated carton producers. Its fully owned subsidiary Neptune Papers is one of …………

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Event Update

Hemas Holdings (HHL) – HHL Divests its Integrated Logistics Arm

13 October 2021

  • On 13 October 2021, Hemas Holdings (HHL) announced the divestment of its 50% stake in Spectra Logistics (Pvt) Ltd (held through fully owned subsidiary Hemas Transportation (Pvt) Ltd) to GAC Logistics Ltd (a global integrated …………

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Sector Update

Tourism Sector

8 October 2021

  • Tourist arrivals to Sri Lanka was recorded at 13,547 persons for the month of September 2021, with India emerging as the largest source market for the month. Consequently, …………

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Event Update

Macro-Economic Impact Analysis of the CBSL’s 6-month Policy Roadmap

6 October 2021

  • The Central Bank of Sri Lanka (CBSL) unveiled its near term (6 month) policy road map as the first phase of a 3 Year Road map on 1 Oct 2021. Following is an analysis …………

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Event Update

John Keells Holdings (JKH) – Event Update – JKH receives 34% equity stake in the West Container Terminal project

1 October 2021

  • John Keells Holdings (JKH) announced that the Build, Own and Transfer (BOT) Agreement between the Sri Lanka Ports Authority (SLPA) and Colombo West International Container Terminal Private (Limited), the project company………….

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Event Update

Market Statistics for September 2021

30 September 2021

  • The Colombo Bourse closed positive in September 2021, with the benchmark All Share Price Index (ASPI) gaining +5.1% MoM to 9,460 points ………….

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Event Update

John Keells Holdings (JKH) – Leisure Sector Recovery on the Horizon

29 September 2021

  • Tourist arrivals from UK were significantly impacted in Sri Lanka and Maldives once they were included in the red list during 1Q22. However, both destinations have been………….

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Event Update

CBSL Imposes 100% Cash Margins on Specified Imports

9 September 2021

  • Licensed Commercial Banks (LCBs) were directed by the Central Bank of Sri Lanka (CBSL) with immediate effect, that the Letters of Credit (LCs) shall not be opened by LCBs for the importation………….

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Event Update

Sri Lanka Tourism Sector – Successful vaccination campaign to drive tourism sector revival

9 September 2021

  • Tourist arrivals to Sri Lanka was recorded at 5,040 tourists for the month of August 2021, with Canada emerging as the largest ………….

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Event Update

WindForce (WIND) : Grid substation repair complete; WIND’s plants back at full capacity

8 September 2021

  • Recent social media posts by WIND have indicated that the repairs to the Norochcholai grid substation were completed recently and all three of WIND’s power ………….

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Event Update

Sri Lanka Textile Manufacturers – Geared with Capacity to Maximize on Positive Industry Dynamics

8 September 2021

  • Disruptions to global supply chains expedited measures taken by US and EU brands to secure vertical solutions through near-shoring/re-shoring ………….

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Event Update

Sri Lanka Near term External obligations and Exchange Rate

8 September 2021

  • Based on market sources, Sri Lanka’s Gross Official Foreign Reserves (GOFR) improved to ~US$3.5bn as at 1 Sep from ………….

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Event Update

Beneficiaries of Currency Depreciation

1 September 2021

  • The indicative exchange rate published by the Central Bank of Sri Lanka (CBSL) has depreciated to Rs.210/US$ as at 31 August 2021 compared to ………….

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Event Update

Implications of Currency Depreciation

18 August 2021

  • Despite the Central Bank of Sri Lanka (CBSL) indicating that the “Licensed Banks have not been asked to “Devalue” the Sri Lanka Rupee” in a press release dated 18 August 2021, and indicating ………….

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Event Update

Sri Lanka – Bankable Counters on a Pending Recovery Story

5 August 2021

  • Sri Lankan banks remained resilient amidst challenging banking conditions especially following the Easter Sunday attacks and due to the ongoing Pandemic. The Sector increased its loan loss impairment ………….

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Event Update

Melstacorp (MELS) – Market Announcement – Repurchase of shares and reduction in stated capital

2 August 2021

  • As a recently restructured entity, MELS has a very low level of reserves compared to its stated capital. As at 31 March 2021, the company level reserves ………….

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Market Update

Market Statistics for July 2021

31 July 2021

  • The Colombo Bourse closed positive in July 2021, with the benchmark All Share Price Index (ASPI) gaining +3.6% MoM to 8,120 points………….

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Event Update

Hayleys Fabric (MGT) – SAT Acquisition Wards Off Capacity Constraints

29 July 2021

  • MGT reported a 4Q21 Net Profit (NP) of ~US$0.8mn (vs. a net loss of -US$0.9mn in 4Q20 though -39% QoQ), below our expected ………….

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Economic Update

Sri Lanka GDP Growth 1Q2021

13 July 2021

  • 1Q2021 GDP growth +4.3% YoY amid relaxed mobility restrictions ………….

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Event Update

Executive Board Adopts IMF MD’s US$650bn Proposal

12 July 2021

  • On July 8, 2021, the Executive Board of the IMF adopted a decision that concurred with the Managing Director’s proposal for a new general SDR ………….

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Event Update

Statement by CBSL Governor – Foreign Currency liquidity n market

28 June 2021

  • The Governor of the Central Bank of Sri Lanka (CBSL) released a statement today amid certain media reports indicating ………….

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Event Update

Royal Ceramics Lanka (RCL) – Import Ban to be the Tailwind

18 June 2021

  • RCL reported a 4Q21 net profit of Rs.2,822mn (vs. Rs.657mn in 4Q20 and +40% QoQ), above our expectation of Rs.2,121mn. Consequently, FY21 ………….

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Event Update

Windforce Ltd – Cabinet nods to Construction of Wind Power Plant in Mannar

16 June 2021

  • The Cabinet of Ministers has granted approval to a proposal made by WindForce Limited (WIND) to construct ………….

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Event Update

Potential Revocation of EU GSP+ on Sri Lankan Exports and the Likely Impact to local Fabric Manufacturers

11 June 2021

  • The EU Parliament adopted a resolution on 10 June 2021 (628 in favor and 15 against) calling on the EU Commission to consider temporary withdrawal of ………….

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Event Update

The X-Press Pearl Fire and its Impact

7 June 2021

  • It was reported that the X-Press Pearl ship caught fire on 20 May 2021, 9.5 nautical miles (17.6 km) northwest of the
  • ………….

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Event Update

The CBSL announces a Third Loan Moratorium

27 May 2021

  • Business Loans Offered a 3-month moratorium (15 May to 31 August)

  • Interest on Interest to be charged set at 6.18% p.a.

  • A further ~5 -7% of LCB clients est. to take up the proposed concession

    ………….

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Event Update

NDB places its unsubscribed 16.8% rights to Norfund

12 May 2021

  • National Development Bank (NDB) disclosed 83.2% of its rights were subscribed (and additionally applied) for and the Bank placed the remaining 16.8% with ………….

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Event Update

Hayleys Fabric (MGT) – Event update – Acquisition of Majority stake in South Asia Textiles

10 May 2021

  • Hayleys Fabric (MGT) has acquired 98.8% of the equity stake of South Asia Textiles Limited (SAT) for a consideration of Rs.3.95bn from ………….

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Event Update

Cargills (Ceylon) (CARG) – CARG partners with Unilever to reduce plastic waste

30 April 2021

  • Cargills (Ceylon) (CARG) in partnership with Unilever Sri Lanka launched a sustainability campaign called “Thank You for Recycling” at ………….

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Event Update

Hemas Holdings (HHL) – HHL Immune to Ban on Palm Oil Imports

12 April 2021

  • On 05 April 2021, the president of Sri Lanka instructed a complete ban on Palm oil imports with immediate effect citing harmful health and environmental implications of Palm oil. Meanwhile, the press release ………….

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Event Update

Aitken Spence (SPEN) Acquires Waltrim Energy Ltd

8 April 2021

  • On 07 April 2021, Aitken Spence (SPEN) has entered into an agreement with the shareholders of Waltrim Energy Ltd and has acquired 100% shareholding in the said company for a total consideration of Rs.900mn. A stake of 60.59% of Waltrim Energy Ltd was previously held by Sunshine………….

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Event Update

Sunshine Holdings (SUN) – GoSL Bans Importation of Palm Oil

6 April 2021

  • On 05 April 2021, President Gotabaya Rajapaksa had instructed to completely ban the importation of Palm Oil with immediate effect. The Controller General of Department of Imports and Exports Control has been advised to issue the relevant gazette order to give effect………….

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Event Update

Tourism in Sri Lanka – Beyond the Pandemic

5 April 2021

  • The Tourism industry is a key contributor to Sri Lanka’s economy, accounting for 4 – 5% of the country’s GDP. In addition to being ………….

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Market Update

5 April 2021

  • The ASPI rose +5.1% QoQ during 1Q2021 despite the market correction witnessed since reaching the ………….

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Valuation Update

RCL Group

31 March 2021 (Prices as at 30th March 2021)

  • Trading of shares of LWL, TILE and PARQ were suspended for three market days effective from 29 March 2021 to 31 March 2021 due to the sub division of shares. Subsequently, the shares will commence trading………….

