Event Updates & Other Reports

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.

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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)

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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%

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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

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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

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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

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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

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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

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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.

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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.

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EVENT UPDATE

Hemas Holdings (HHL) – Event Update – Change of CEO

25 June 2020

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  • Hemas Holdings (HHL) announced that Mr. Steven Enderby has notified the Board of Directors of his intention to retire w.e.f. 30 Sep 2020
  • Ms. Kasturi Chellarajah Wilson will be appointed as the new CEO w.e.f. 01 Oct 2020. She will be the first female group CEO of a listed conglomerate in Sri Lanka. Ms. Wilson will be appointed as a Director to the Board w.e.f. 01 Jul 2020 and will hold the position of Deputy CEO during the transition period
  • Ms. Wilson joined HHL in 2002 and is currently heading group Pharmaceutical and Mobility Divisions
  • The replacement for the Managing Director positions of Pharmaceuticals and Mobility sectors are yet to be notified. HHL meanwhile has appointed Mr. Sriyan De Silva Wijeyeratne to head the Consumer vertical
  • Our NP forecasts for HHL stand at Rs.1,303mn for FY21E (-13% YoY) and at Rs.3,227mn (off a low base) for FY22E
  • We rate HHL share as a BUY, with a Target Price of Rs.70.5 per share. (+15% upside; +16% including dividend yield)

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EVENT UPDATE

John Keells Holdings (JKH) – JKH entered into a financing agreement with IFC for US$175mn

23 June 2020

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  • John Keells Holdings (JKH) announced that it had entered into a long-term financing agreement with the International Finance Corporation (IFC) for US$175mn. The facility is the largest investment by IFC in Sri Lanka
  • As per JKH, the proceeds from the facility will primarily be utilised to fund the expansion of supermarkets business, recent investments in hotels in the Maldives and Sri Lanka and for general corporate investments
  • Rate of the facility is at 6-month LIBOR + 380bps (based on the 6-month LIBOR as of date – the initial interest rate on the loan will be 4.21%), with a step-down pricing mechanism to a margin of 355bps by March 2024. Tenor will be ten-years till June 2030, with a four year grace period
  • Our current net profit forecasts for JKH stand at Rs.5,267mn for FY21E (-40% YoY), and Rs.11,672mn for FY22E (off a low base). We have not revised our forecasts due to uncertainty on fund allocation and timelines on usage
  • Our target price for JKH is at Rs.123.6 (total upside of +3.5%), rated HOLD

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CORPORATE EARNINGS UPDATE

Exchange Rate Revision

19 June 2020

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  • Given the recent import ban on non essential items, the LKR/US$ has appreciated +7% since 09 April 2020 to 22 June 2020. This appreciation of the LKR follows the significant -10% depreciation that the currency experienced from 01 Jan 2020 to 09 April 2020
  • Given that the Government of Sri Lanka (GoSL) may continue its stance on imports at least till the Int’l Sovereign Bond settlement that falls (matures) on 04 Oct 2020, we revised our LKR outlook by -7.5% to Rs.195 as at 31 Dec 2020
  • Given this backdrop, we have revised our corporate earnings expectations

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EVENT UPDATE

SRR further reduced to assist economic activity

17 June 2020

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  • CBSL on 16 June 2020 held an emergency meeting to take policy action

  • SRR reduced by 200 bps to 2.0% to infuse ~Rs.115bn

  • A further credit scheme was implemented to revive credit growth

  • Construction sector to be provided with a borrowing scheme using government guarantees as collateral

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ECONOMIC UPDATE

LKR appreciates 7% since mid-April owing to Import limitations

16 June 2020

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  • The LKR has appreciated 7.3% as at 15 June 2020, from its peak of Rs.199/US$ reported on 9 April 2020. Given the significant depreciation witnessed since the onset of COVID 19 in Sri Lanka, the Government of Sri Lanka (GoSL) banned imports on 16 April 2020 by limiting imports to fuels, medicines and few other essentials.

  • The said import limitation was imposed owing to the muted ISB market given the anticipated negative impact from COVID 19 on the global economy. With the GoSL having to honor an estimated US$ 4bn during April to December 2020, around 70% of the funding needed for pending debt settlements were secured by obtaining funding from neighboring India and the Republic of China.