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Event Update

Sunshine Holdings (SUN) Recommences Trading Post Sub-division

31 March 2021

  • On 05 February 2021, Sunshine Holdings (SUN) announced that the Board of Directors of the company had approved to increase its shares by way of a subdivision, in the proportion of……………

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Event Update

Buying Opportunity on Top Three LCBs

31 March 2021

  • With COMB, HNB and SAMP counters to enter XD w.e.f. today (31 March 2021), we expect price reductions to range from -5.0% for COMB, -3.4% for HNB and ……………

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Event Update

John Keells Holdings (JKH) – Colombo Port City to allow Gaming Activities

30 March 2021

  • According to a draft law to be presented to parliament shortly, a special economic zone is to be set up in the Colombo Port City (CPC) which is set to have regulation covering……………

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Market Update

Reassessment of the Market

23 March 2021

  • Below stocks represent significant potential backed by fundamentals, following market correction since ……………

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Event Update

National Development Bank (NDB) – Re-energising for Growth

22 March 2021

  • NDB reported a 4Q2020 net profit of Rs.1,248mn (EPS of Rs.5.4; -35% YoY), above our expected EPS of Rs.4.6. YoY earnings decline in 4Q2020 is due to ……………

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Event Update

Economic Update – Sri Lanka GDP Growth 4Q2020

18 March 2021

  • 4Q2020 GDP growth +1.3% YoY despite a second wave of COVID-19 infections ……………

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Event Update

John Keells Holdings (JKH) – JKH and Adani Ports receive Letter of Intent from GoSL for West Container Term

18 March 2021

  • John Keells Holdings (JKH) announced on 15 March 2021, that the consortium involving Adani Ports and Special Economic Zone Limited (APSEZ) and JKH has received a Letter of Intent (LOI) from ……………

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Event Update

WindForce Limited (WIND) – IPO: Powered by Nature

WIND: Rs.16.0 (IPO)   Intrinsic Value: Rs.20.7   ±% Potential: +29.3%

12 March 2021

  • WindForce Limited (WIND) is the largest and most diversified renewable energy company in Sri Lanka, operating ten solar, seven wind and ten mini-hydro power plants with a total effective capacity of 126MW – larger than the total effective energy generating capacity of the five largest CSE listed utility companies combined. In addition to operations in Sri Lanka, WIND is also ……………

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Event Update

NDB secures DFI-Norfund to subscribe to ~10% of unsubscribed Rights

8 March 2021

  • National Development Bank (NDB) disclosed that the bank has received an expression of interest from a leading Development Financial Institution (DFI), the Norwegian Investment Fund (Norfund), to invest in a maximum of 9.99% of ……………

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Event Update

Windforce – Subscription opens on 24th March 2021

5 March 2021

  • WindForce – Sri Lanka’s Largest, most Diversified Renewable Energy Company for over a decade, the Company has been a breath of fresh air across the renewable energy space in the country
    Join hands with the Company as it reach new heights with its Initial Public Offering on Colombo Stock Exchange
    ……….

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Event Update

Commercial Bank of Ceylon (COMB): Driven by Mid Teen Near Term ROEs

4 March 2021

  • COMB reported a 4Q2020 net profit of Rs.5,873mn; EPS of Rs.5.4 (-3% YoY, +55% QoQ), above our expected EPS of ……………

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Event Update

Dialog Axiata (DIAL) – Lower Data Costs to Drive Higher Margins

1 March 2021

  • Dialog Axiata (DIAL) reported a 4Q2020 EPS of Rs.0.42, below our expected EPS of Rs.0.5. Profits were driven by growth in Revenue and EBITDA……………

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Event Update

John Keells Holdings (JKH) – GoSL to offer West Container Terminal to India

16 February 2021

  • Local news articles have reported that the Government of Sri Lanka (GoSL) is planning to offer the West Container Terminal (WCT) at the Colombo port to India……………

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Sector Update

Tile Sector

11 February 2021

  • Implementation of the latest suggestions on CESS and CID rates on importation of sanitary ware is not yet finalized. However, the sanitary ware imports are currently subject to a CESS of 15% or Rs.40/kg and CID of 15%…………….

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Event Update

Hemas Holdings (HHL) – Event Update – GoSL bans single use plastic and polythene w.e.f 31 March

10 February 2021

  • In October 2020, the Cabinet of Ministers approved a ban on a range of single-use plastics and polythene. Subsequently, a gazette notification was filed by the Ministry of Environment on 21 January 2021 to implement the ban w.e.f 31 March 2021 allowing a short grace period for manufacturers to shift to…………….

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Sri Lanka Market Update

COVID-19 vaccine drive kicks of in Sri Lanka

2 February 2021

  • The Government of Sri Lanka (GoSL) rolled-out its COVID-19 inoculation campaign on 29 January 2021 utilizing a grant of 500,000 Covishield vaccines provided by the government of India…………….

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Event Update

SAMP announces a subdivision of its shares in the ratio of 1 into 3

29 January 2021

  • On 27 Jan 2021, The Board of Directors of the Sampath Bank (SAMP) announced a subdivision of shares, whereby one ordinary share will be sub divided into three ordinary shares, subject to regulatory approval and shareholder approval at a general meeting…………….

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Event Update

Forward Sales and Purchases of Foreign Exchange by LCBs

25 January 2021

  • On 25 January 2021 the Central Bank of Sri Lanka (CBSL) directed Licensed Commercial Banks (LCBs) to refrain from entering into forward contracts of foreign exchange for a period of 3 months (i.e. up to 25 April 2021) with immediate effect…………….

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Banking Sector Update

Restrictions on discretionary payments

20 January 2021

  • On 13 May 2020, the Monetary Board of the Central Bank of Sri Lanka (CBSL) issued directions on restrictions on discretionary payments of licensed commercial and specialized banks (licensed banks) considering the possible adverse impact of the COVID-19 outbreak on liquidity and capital adequacy requirements of licensed banks……………

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Sri Lanka Outlook 2021

7 January 2021

  • Sri Lanka faced a challenging 2020 with the outbreak of Covid-19 pandemic impacting the island from late 1Q2020. The market fell -7% to a pandemic low of 4,248 points on 11th and 12th May 2020 (following a 52-day closure from 20 March 2020)……………

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Event  UPDATE

DIAL Axiata – Purchase of H One (Pvt) Ltd for US$1.6mn to US$1.8mn

24 December 2020

  • Dialog Axiata (DIAL) announced that Dialog Broadband Networks (Private) Limited (DBN), a wholly owned subsidiary of DIAL entered into a Share Sale and Purchase Agreement (SSPA) to acquire 100% stake in Sri Lanka’s leading Microsoft solutions provider, H One (Private) Limited……………

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Event  UPDATE

Sunshine Holdings (SUN)

17 December 2020

  • Sunshine Healthcare Lanka Limited (SHL), which is a fully owned subsidiary of Sunshine Holdings (SUN), has agreed with Akbar Brothers (Pvt) Ltd (ABL), which owns 99.99% of the ordinary voting shares of Akbar Pharmaceuticals (Pvt) Ltd (ABPL) to purchase the ……………

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Event  UPDATE

Hemas Holdings (HHL)  – Divestment of SHOT

15 December 2020

  • Hemas Holdings (HHL) divested its stakes in Serendib Hotels (SHOT) on 15 Dec 2020, for a total consideration of Rs.793mn
  • Voting share (SHOT-N) was sold at Rs.14.2 per share (42.8mn shares – 56.7% stake) and non-voting share ……………

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Event  UPDATE

Hemas Holdings (HHL)  – Divestment of SHOT

15 December 2020

  • Hemas Holdings (HHL) divested its stakes in Serendib Hotels (SHOT) on 15 Dec 2020, for a total consideration of Rs.793mn
  • Voting share (SHOT-N) was sold at Rs.14.2 per share (42.8mn shares – 56.7% stake) and non-voting share ……………

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MARKET UPDATE

Tokyo Cement Company (Lanka) (TKYO) – Lanwa Sanstha to Commence Operations in June

11 December 2020

  • Sri Lanka’s national cement consumption over the past two years declined by 10.0% from 7.0mn MT in 2017 to 6.3mn MT in 2019 mainly due to subdued economic growth ……….

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MARKET UPDATE

Reduction in Mortgage Rates

8 December 2020

  • CBSL announced guidelines on Housing Loan rates – rates for salaried employees reduced to 7% for first five years
  • Credit growth to be further supported by ……….

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EVENT UPDATE

New Guidelines to Restart Tourism in Sri Lanka

2 December 2020

  • The SLTDA on 01 December 2020 has stated that 63 hotels accounting for 6,187 rooms have received ‘Safe and Secure’ compliance certification to resume operations post-COVID-19. 35 of the first recipients are inland properties and 28 are beach resorts
  • Furthermore, recent press articles have indicated that a comprehensive set of guidelines has been submitted by authorities and is awaiting approval. Accordingly, it has been suggested ……….

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EVENT UPDATE

Tokyo Cement Company (Lanka) (TKYO) – Expansion of Manufacturing Capacity by 1mn MT

20 November 2020

  • Tokyo Cement Company (Lanka) (TKYO), is expected to sign a supplementary agreement with Board of Investment of Sri Lanka (BOI) to expand the production capacity by 1mn MT per annum at their existing location at Cod Bay, China Bay, Trincomalee.
  • Decision to expand the manufacturing capacity……….

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SRI LANKA NATIONAL BUDGET 2021

Impact Analysis

20 November 2020

  • The National Budget 2021 Proposals focus on lifting the country out of Covid-19 and setting the stage for growth and recovery
  • The GoSL is expecting a fiscal deficit of 8.9% for 2021E – highest since 2009 ……….

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SRI LANKA NATIONAL BUDGET 2021

Highlights

17 November 2020

  • The Prime Minister and Minister of Finance of Sri Lanka, Hon. Mahinda Rajapaksa, presented Sri Lanka’s 75th National Budget for 2021 in Parliament on 17 November 2020
  • The Government of Sri Lanka (GoSL) expects to reach a fiscal deficit of ……….

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EVENT UPDATE

Covid-19 Loan Moratorium Extended by further 6 months 

Impact analysis on COMB, HNB, SAMP and NDB

10 November 2020

  • Following the initial Debt moratoriums announced on 17 March 2020, the Central Bank of Sri Lanka (CBSL) on 09 Nov 2020, announced an extension of the said moratoriums w.e.f. 1 Oct 2020 to 31 Mar 2021.
  • Borrowers within the sectors including apparel, IT, plantations will be liable for ……….

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EVENT UPDATE

John Keells Holdings (JKH) – India to operate Colombo East Terminal

1 November 2020

  • Local news articles have reported that Sri Lanka has decided that India’s Adani Group will handle management of the East Container Terminal (ECT) operations
  • According to the article, Indian government-preferred Adani Group will have a 49% stake along with the local partner, John Keells Holdings (JKH). Sri Lanka Port Authority (SLPA) will ……….

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COMPANY UPDATE

Hayleys Fabric (MGT) – Higher Tier 1 customer mix and upcoming knitting capacity addition to stabilize earnings and enhance margins

21 October 2020

  • Hayleys Fabric (MGT) indicated that the company’s production facility is operating at full capacity since May 2020 as MGT benefitted initially from heightened global demand for Personal Protection Equipment (PPE) in the immediate aftermath of the COVID-19 outbreak. The surge in production instigated by PPE was soon followed by new orders for regular fashion fabric from Tier 1 customers based in the US, strengthening MGT’s order pipeline and earnings visibility moving forward……….

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EVENT UPDATE

National Development Bank -28 for 61 Rights Issue at Rs.75 per share to raise Rs.8bn

20 October 2020

  • On 20 October 2020, National Development Bank (NDB) announced its intention to issue shares by way of Rights, to be issued at, 28 new ordinary voting shares for every 61 ordinary voting shares held. The issue is priced at Rs.75 per new share, to raise Rs.8bn worth capital (~107mn new shares) to NDB’s CET I and is subject to approval of the CSE and shareholders……….

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EARNINGS REVISION

Tokyo Cement Company (Lanka)

19 October 2020

  • TKYO’s net profit forecast for FY21E is revised up by +33% to Rs.3,497mn (+50% YoY), largely due to anticipated GP margin growth in the near term. We however, broadly maintain its FY22E NP at Rs.3,736mn (+7% YoY) with revenue growth likely to be challenged by the anticipated rise in competition in the medium term……….

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VALUATION UPDATE

Melstacorp

16 October 2020

  • Melstacorp (MELS) is a conglomerate with interests in Alcoholic Beverages, Insurance, Plantations, Telecommunication and Diversified sectors. Further, the group has exposure to Tourism, Logistics and Power Generation through  ………

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EVENT UPDATE

Teejay Lanka (TJL) – Price correction on fears of COVID-19 re-spread provides an entry point

8 October 2020

  • Following the identification of a COVID-19 cluster emerging from an apparel manufacturing facility based in Minuwangoda (~40KM North of Colombo), the ASPI corrected -7.7% on ………

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EVENT UPDATE

COMB Issues 115.2mn shares in PP deal to IFC

7 October 2020

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COMB lists 115.2mn vot. Shares, with the US$50mn investment converted at Rs.184.3/US$

  • IFC becomes the largest shareholder following the Private Placement

  • Placement PBV valuation stands at 0.59X on current book value

  • US$50mn capital infusion to CET I

Outlook and Valuations

  • With COMB receiving new capital worth Rs.9.22bn into its CET-I capital with freshly issued 115.197mn shares, IFC’s total shareholding increased to ~14.7% based on publicly available shareholder information.
  • This enhances COMB’s capital adequacy ratios for CET I, Tier I and Tier I+II by 0.96% (or ~1%), resulting in COMB’s 30 June 2020 (latest reported) Tier I Capital Adequacy Ratio increasing to 14.0% with an excess capital buffer of ~4.5%
  • We maintain our EPS forecasts for COMB at Rs.12.4 (-26% YoY) and Rs.18.5 (+49% YoY) for 2020E and 2021E respectively, given the PP issue is broadly in line with our previous assumptions.
  • On forecast earnings, COMB voting share trades on par with the sector on PE (and book) multiples of 6.0X (PBV – 0.57X) for 2020E and 4.0X (PBV – 0.52X) for 2021E. The less liquid non-voting share trades at a 13% discount to the voting share
  • We maintain COMB’s rating at a Buy with target price set at Rs.96.3 for its Voting share based on an average of estimated PBV and Residual Income models which indicate a 12M upside potential of +29.3%.

MARKET UPDATE

CSE corrects on fears of COVID-19 re-spread

5 October 2020

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  • There has been a second wave of Covid-19 in many parts of the world that was relatively worse than the first. The Sri Lankan government has cautioned the public to adopt stricter practices of social distancing and also imposed police curfew in the northern part of the western province. Whilst next three days remain critical for the Island nation in assessing the re-spread of Covid-19, it should be noted that countries like New Zealand have managed to control a potential second wave relatively better
  • Whilst we remain positive of the attempts of the armed forces to curb any spread of the disease, if not controlled effectively it could possibly turn negative for Sri Lankan consumer companies as the recovery pace will turn negative and a rebound will be delayed
  • Given that Sri Lankan Government honored its recent Int’l Sovereign Bond (ISB), and is expected to announce its fiscal budget for 2021E on 17 Nov 2020, that is expected to be a reform-oriented budget, we remain positive of the macro outlook, especially with regards to debt sustainability in the near to medium term
  • The all share index (ASPI) rose +32.3% since the re-open of the market on 11 May 2020 to 02 Oct 2020, whilst also becoming the best performing market in the world in the month of September 2020, rising +12.3%
  • Almost all listed sectors increased more than +20% since the re-open of the market till 02 Oct 2020. Banks (+25%), Consumer Durables and Apparel (+78%), Consumer Services (+26%), Telco Services (+38%), F&B and Tobacco (+26%), Retail (+56%) to Energy (+66%) contributed to the overall market gain
  • However, the market corrected a net -7.7% on 05 Oct 2020, upon the news of heightened Covid-19 cases stemming from an apparel manufacturing facility, that was announced on 04 Oct 2020
  • Following the market correction on 05 Oct 2020, the following stocks have entered our Buy list (Please refer attachment for the complete Buy list)

    · Teejay Lanka (+25.0% upside)

    · Access Engineering (+20.5% upside)

    · Chevron Lubricants Lanka (+15.4% upside)

    · Sampath Bank (+15.2% upside)

    Note: Whilst recognizing the efforts of our military services in curbing a re-spread of the virus, we however do not rule out a second wave given next 72 hours remain critical for the assessment of same.