  • With the IMF agreement on the former extended fund facility expiring during early June 2020, the request made by the GoSL from the IMF for a Rapid Credit Facility amounting to US$800mn is still under negotiations. Thus, from a worst-case scenario, the GoSL may have to let its Gross Official Foreign Reserves (GOFR) to be adjusted when it comes to the settlement of the International Sovereign Bond that is expected to mature on 4 Oct 2020.

  • The CBSL also has been maintaining its GOFR at a healthy level which stood at US$6.5bn as at 01 June 2020 with minimal forex market interventions to safeguard the LKR.

  • Given the above positive developments, we revise our LKR /US$ forecast to 195/US$ as at 31 December 2020 (from its previous Rs.210.7 estimate).

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BANKING SECTOR UPDATE

Restarting Sri Lanka’s Tourism

08 June 2020

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  • On 24 March 2020, the Central Bank of Sri Lanka (CBSL) announced debt moratoriums (capital and interest) for a period of 2-6 months, and additional working capital support at a concessionary interest rate of 4% per annum for businesses and individuals affected by the pandemic
  • SME, Tourism, Apparel, Plantations, Information Technology and related logistic providers were identified as troubled sectors eligible for the relief measures
  • Further relief measures were provided for individual borrowers as well
  • Subsequently on 06 May 2020, the CBSL indicated that interest will not be charged during the moratorium period for the loans that remain outstanding. i.e. original repayment schedule will be extended by an equal period of time with same instalment value
  • However, the banking sector was said to be in discussions with the CBSL and had requested for an amendment in the directive citing sustainability issues in the event no interest is charged from borrowers during the moratorium period
  • News articles indicated that the CBSL has accommodated the request made by the banking sector to charge interest from borrowers who have availed COVID-19 allied debt moratoriums. As per the press, the banks are now permitted to charge interest up to 7% per annum, which has to be paid in Equal Monthly Instalments (EMI)
  • The CBSL is yet to make an official announcement confirming the same
  • This update includes our revised forecasts for banking sector counters following the aforementioned developments

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EVENT UPDATE

Restarting Sri Lanka’s Tourism

08 June 2020

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  • On 08 June 2020, the Sri Lanka Tourism Development Authority (SLTDA) had issued a set of guidelines to be followed by tourists as well as businesses operating in the tourism sector, subsequent to the relaxation of curfews and the resumption of economic activity in the country – the report discusses few key guidelines mentioned in the document released by the SLTDA

  • Despite the Bandaranaike International Airport (BIA) set to re-commence operations in August 2020, tourist arrivals are likely to be low in the near term due to subdued public sentiment, limited access to tourist attractions and travel restrictions imposed by several countries across the globe

  • Measures are likely to be taken to promote avenues such as wellness tourism in the near to medium term, whilst promotion campaigns are expected to target high-end tourists

  • Sector is expected to recover within a period of 18 – 24 months, on the back of an anticipated pick up in global economic activity, improved public sentiment and measures taken by the GoSL to promote Sri Lanka as a safe tourist destination

  • Our 2020E tourist arrivals forecast stands at 660,929 persons (-66% YoY), whilst 2021E tourist arrivals forecast is at 1,006,110 persons (+52% YoY – off a low base), with sector earnings expected to be recorded at US$1,178.6mn for 2020E and US$1,901.7mn for 2021E

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EVENT UPDATE

Tokyo Cement Company (Lanka) – Event Update – Increase in CESS for Clinker and Cement Imports

04 June 2020

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  • Government of Sri Lanka (GoSL) announced that CESS applicable on clinker and cement imports was increased w.e.f 03 June 2020. Accordingly, CESS applicable on imported clinker, bulk cement and bag cement are at Rs.1.00, Rs.3.00 and Rs.5.00 per kg respectively

  • Amid the increase in CESS for clinker imports, TKYO’s cost of sales are expected to increase, resulting in a contraction of GP margins

  • Given the increase in CESS for bulk and bag cement (estimated to constitute ~38% of local cement consumption in 2019), importers are expected to face significant cost increases in the importation of cement. With importers being disincentivised, competition from imported cement is anticipated to decline significantly, paving way for local manufacturers to strengthen their market shares