EVENT UPDATE

Hemas Holdings (HHL) – MORI opens new Pharmaceutical Plant

5 October 2020

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  • Morison (MORI), 91% owned subsidiary of HHL opened its newest Pharmaceutical facility on 02 Oct 2020
  • The US$18.5mn manufacturing plant is situated in Homagama (30km east of Colombo). The factory is the first to obtain EU Good manufacturing practice (GMP) certification in Sri Lanka
  • Currently production is for testing and validation purposes and commercial operations are expected to be started in 2021
  • Initially the plant is to produce drugs manufactured within the current MORI facility and increase production subsequently based on additional demand
  • Our current NP forecasts for HHL are at Rs.1,089mn (+21% YoY) for FY21E and Rs.3,641mn for FY22E
  • HHL is currently trading at PERs of 24.9x for FY21E and 12.4x for FY22E. The HHL share has increased +25% in past month (vs. +13% of ASI)
  • Our current target price for HHL is Rs.76.1 (total upside of +2%), rated HOLD

EVENT UPDATE

Moody’s downgrades three Sri Lankan Banks

30 September 2020

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  • Moody’s Investors Service has on 29 September 2020 downgraded the long-term foreign currency deposit ratings of Bank of Ceylon (BOC), Hatton National Bank (HNB) and Sampath Bank (SAMP) to Caa1 from B3, and the banks’ long-term local currency deposit ratings to Caa1 from B2

  • Moody’s has also downgraded the Baseline Credit Assessment (BCA) of BOC to caa1 from b3, and those of HNB and SAMP to caa1 from b2. The rating outlooks, where applicable, are stable

  • The rating agency has stated that downgrade of the BCAs of BOC, HNB and SAMP is driven by their downgrade of Sri Lanka’s sovereign rating on 28 September 2020. Accordingly, all the Banks rated by Moody’s has been downgraded

  • Although S&P and Fitch ratings have not downgraded Sri Lanka’s sovereign rating yet, recent historical actions indicate that a rating action by one agency has been followed suit by the other two agencies

    Note:

    1. Other countries rated Caa1 by Moody’s include Angola, Barbados, Belize, Congo, Gabon, Iraq and Mali

    2. Argentina and Lebanon (countries that defaulted recently) are rated Ca and C respectively. Accordingly Argentina and Lebanon are rated 1 notch and 2 notches below Sri Lanka’s sovereign rating respectively

EVENT UPDATE

Government’s Response to the Rating Downgrade by Moody’s Investors Services

29 September 2020

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  • On 28 Sep 2020 Moody’s Investors Services (MIS) downgraded Government of Sri Lanka’s (GoSL) long-term foreign currency issuer and senior unsecured ratings to Caa1 from B2 whilst changing the outlook to Stable. Following that, the Ministry of Finance of Sri Lanka (MoFSL), released a statement addressing the downgrade by MIS.

  • MIS in their rating action indicated that:

    “The decision to downgrade Sri Lanka’s rating to Caa1 by Moody’s relates to COVID-19-induced shock, which Moody’s regards as a social risk, will significantly weaken Sri Lanka’s already fragile funding and external positions. Heightened liquidity and external risks stem from Sri Lanka’s limited secured funding sources to meet its material external debt service payments over the coming years, during which period market refinancing will remain vulnerable to shifts in investor sentiment.

  • The GoSL is of the view that MIS has alluded to its scenario at an inappropriate time given that Sri Lanka has taken all the necessary steps to avert a potential Sovereign default despite the challenges posed by COVID-19.

  • With Gross Official Foreign Reserves (GOFR) hovering around US$7.4bn as at 31 August 2020, the need for an IMF facility may not be required as IMF assistance for countries with economic dynamics similar to Sri Lanka has risen only when GOFR has fallen below the US$5bn mark. Thus even after allowing the upcoming ISB settlement of ~US$1bn to be off-set through GOFR, SL is likely to be left with a balance of US$6.4bn, which may not require the need of IMF assistance.

  • Moody’s Rating Action Commentary (M-RAC) and the recent analysis of the SL economy by an International Investment Bank (IIB) point towards Sri Lanka’s rising interest cost to revenue ratio. They indicate the fact that overall interest cost to revenue ratio that is hovering a shade below 50% is a relatively high number, and thus is not sustainable for an economy of SL’s nature in the medium to long term.

  • Whilst the facts remain as they are, we believe an analysis of this nature to assess the sustainability of debt should ideally assess the foreign debt service component as a % of revenue, which is the component that any Government cannot defer as other options are available for domestic debt for a sovereign nation.

  • Given that Sri Lanka’s foreign debt service to overall revenue ratio is still at manageable levels (less than 15%), and owing to the fact that Sri Lankan Government has indicated its willingness to move gradually to domestic debt in the medium term, we do not foresee a debt default risk from the Government of Sri Lanka in the near to medium term.

  • With the GoSL indicating to honor its ISB maturing on 4 Oct 2020, and given healthy GOFRs as of now, we believe it will allow the Government with almost two thirds majority to come up with a 2021E fiscal budget that focuses on reforms (especially in the SOE segment).

  • A policy framework that allows growth of domestic-business sectors to substitute imports whilst focusing on export growth is key in formulating such a fiscal budget as COVID-19 could possibly be turned into a blessing in disguise for economies such as Sri Lanka.

EVENT UPDATE

Inward Investment SWAPs (IIS)

24 September 2020

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  • The Monetary Board of the Central Bank of Sri Lanka (CBSL), in order to encourage fresh foreign inflows to the country, decided to offer “USD / LKR Buy – Sell Currency SWAPs” for tenures beyond one year and up to two years to Licensed Commercial Banks (LCBs) under the scheme named “Inward Investment SWAPs Scheme (IIS Scheme)”. The IIS scheme’s objective is to facilitate LCBs to hedge the foreign exchange risk pertaining to foreign currency inflows that are directed through Inward Investment Accounts (IIAs).
  • Operating instructions issued to LCBs indicate IIS scheme is applicable on Forex inflows directed through Inward Investment Accounts (IIAs). Although IIAs are used to facilitate investments in many instruments i.e. Equity, Govt securities, Debentures, Unit trusts, Bank deposits, etc., the State minister of Finance, Hon. Nivard Cabraal indicated to media that the said announcement is only applicable for investments in Government securities as of now.
  • With Sri Lanka heading towards a new chapter in foreign investments as per the State Minister of Finance, it will be essential to revive both the fixed income and equity markets by introducing mechanisms of this nature.
  • We estimate this announcement to be positive on the overall economy especially in reviving the fixed income market. We believe extension of similar hedging instruments to equity investors may assist a FII revival in capital markets in the near term. This type of Government policy support will help to attract much needed foreign currency flows into Sri Lanka, amid ambitious plans of a near term economic revival.

EVENT UPDATE

Hemas Holdings (HHL) – Government Plans on Reducing Pharma Imports

15 September 2020

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  • In line with the broader policy of reducing dependence on imports, the President of Government of Sri Lanka (GoSL) announced plans to reduce pharmaceutical imports by 50% within next three year
  • The GoSL is planning to save ~Rs.60bn of ~Rs.130bn spent annually on pharmaceutical imports and according to the notice 25 medium scale businessmen are to invest US$300mn to meet local demand
  • Government is the largest customer for pharmaceuticals in Sri Lanka, accounting to ~80% of volumes, out of which ~80% is assumed to be imported. Morison (MORI), 91% owned subsidiary of HHL is currently a leading supplier for GoSL pharmaceutical requirements
  • Private Consumption of pharmaceuticals is ~20% of volumes (assumed to be higher in terms of value terms), out of which over 90% is assumed to be imported.
  • GoSL will likely target the Government pharmaceuticals requirement for import substitution and MORI is also in the process of expanding domestic manufacturing
  • The proposal will likely be positive for HHL, given that MORI is already in the process of expanding domestic manufacturing. However, there can be an impact on margins if HHL imports are substituted by domestic manufacturing, due to lower margins of domestic manufacturing operations
  • Our Net Profit forecasts for HHL are at Rs.1,809mn (+21% YoY) for FY21E and Rs.3,641mn for FY22E
  • The HHL share has underperformed the ASI during past 12 months and 2020YTD declining -11% and -20% (vs. -5% and -10% of ASI). The share has however outperformed the ASI in past month increasing +9% (vs. ASI’s +5%)
  • The share is trading at PERs of 22.0x and 10.9x for FY21E and FY22E respectively. Our target price for HHL is at Rs.76.1 (total upside of +16%), rated BUY

EVENT UPDATE

Listed Banks’ Maximum Shareholding Limits Revised Up

8 September 2020

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  • The Monetary Board of the Central Bank of Sri Lanka (CBSL), having considered the benefits to the banking system through the investments by Multilateral Financial Organizations (MFOs) in the shareholding of licensed commercial banks, has amended the maximum percentage of ownership of shares
  • To 15% for any shareholder referred to in Sections 12(1C) and 46(1)(d).
  • To 20% for Multilateral Financial Organizations such as the World Bank (WB), International Finance Corporation (IFC), Asian Development Bank (ADB) and any other MFO as approved by the Monetary Board of the CBSL subject to the condition that the material interest so acquired shall be reduced to 15% within a period of 10 years from the date of stipulation.
  • Previously (i.e. till 07 September 2020) the share ownership limit was set at 10% of the issued share capital carrying voting rights in a licensed bank, in the following instances.
  • A company, incorporated body or individual (15% in the case of share ownership in an LSB).
  • Company, together with its subsidiaries, its holding company etc.
  • Individual, together with his close relations and companies in which he / she has a substantial interest
  • Further, the shareholding was allowed to be increased to 15% with the Monetary Board approval on case by case basis till 07 September 2020.
  • We view the said amendment (to increase the caps) as a positive for the overall sector given that an eventual 15% shareholding may not impact a bank’s governance via significant influence whilst also it promotes better equity participation of MFOs to benefit from their tech – knowhow (in addition to the benefit of MFO’s equity funds) in revitalizing the domestic economy in the medium to longer term.

EVENT UPDATE

Dialog Axiata  – Estimated Impact Upon the Implementation of Mobile Number Portability

25 August 2020

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  • The Telecommunications Regulatory Commission of Sri Lanka (TRCSL), announced recently that it has received a grant from the Institutional Development Fund (IDF) under the World Bank to develop its knowledge base and implementation capacity, enabling it to design and implement Mobile Number Portability (MNP) within the Telco industry.
  • The long-awaited announcement took place, amid the receipt of funds to implement MNP in Sri Lanka. Whilst this leads to a more liberalized telco market, it may also allow consumers (users) to be identified by one single number notwithstanding the network they are on.
  • Typically, when MNP is implemented in a country, a rise in churn (a measure of the number of users moving out of a network over a specific period) follows. However, markets such as Singapore, has exhibited that, churn will stabilise with time and allow competition within the players to drive their respective market shares based on their service offering.
  • When it comes to coverage and service offering, DIAL currently stands at a dominant position which has enabled the group to increase its market share despite accounting for almost half of the Sri Lankan Telco SIM market.
  • On the other hand, DIAL has managed to achieve a 93% coverage when it comes to 4G mobile coverage, which will enable them to lead the service offering within the local telco market.
  • Further, DIAL remains to be the only operator to successfully commercially test 5G in Sri Lanka, resulting in DIAL having a slight edge over the other players when it comes to customer retention.
  • Due to the above reasons, we believe, even though there is likely to be a fluctuation in market shares upon the initial implementation of MNP in Sri Lanka, given the deep pockets (compared to its peers), DIAL will be better positioned to continue its growing market share in the domestic market in the medium to longer term.
  • DIAL share outperformed the broader market by +4% and +15% during past 3 months and 12months although underperforming the broader market by -8% during the past month.
  • DIAL trades on PER multiples of 11.9X (2.9X EV/EBITDA) for 2020E and 6.2X (2.6X EV/ EBITDA) for 2021E. We believe the counter continues to be undervalued given its COVID-19 insulated core earnings along with its pending medium-term repayment of its Foreign currency debt obligations.
  • Based on a blended valuation approach, which takes an equal weightage between DCF, EV/EBITDA and PE methodologies, we have derived a 12M Target Price of Rs.13.9 (+22.9% upside).

http://www.trc.gov.lk/component/content/article/48/143-mobile-number-portability-eoi.html

BANKING SECTOR UPDATE

Impact Analysis on Reduction of Regulated Interest rates

24 August 2020

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  • At the monetary policy review meeting held on 19 August 2020, The CBSL lowered the cap on interest rates charged by Licensed Commercial Banks (LCBs) and Licensed Specialized Banks (LSBs) on specific credit facilities such as credit cards, pawning and pre-arranged temporary overdrafts.

  • Accordingly, maximum interest rates charged on credit cards were reduced to 18% (vs 28% previously) whilst the cap on interest rates on pawning facilities were reduced to 10% (vs 12% previously)

  • However, given the limited exposure of key listed banks to credit cards and pawning facilities we expect the reduction in interest rate caps on such facilities to only have a marginal impact on earnings of listed LCBs. However, Nations Trust Bank (NTB) has a relatively large exposure to credit cards and therefore could be negatively impacted in the near term until credit growth picks up

  • Moreover, we expect low interest rates resulting from the aforementioned cuts to drive credit purchases and borrowings among low income groups of the economy resulting in higher credit card and pawning balances

  • Furthermore, we expect lower cost of funds brought about by policy rate reductions (-250bps YTD2020) and SRR cuts (-300bps YTD2020) to further alleviate the impact on Net Interest Income and earnings

EVENT UPDATE

Sri Lanka – Interest Rates – Regulated Interest Rates Reduced to Reflect Recent Policy Rate Cuts

20 August 2020

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  • The Monetary Board of the Central Bank of Sri Lanka (CBSL), at its meeting held on 19 August 2020, decided to maintain its policy interest rates whilst reducing regulated interest rates to reflect recent policy rate reductions. As a result, Credit card interest rates, Pre arranged Temporary Overdrafts (TODs), Pawning Interest Rates and Penal Interest rate were reduced to 18%, 16%, 10% and 2% respectively.
  • The CBSL indicated that the recent reductions in market interest rates (depicted by AWPLR and AWLR) assisted the expansion of the broad money supply, which will help growth of credit in the economy resulting in a faster recovery of the economy. GDP contracted -1.6% in 1Q2020 based on the statistics published by the Department of Census and Statistics (DCS) and is expected to contract significantly in 2Q2020E due to the on set of Covid-19 in Sri Lanka from mid March 2020.
  • CBSL indicated that its Gross Official Foreign Reserve (GOFR) rose to US$7.1bn (4.7 months import cover) as at end July 2020 from US$6.7bn as of end June 2020 (owing to the receipt of the SAARC swap facility from India during the month of July 2020) and the country remains in a comfortable space to honor its short to medium term external debt obligations with minimal sovereign default risk.
  • CBSL further indicated an anticipated forecast of Sri Lanka’s near term headline inflation which is expected to be around 5% in the near term. This also indicates that the decision CBSL adopted to reduced regulated interest rates may further ease pressure on the general consumer, allowing to assist consumption driven growth in the near term. Banking sector NPAs improved from 5.6% as at end May 2020 to 5.4% as at end June 2020, depicting a shift towards a gradual recovery of the economy.
  • As indicated in our previous update, we continue to believe that further policy rate cuts won’t sustain below the current level, and measures in line with today’s decision will help revive the consumption levels of the economy as a whole.
  • Consequently, we maintain our interest rate forecast for 12 month T-yield at 5.5% as at 31 Dec 2020E whilst maintaining our LKR /US$ forecast at 195/US$ as at 31 December 2020E.

EVENT UPDATE

COMB : Resolution to Approve IFC’s Private Placement Passed

13 August 2020

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  • COMB announces a US$50mn worth vot. share private placement to IFC at Rs.80/share
  • IFC to become the largest shareholder following the Private Placement
  • Post – Placement PBV valuation stands at 0.61X on 2020E earnings
  • US$50mn capital infusion to CET I to result in an excess capital buffer of 3.5% based on publicly available CARs
  • Commercial Bank of Ceylon (COMB) announced it passed all resolutions pertaining to the Private Placement of IFC and its allied parties to make an investment of US$50mn into its CET I capital with freshly issued voting shares at Rs.80 per share.
  • Given that the spot mid exchange rate hovers ~Rs.185/US$ as of end 12 August 2020, COMB is expected to receive Rs.9.25bn worth funds into its CET-I capital with freshly issued 115.625mn shares resulting in IFC’s total shareholding increasing to 14.7% based on publicly available shareholder information.
  • This will enhance COMB’s capital adequacy ratios for CET I, Tier I and Tier I+II by 0.96% (or ~1%), resulting in COMB’s 31 March 2020 reported Tier I Capital Adequacy Ratio increasing to 12.5% with an excess capital buffer of ~3.5%
  • Given that we revised up COMB’s NP forecasts for 2020E and 2021E by +6% and +7% to Rs.12,257mn (-33% YoY) and Rs.20,697mn (+66% YoY) respectively following the initial announcement of the PP, we maintain our EPS forecasts for COMB at Rs.11.3 (-33% YoY) and Rs.18.8 (+66% YoY) for 2020E and 2021E respectively, due to the approved Private Placement of IFC.
  • On previously revised earnings, COMB voting share trades on par with the sector on PE (and book) multiples of 7.2X (PBV – 0.61X) for 2020E and 4.3X (PBV – 0.55X) for 2021E. The less liquid non-voting share trades at a 17% discount to the voting share
  • We maintain COMB’s rating at a Buy with target price set at Rs.93.2 for its Voting share based on an average of estimated PBV and Residual Income models which indicate a 12M upside potential of +15.0%.

POST ELECTION UPDATE

Sri Lanka General Elections 2020

7 August 2020

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  • The Rajapaksa led Sri Lanka Podujana Peramuna (SLPP) registered a convincing win from the General Election conducted on 5 August 2020. The SLPP and its allies have secured 150 seats required for 2/3rd majority

  • The SLPP won 145 seats on their own and with their allies who contested separately they have secured 150 seats. Sajith Premadasa led SJB ended up with 54 seats whilst the ITAK representing minority Tamil voters in North/East has secured 10 seats

  • The margin of SLPP’s victory has been well above expectations and gives a strong platform to the SLPP to pursue their agenda with minimal opposition. New Parliament will meet on 20 August 2020

  • Government of Sri Lanka (GoSL) has already implemented some of the key proposals laid out in the manifesto of the President Gotabaya Rajapaksha. With the current mandate we expect the new Government to venture into hard and swift reforms that are needed to get close to long term economic targets

  • Private sector will also have the opportunity to work more closely with the GoSL enabling the implementation of most projects implemented without a delay, which will be vital for Sri Lanka’s economy.