  • Accordingly, we revise up our revenue forecast for FY21E by +4% to Rs.29,699mn (-17% YoY), and by +10% to Rs.37,124mn (+25% YoY) for FY22E, on the back of higher volume expectations

  • We revise down our FY21E net profit forecast by -23% to Rs.538mn (-72% YoY), amid downward revisions to GP margin expectations. Meanwhile, net profit forecast revised up by +6% to Rs.1,970mn for FY22E, with the upward revision to revenue more than offsetting the downward revision to GP margins

  • TKYO’s voting share rose +30% over the past 12M though declining -21% during the past 3M (vs. -10% and -15% of ASPI). TKYO’s non-voting share rose +45% over the past 12M and declined -18% during the past 3M. The voting share trades at a forward PER of 21.2X for FY21E and 5.8X for FY22E

  • Based on a DCF valuation, we have derived a 12M target price of Rs.35.5 for the voting share, which suggests a potential upside of ~25% to current price levels, and revise up the rating for the share to BUY

  • The increase of CESS for cement imports and thereby reduced competition in the local cement industry is expected to bode well for TKYO in the medium to long term as a result of higher market share levels expected, whilst the impact on GP margins is expected to be negated by higher capacity utilisation levels in the medium term. However, a slower than anticipated market share increase, further LKR depreciation or a slower pick-up in cement volumes will likely delay any material share price gains

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EVENT UPDATE

Hemas Holdings (HHL) – Event Update – Disclosure Regarding 4Q20 Turnover

01 June 2020

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  • On 01 June 2020, HHL made a disclosure regarding the delay in submission of interim financial statements for the period ended 31 March 2020. It was further disclosed that the Group 4Q turnover declined -7% YoY to Rs.14.9bn. Decline caused by business operations being interrupted by the COVID-19 related restrictions from mid-March
  • This is ~11% lower than our initial estimates; our previous group revenue forecast for 4Q20 was at Rs.16.8bn. We forecast 4Q20E NP in the range of Rs.320mn – Rs.350mn (-59% QoQ to -63% QoQ); EPS in the range of Rs.0.54 – Rs.0.59
  • We have revised down our FY20E net profit forecast by -12% to Rs.1,330mn (-60% YoY) amid downward revisions to revenue expectations. Net profit forecast for FY21E revised down by -5% YoY to Rs.1,054mn (-21% YoY). Meanwhile, FY22E net profit forecast at Rs.3,142mn (recovery off a low base where key Consumer and Healthcare businesses expected to fully recover)
  • The HHL share has underperformed the broader market 2020YTD, declining -28% (vs ASI’s -22%). However, the share outperformed post reopening the market, increasing +7% (vs. ASI’s +5%)
  • HHL currently trades at PER multiples of 33.9X for FY21E and 11.4X for FY22E. Our 12M Target Price for HHL is at Rs.67.0 (total upside of +12.6%), rated HOLD
  • Despite the resilient nature in HHL’s key businesses, the share does not seem to offer much upside due to the increase witnessed post opening up the market. However, longer term investors may favor the share considering the medium to long term upside of its key businesses

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EVENT UPDATE

People’s Leasing and Finance (PLC) – Event update – Disclosure regarding 4Q20 Turnover