VALUATION UPDATE

Melstacorp (MELS – Rs.28.4)

29 July 2020

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  • Melstacorp (MELS) is a conglomerate with interests in Alcoholic Beverages, Insurance, Plantations, Telecommunication and Diversified sectors. Further, the group has exposure to Tourism, Logistics and Power Generation through 50.1% owned listed conglomerate, Aitken Spence (SPEN)

    q The core alcoholic beverage sector of MELS, which includes listed subsidiary Distilleries Company of Sri Lanka (DIST), is expected to be impacted considerably by the ban on sale of alcohol during the lockdown on Sri Lanka

  • However, with the ban on ethanol imports (the key ingredient used in the manufacture of hard liquor) the overall impact would be partly offset by better GP margins due to the lower cost of local ethanol

  • The tourism sector is not expected to recover in the near term due to travel restrictions that have been imposed in order to control the spread of COVID-19 though domestic tourism has witnessed a pick-up after the lockdown restrictions in Sri Lanka was eased

  • The plantation sector witnessed higher prices at tea auctions during the lockdown the sales volumes are believed to have been low given the prevailing drought

  • Telco subsidiary, Lanka Bell is expected to have witnessed a decline in voice usage during the work from home period and the increased demand for data is not expected to offset the drop given the smaller market share of the company

  • The group’s healthcare sector could be a potential growth driver in the longer term

  • Our net profit forecast for MELS has been revised down by -73% to Rs.2,034mn (-57% YoY) mainly owing to the impact to the diversified sector from lower tourist arrivals. FY22E net profit forecasts stand at Rs.5,150mn with the anticipated recovery in key sectors

  • The DIST share has witnessed higher liquidity than MELS since the re-opening of the market on 11 May 2020 despite a significantly lower free float of 3.3%

  • Whilst we remain positive on MELS’s core beverage business over the medium term, and thereby recommend investors seek direct exposure to DIST, reservations linger over the MELS group’s recent investments and rationale on diversification into increasingly non-core businesses

  • The company is yet to release its 4Q20 quarterly financial statements and FY20 annual report

EVENT UPDATE

Sri Lanka – Road to General Election 2020: Pre- Election Update

28 July 2020

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  • Sri Lanka’s General Election will take place on 5 August 2020 to form the next parliament of Sri Lanka
  • The outcome of this election seems a foregone conclusion, with everyone expecting an easy win for the Rajapaksa led Sri Lanka Podujana Peramuna (SLPP) alliance
  • Priority of the new government should be to present a full budget, as Sri Lanka has been operating under Votes of Account and other constitutional powers with regards to government finances
  • We forecast 12 month T-yield at 5.5% as at 31 Dec 2020E whilst maintaining our LKR /US$ forecast at 195/US$ as at 31 December 2020E
  • With continuous discussions on concessional funding, the country remains in a comfortable space to honor its short to medium term external debt obligations
  • More confidence expected post elections and corporate earnings are expected to bounce back towards later part of the year with the resumption in business activity

    Top Picks : CARG, CTC, DIST,TKYO, HHL, JKH, DIAL, HNB,COMB,SAMP

EVENT UPDATE

DFCC Bank (DFCC) – Management Succession and Valuation update

22 July 2020

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  • On 20 July 2020, DFCC Bank (DFCC) announced that Mr.Thimal Perera, who currently holds the position of Deputy Chief Executive of the Bank, has been selected by the Board of Directors to replace Mr.Lakshman Silva as the Chief Executive Officer w.e.f 01 Jan 2022
  • Mr.Thimal Perera has over two decades of experience in the Financial services and Banking sector, having held senior positions with the HSBC group, the Commercial Bank of Qatar, Barclays Bank, UAE and Hatton National Bank prior to joining DFCC. Apart from his position at DFCC, he also serves as a Director of Synapsys Ltd, Acuity Partners Ltd and Acuity Stock Brokers (Pvt) Ltd
  • DFCC paid a final dividend of Rs.3.0 per share for 2019 by way of a cash dividend of Rs.2.5 and scrip dividend of Rs.0.5 in the proportion of 1:168.2 shares
  • DFCC held ~13.5% of Commercial Bank of Ceylon (COMB) shares as at 31 March 2020, which is likely to reduce to ~12% following the completion of COMB’s private placement with International Finance Corporation (IFC). As at 31 Mar 2020, investments in COMB accounted for ~19% of DFCC’s book value
  • DFCC’s currently trading at multi-year low P/BV of 0.36X with reported ROEs of 8.2% and 6.3% for 2018 and 2019, respectively. DFCC’s ROE adjusted for the stake in COMB stood at 10.6% and 7.1% in 2018 and 2019, respectively
  • P/BV of DFCC’s Banking operations (excluding the investment in COMB) stands at 0.21X assuming any proceeds from COMB stake are fully distributed.
  • Our 2020E NP forecast for DFCC is at Rs.1,652mn (-45% YoY) due to sluggish credit growth amid negative consumer sentiment following the onset of COVID-19, high credit costs and pressure on NIS resulting from debt moratorium reliefs granted by the CBSL. 2021E NP forecast at Rs.3,238mn (+96% YoY) led by a revival in credit demand helped by the dovish monetary policy stance adopted by the CBSL
  • The DFCC share has underperformed the broader market declining -1% and -29% over the past 3 months and 12 months, respectively (vs ASI rising +10% and falling -11% over the same period) and the share is now trading at a -40% discount to its 12M high of Rs.99.1 recorded on 29 July 2019
  • DFCC currently trades at PER multiples of 11.1X (PBV of 0.36X) for 2020E and 5.7X (PBV of 0.35X) for 2021E providing ROEs of 3-6%

EVENT UPDATE

People’s Leasing and Finance (PLC) – Share price movement and a surge in Turnover

21 July 2020

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  • Since our 4Q20 earnings review note on 25 June 2020, People’s Leasing and Finance (PLC) has recorded an average daily turnover of Rs.23.6mn sparked by an increase in foreign selling activity (vs. an average daily turnover of Rs.6.8mn in 2020YTD). On 20 July 2020, PLC recorded its highest daily turnover in 2020YTD at Rs.276mn with foreign investors selling stakes worth Rs.244mn (-21mn shares). Foreign shareholding in PLC stood at 5.0% as at 21 July 2020
  • During the same period, PLC has fallen -11% against ASI’s decline of -2% and is now trading at a -36% discount to its 12M high of Rs.18.2 reached on 26 Dec 2019
  • PLC’s FY20 EPS was reported at Rs.2.1 (-31% YoY) impacted by a significant rise in impairment provisioning to Rs.5.0bn (vs.1.9bn in FY19) likely as an early precaution for an anticipated increase in NPA beyond the moratorium period in 2H21E
  • PLC has not yet announced a final dividend for FY20
  • Our FY21E net profit forecast for PLC is at Rs.3,703mn (+9% YoY). YoY increase in NP is due to the significant impairment charge absorbed in FY20. However, COVID-19 related negative revisions to FY21E NP at -37% due to lackluster credit growth amid negative consumer sentiment and import bans on motor vehicles, high credit costs and pressure on NIS resulting from debt moratorium reliefs granted by the CBSL. FY22E NP forecast at Rs.5,531mn (+49% YoY) led by a revival in credit demand supported by the dovish monetary policy stance adopted by the CBSL
  • The PLC share has underperformed the broader market declining -3% and -20% over the past 3 months and 12 months, respectively (vs ASI rising +10% and -12% over the same period)
  • PLC currently trades at PER multiples of 5.1X (PBV of 0.5X) for FY21E and 3.4X (PBV of 0.5X) for FY22E providing ROEs of 11-15%
  • We do not expect a material upside to the share price in the near term owing to the prevailing challenging market conditions. A re-rating of the share will depend on a resurgence of credit growth following the relaxation of vehicle import restrictions

VALUATION UPDATE

Hemas Holdings (HHL) – Notice of Cancellation on medicines

20 July 2020

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  • National Medicines Regulatory Authority (NMRA) on 17 July 2020 has issued notices of cancellation of registrations and import licenses to five pharmaceutical companies in relation to 10 medicines for arbitrarily and unilaterally increasing their retail prices
  • The list includes three drugs imported by Hemas Pharmaceuticals (Pvt) Ltd, a subsidiary of Hemas Holdings (HHL)
  • The issue of notice does not revoke the import license immediately. The companies will have a time of one month to provide clarifications to the NMRA
  • According to HHL, the revenue from medicines that have been served notice contribute less than 1% of group revenue (likely less than 2% of healthcare sector revenue of HHL)
  • Our current Net Profit forecasts for HHL are at Rs.1,410mn (-6% YoY) for FY21E and Rs.3,259mn for FY22E
  • On current forecasts the share is trading at PERs of 25.3x and 11.0x for FY21E and FY22E respectively. Our target price for HHL is at Rs.72.4 (total upside of +22%), rated BUY

VALUATION UPDATE

Hatton National Bank (HNB)

14 July 2020

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  • Recent upward Net Profit revision for 2020E is attributable to better core growth owing to lower interest rates.
  • Cost of equity revised down due to significant reductions witnessed in interest rates.
    Foreign Exchange income to be relatively less in 2020E (as opposed to previously estimated due to ongoing import bans).
  • With our 31 December 2020E US$/LKR forecast revised down by -7% to Rs.195/US$ on 16 June 2020, and Interest rate forecast for 12 month Treasury yield also revised down by 75bps to 5.5% recently, HNB’s forecast net profits were revised up previously by +11% to Rs.8,003mn (-45% YoY) for 2020E whilst marginally revising down its 2021E NP to Rs.15,307mn (+91% YoY).
  • HNB voting share underperformed the broader market during past twelve months and 3 months by -11% and -8% respectively. However, the voting share outperformed the ASPI during the past month by +5%.
  • On revised earnings, HNB voting share trades at a discount to the sector on PE multiples of 6.4X (PBV – 0.34X) for 2020E and 3.3X (PBV – 0.31X) for 2021E. HNB’s relatively illiquid non-voting share trades at a ~21% discount to its voting share. HNB is forecast to record group ROEs of ~5% – 10% in the short to medium term.
  • Following the recent revisions to macro-economic forecasts, we maintain HNB’s rating at a “BUY”, with the 12-month target price set at Rs.133.9 per share, which indicates an upside potential of +28.7%.
  • HNB-N share is valued at Rs.142.2 based on the residual income model with target cost of equity set at 18.5%. On a PBV basis, we derive a value of Rs.125.6 on forward PBV multiples of 0.4X.

VALUATION UPDATE

Dialog Axiata – DIAL

10 July 2020

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  • Recent decline in interest rates and appreciation of the LKR has favoured Dialog Axiata (DIAL) by way of reduced Foreign currency (FX) losses and owing to the reduced cost of equity.
  • DIAL’s US$181mn loan’s moratorium ends in 4Q2020E resulting in a capital repayment of US$18mn per quarter. Given the improving US$/LKR outlook, we expect DIAL to report relatively low FX losses resulting in relatively better bottom line growth as revised in our recent (dated: 1 July 2020) market update.
  • With our 31 December 2020E US$/LKR forecast being revised down by -7% to Rs.195/US$ on 16 June 2020, DIAL’s forecast net profits were revised up previously by +48% and +1% to Rs. 7,585mn (-30% YoY) for 2020E and Rs.14,701mn (+94% YoY, off a low base) for 2021E.
  • DIAL share outperformed the broader market by rising +9%, +33% and +22% during the past, month, 3 month and 12month periods compared to ASPI’s increases of +4%, +11% and -8% respectively.
  • DIAL trades on PER multiples of 12.1X (3.0X EV/EBITDA) for 2020E and 6.3X (2.8X EV/ EBITDA) for 2021E. Despite recent gains of the share, we believe the counter continues to be still undervalued given its COVID-19 insulated core earnings along with its pending medium-term repayment of its Foreign currency debt obligations
  • Based on a blended valuation approach, which takes an equal weightage between DCF, EV/EBITDA and PE methodologies, we have derived a 12M TP of Rs.13.9, yielding a +23.3% upside potential to the current stock price. Near-term catalysts for the stock are insulated top line growth from COVID-19, change in focus of capex to increase business volume growth in the near term and due to DIAL being an essential service during times of social distancing.

VALUATION UPDATE

Dialog Axiata – DIAL

10 July 2020

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  • Recent decline in interest rates and appreciation of the LKR has favoured Dialog Axiata (DIAL) by way of reduced Foreign currency (FX) losses and owing to the reduced cost of equity.
  • DIAL’s US$181mn loan’s moratorium ends in 4Q2020E resulting in a capital repayment of US$18mn per quarter. Given the improving US$/LKR outlook, we expect DIAL to report relatively low FX losses resulting in relatively better bottom line growth as revised in our recent (dated: 1 July 2020) market update.
  • With our 31 December 2020E US$/LKR forecast being revised down by -7% to Rs.195/US$ on 16 June 2020, DIAL’s forecast net profits were revised up previously by +48% and +1% to Rs. 7,585mn (-30% YoY) for 2020E and Rs.14,701mn (+94% YoY, off a low base) for 2021E.
  • DIAL share outperformed the broader market by rising +9%, +33% and +22% during the past, month, 3 month and 12month periods compared to ASPI’s increases of +4%, +11% and -8% respectively.
  • DIAL trades on PER multiples of 12.1X (3.0X EV/EBITDA) for 2020E and 6.3X (2.8X EV/ EBITDA) for 2021E. Despite recent gains of the share, we believe the counter continues to be still undervalued given its COVID-19 insulated core earnings along with its pending medium-term repayment of its Foreign currency debt obligations
  • Based on a blended valuation approach, which takes an equal weightage between DCF, EV/EBITDA and PE methodologies, we have derived a 12M TP of Rs.13.9, yielding a +23.3% upside potential to the current stock price. Near-term catalysts for the stock are insulated top line growth from COVID-19, change in focus of capex to increase business volume growth in the near term and due to DIAL being an essential service during times of social distancing.

VALUATION UPDATE

John Keells Holdings – JKH Rs 114 (BUY)

09 July 2020

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  • John Keells Holdings (JKH), the largest listed conglomerate in Sri Lanka will have opposite effects from stronger LKR and lower lending rates. Meanwhile, despite the neutral net impact to earnings, JKH target price was revised up with a BUY rating to reflect the lower risk free rates
  • Amid stronger LKR exchange rate expectations with the appreciation of the currency by ~7% from 09 Apr – 15 Jun 2020, we previously revised down JKH’s net profit forecasts by -5% and -4% for FY21E and FY22E
  • We subsequently revised up our earnings forecasts by +11% for FY21E and by +3% for FY22E, to account for lower net finance cost expectations
  • Whilst FY21E EPS is expected to fall to Rs.4.2 (-38% YoY), a strong recovery is expected in FY22E at Rs.9.1 (NP of Rs.12.1bn)
  • The JKH share has underperformed the broader market during last 12M and 2020 YTD declining -19% and -32% respectively (vs. ASI’s -8% and -17%)
  • With risk free rates of returns also being lowered, we have reduced the discount rates for businesses, raising the target price to Rs.134.9 rated BUY (upside of +19% including dividend)

EVENT UPDATE

Distilleries Co. of Sri Lanka (DIST – Rs.14.5) – Impact of Exchange Rate, Low Interest Rates and GoSL Ban on the Import of Ethanol

09 July 2020

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  • Distilleries Company of Sri Lanka (DIST), the market leader in Sri Lanka’s (legal hard alcohol market with a ~65% market share in the core arrack segment, is believed to have imported ~50% of its total ethanol requirement for liquor production prior to the ban on ethanol imports, with ethanol comprising ~80% of its cost of sales
  • With the revision of our year end exchange rate outlook and the reduction in market lending rates due to the reduction in policy rates in 2020YTD, we have revised up our net profit forecasts for DIST. The company is expected to benefit slightly due to the more favourable outlook on the LKR and reduced lending rates
  • Accordingly, we maintained our FY21E EPS forecast at Rs.1.2 given the restriction on ethanol imports and revised up our FY22E EPS forecasts by +4% to Rs.1.4 to reflect the lower cost on ethanol imports for DIST given the more favourable outlook on the LKR exchange rate
  • Further, we revised down our net finance cost forecasts by ~Rs.5mn and ~Rs.30mn for FY21E and FY22E on lower net finance cost expectations for DIST in our Corporate Earnings Update on 01 July 2020
  • The import policy released by the Ministry of Finance and Planning in May 2020 confirmed that the ban on import of ethanol implemented from 01 Jan 2020 will continue. Ethanol is the key raw material used in the production of hard liquor
  • Press articles also indicated that the liquor manufacturers were expressing their concern over the quality and safety of liquor produced using local ethanol which was denied by Lanka Sugar Company (Pvt) Ltd which produces ethanol in Sri Lanka
  • Following the ban on import of ethanol the price of locally produced ethanol has increased from Rs.290 per litre to Rs.500 per litre. This is broadly in line with our current forecasts and we will be maintaining our forecasts accordingly
  • Our net profit forecasts for DIST currently stand at Rs.5,549mn for FY21E (EPS Rs.1.2, -7% YoY) and Rs.6,476mn (EPS Rs.1.4, +17% YoY) for FY22E
  • Based on a blended valuation, which takes an equal weightage between DCF and PE methodologies, we have derived a 12M target price of Rs.17.6, which suggests a ~22% upside potential to current price levels and we rate the share as a BUY
  • 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%

BANKING SECTOR UPDATE

Policy Interest Rates reduced by a further 100bps

09 July 2020

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  • The Monetary Board of the Central Bank of Sri Lanka (CBSL), at its meeting held on 8 July 2020, decided to reduce its policy interest rates by a further 100bps w.e.f. 09 July 2020.
  • The CBSL indicated that these policy measures to date were implemented in order to kick start relatively low credit growth as of now whilst hinting that 2Q2020E real GDP growth numbers to be significantly impacted by COVID 19 pandemic. With Private sector credit growth declining to 6.4% YoY in May 2020 from 7.6% in April 2020 amid some indications of crowding out, the CBSL believes today’s (9 July 2020) 100bps rate cut to spur private sector credit growth amid extremely high liquidity levels in the financial market as of now.
  • Despite CBSL and Government’s efforts to improve economic activity, owing to COVID 19 and relatively high NPAs in the system, the banking sector was reluctant to lend to the businesses (indicated by extremely low margins made via corporate financing). However, with the release of liquidity via SRR cuts and freshly minted money, CBSL is likely to supervise the lending process of LCBs in order to stimulate economic activity under the recently announced 4% credit facilities that will be guaranteed by the CBSL.
  • With the Government of Sri Lanka likely to receive concessional funding worth US1bn from the Federal Reserve (Fed) in the near term (which is at the discussion phase as of now) amidst gross official reserves at US$6.7bn as of end June 2020, the country remains in a comfortable space to honor its short to medium term external debt obligations with minimal sovereign default risk.
  • Although the recent interest rate reductions are likely to reduce the market interest rates in the near term by a further 20bps to 30bps, given the fact that the economy operates on marginal positive real rates of +32bps (NCPI estimate for end June 2020 of ~5.0% vs. 12-month T bill of 5.32% as of 9 July 2020), we believe further rate cuts won’t sustain below the current level, although the current stimulus was required to spur credit growth in the near term. Consequently, we maintain our interest rate forecast for 12-month T-yield at 5.5% as at 31 Dec 2020E whilst maintaining our LKR /US$ forecast at 195/US$ as at 31 December 2020E

EVENT UPDATE

Tokyo Cement Company (Lanka) (TKYO) – Impact of Exchange Rate, Lower Interest Rates and Cess Reduction

07 July 2020

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  • Tokyo Cement Company (Lanka) (TKYO), one of the largest cement manufacturers in Sri Lanka, is expected to benefit from both a stronger LKR exchange rate given its exposure to imported clinker as well as lower lending rates given its high leverage levels
  • A stronger currency coupled with lower lending rates is anticipated to only provide a partial relief to TKYO’s earnings in FY21E, amid a steep decline in volumes expected this year in the wake of COVID-19
  • Meanwhile, Government of Sri Lanka (GoSL) announced that Cess applicable on clinker and cement imports was reduced w.e.f 01 July 2020. Accordingly, Cess applicable on imported bulk cement and bag cement are at Rs.2.0 per kg and Rs.3.0 per kg respectively. Cess on imported clinker has been rescinded
  • Following the reduction in Cess for clinker imports, TKYO’s cost of sales are expected to decrease, resulting in an expansion of GP margins
  • However, with the latest downward revision of Cess, the impact to importers’ cost structures is lessened, although, overall costs have increased considering both the June and July Cess revisions.
  • Accordingly, we revise down our revenue forecast for TKYO by -7% to Rs.27,731mn (-23% YoY) for FY21E, and by -6% to Rs.34,941mn (+26% YoY) for FY22E, on the back of lower volume expectations as competition from importers is likely to continue
  • Consequently, we revise up our net profit forecast by +2% to Rs.680mn (-65% YoY) for FY21E, amid upward revisions to GP margin expectations. Meanwhile, net profit forecast revised down by -4% to Rs.2,048mn for FY22E, with the downward revision to revenues more than offsetting the upward revision to GP margins
  • TKYO’s voting share rose +35% over the past 12M and +49% since market re-opening on 11 May 2020 (vs. -8% and +11% of ASPI), whilst the non-voting share rose +57% over the past 12M and +50% since market re-opening. Both voting & non-voting share prices have been highly volatile in the recent past. Meanwhile, the voting share trades at a forward PER of 19.8X for FY21E and 6.6X for FY22E
  • Based on a DCF valuation, we have derived a 12M target price of Rs.39.1 for the voting share, which suggests a potential upside of ~17% to current price levels, and maintain the rating for the share as BUY
  • A stronger LKR exchange rate, lower lending rates and the removal of Cess for clinker imports are expected to bode well for TKYO. With the anticipated commencement of large-scale infrastructure projects coupled with other private projects, cement consumptions levels are expected to pick-up from FY22E, which will result in a material increase in TKYO’s capacity utilisation levels, and thereby improved GP margins

CORPORATE EARNINGS UPDATE

Interest Rate Revision

01 July 2020

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  • The Monetary Board of the Central Bank of Sri Lanka (CBSL) is adopting an accommodative stance with policy rates being revised down by 150bps in 2020YTD and Statutory Reserve Ratio (SRR) by a cumulative 300bps
  • Accordingly, treasury bill and treasury bond yields have also decreased 2020YTD
  • With the recent developments, we revise down our 12 month treasury bill yield forecast by 75bps to 5.50%
  • Given this backdrop, we have also revised our corporate earnings expectations

CORPORATE EARNINGS UPDATE

Interest Rate Revision

01 July 2020

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  • The Monetary Board of the Central Bank of Sri Lanka (CBSL) is adopting an accommodative stance with policy rates being revised down by 150bps in 2020YTD and Statutory Reserve Ratio (SRR) by a cumulative 300bps
  • Accordingly, treasury bill and treasury bond yields have also decreased 2020YTD
  • With the recent developments, we revise down our 12 month treasury bill yield forecast by 75bps to 5.50%
  • Given this backdrop, we have also revised our corporate earnings expectations

CORPORATE EARNINGS UPDATE

Interest Rate Revision

01 July 2020

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  • The Monetary Board of the Central Bank of Sri Lanka (CBSL) is adopting an accommodative stance with policy rates being revised down by 150bps in 2020YTD and Statutory Reserve Ratio (SRR) by a cumulative 300bps
  • Accordingly, treasury bill and treasury bond yields have also decreased 2020YTD
  • With the recent developments, we revise down our 12 month treasury bill yield forecast by 75bps to 5.50%
  • Given this backdrop, we have also revised our corporate earnings expectations

EVENT UPDATE

COMB – Private Placement to IFC

30 June 2020

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  • IFC to become the largest shareholder following the Private Placement
  • Placement PBV valuation stands at 0.61X on current book value
  • US$50mn capital infusion to CET I
  • The long-awaited announcement will enhance COMB’s capital adequacy ratios for CET I, Tier I and Tier I+II by +0.96% (or ~+1%), if approved in the upcoming general meeting. This will consequently result in COMB’s 31 March 2020 reported Tier I Capital Adequacy Ratio increasing to 12.5% with an excess capital buffer of ~3.5%
  • Following the infusion of 125mn shares, the book value per share of the group is to dilute to Rs.125.8 from its previously reported Rs.131.8 as at 31 March 2020, resulting in a post deal PBV valuation of 0.64X (vs. a current valuation of 0.61X based on 31 March 2020 reported figures).
  • We revise up COMB’s NP forecasts for 2020E and 2021E by +6% and +7% to Rs.12,257mn and Rs.20,697mn although broadly maintaining EPS forecasts at Rs.11.2 and Rs.18.7 for 2020E and 2021E respectively, due to the anticipated capital infusion.
  • On revised earnings, COMB voting share trades on par with the sector on PE (and book) multiples of 6.9X (PBV – 0.57X) for 2020E and 4.2X (PBV – 0.52X) for 2021E. The less liquid non-voting share trades at a 14% discount to the voting share
  • We maintain COMB’s rating at a Buy with target price set at Rs.90.0 for its Voting share based on an average of estimated PBV and Residual Income models which indicate a 12M upside potential of +15.3%. COMB-N share is valued at Rs.77.5 based on residual income with cost of equity set at 18.0% (COE revised down due to lower Risk Free Rate). On a PBV basis we derive a value of Rs.102.6 on forward PBV multiples of 0.74X.

EVENT UPDATE

COMB – Private Placement to IFC

30 June 2020

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  • IFC to become the largest shareholder following the Private Placement
  • Placement PBV valuation stands at 0.61X on current book value
  • US$50mn capital infusion to CET I
  • The long-awaited announcement will enhance COMB’s capital adequacy ratios for CET I, Tier I and Tier I+II by +0.96% (or ~+1%), if approved in the upcoming general meeting. This will consequently result in COMB’s 31 March 2020 reported Tier I Capital Adequacy Ratio increasing to 12.5% with an excess capital buffer of ~3.5%
  • Following the infusion of 125mn shares, the book value per share of the group is to dilute to Rs.125.8 from its previously reported Rs.131.8 as at 31 March 2020, resulting in a post deal PBV valuation of 0.64X (vs. a current valuation of 0.61X based on 31 March 2020 reported figures).
  • We revise up COMB’s NP forecasts for 2020E and 2021E by +6% and +7% to Rs.12,257mn and Rs.20,697mn although broadly maintaining EPS forecasts at Rs.11.2 and Rs.18.7 for 2020E and 2021E respectively, due to the anticipated capital infusion.
  • On revised earnings, COMB voting share trades on par with the sector on PE (and book) multiples of 6.9X (PBV – 0.57X) for 2020E and 4.2X (PBV – 0.52X) for 2021E. The less liquid non-voting share trades at a 14% discount to the voting share
  • We maintain COMB’s rating at a Buy with target price set at Rs.90.0 for its Voting share based on an average of estimated PBV and Residual Income models which indicate a 12M upside potential of +15.3%. COMB-N share is valued at Rs.77.5 based on residual income with cost of equity set at 18.0% (COE revised down due to lower Risk Free Rate). On a PBV basis we derive a value of Rs.102.6 on forward PBV multiples of 0.74X.