29 May 2020

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  • On 29 May 2020, People’s Leasing and Finance (PLC) made a disclosure regarding the delay in submission of interim financial statements for the period ended 31 March 2020. As per CSE, the due date for submission of interim financials was extended to 03 Sep 2020 due to COVID-19 related disruptions to finance activities. It was also disclosed that the Group recorded Rs.9.7bn in gross income for 4Q20 (-3% QoQ, -5% YoY) and Rs.40.0bn for FY20 (+4% YoY). YoY growth was driven by higher interest income and a rise in net earned insurance premiums
  • However, the guidance given by PLC for 4Q20 Group revenue is ~7% lower than our initial estimate; our previous Group level revenue forecast for 4Q20 was at Rs.10.4bn. We believe gross income was impacted by muted business activity since mid-March due to lockdown measures imposed by the government.
  • Accordingly, we forecast 4Q20E NP in the range of Rs.957mn – Rs.996mn (-19% QoQ to -22% QoQ); EPS in the range of Rs.0.59 – 0.61
  • We have revised down our FY20E net profit forecast by -8% to Rs.4,264mn (-11% YoY), amid lower than expected revenue in 4Q20. FY21E net profit revised down -47% to Rs.3,110mn (-27% YoY) due to subdued credit growth, the CBSL directed relief measures to borrowers weighing on interest income and higher impairment charges. Meanwhile, FY22E net profit forecast at Rs.5,534mn (+78% YoY) driven by an anticipated pick-up in credit growth and recovery in market interest rates
  • Our base case FY21E net profit forecast mentioned above is under the assumption that borrowers who are eligible for debt moratorium will be charged interest at PLC’s cost of funds. In a worst-case scenario where the eligible borrowers receive a full interest waiver, FY21E net profit is forecast at Rs.419mn (-90% YoY)
  • The PLC share has underperformed the broader market declining -22% and -15% over the past 3 months and 12 months, respectively (vs ASI falling -13% and -9% over the same period)
  • PLC currently trades at PER multiples of 6.1X (PBV of 0.5X) for FY21E and 3.4X (PBV of 0.5X) for FY22E
  • We do not expect a material upside to the share price in the near term citing weak FY21E earnings. A re-rating of the share will depend on resurgence of credit growth following the likely relaxation of vehicle import restrictions in 3Q21E

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EVENT UPDATE

Asiri Hospital Holdings – Disclosure Regarding 4Q20 Turnover

29 May 2020

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  • On 29 May 2020, Asiri Hospital Holdings (ASIR) made a disclosure regarding the delay in submission of interim financial statements for the period ended 31 March 2020. It was further disclosed that the Group recorded Rs.3.7bn in turnover for 4Q20 (-18% QoQ though +4% YoY) and a turnover of Rs.15.5bn for FY20 (+15% YoY). YoY growth is on the back of increased contribution from Asiri Kandy Hospital (commenced commercial operations in April 2019)

  • However, the guidance given by ASIR for 4Q20 Group revenue is ~4% lower than our initial estimate; our previous Group level revenue forecast for 4Q20 was at Rs.3,877mn. The QoQ fall in revenue is due to the outbreak of COVID 19 and island-wide curfews that followed from mid-March

  • Accordingly we forecast 4Q20E NP in the range of Rs.318mn – Rs.337mn (-32% QoQ to -36% QoQ); EPS in the range of Rs.0.28 – Rs.0.30

  • We have revised down our FY20E net profit forecast by -4% to Rs.1,082mn (-36% YoY), amid downward revisions to revenue expectations. Net profit forecast broadly maintained at Rs.1,484mn (+37% YoY – off a low base) for FY21E with the expectation of gradual pickup in topline with island wide curfew being lifted from end May 2020. Meanwhile FY22E net profit forecast at Rs.1,787mn (+21% YoY)

  • The ASIR share has underperformed the broader market declining -10% over the past 12 months (vs ASI declining -9% over the same period) and outperformed the broader market declining -5% over the past 3 months (vs. ASI declining -13% over the same period)

  • ASIR currently trades at PER multiples of 14.3X for FY21E and 11.8X for FY22E

  • We do not anticipate any material share price gain in the near term. However medium term earnings growth is anticipated on the back of increased contribution from Asiri Kandy, lower finance charges coupled with higher expected demand for private healthcare

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EVENT UPDATE

Distilleries Co. of Sri Lanka (DIST – Rs.15.6) – Update on the GoSL Ban on Legal Import of Ethanol and COVID-19 Impact on DIST

28 May 2020

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  • Press articles during mid May indicated that President Rajapaksa was firm on import ban of ethanol. The ban was also confirmed by recent policy on imports by the Ministry of Finance. Ethanol is the key raw material required for the production of hard alcohol.
  • 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 import ~50% of its total ethanol requirement, with ethanol comprising ~80% of cost of sales.
  • Locally procured ethanol is estimated to be significantly cheaper compared to imported ethanol and DIST may stand to benefit from higher margins if sufficient volumes of ethanol can be procured locally.
  • DIST also disclosed on 15 May 2020 in its COVID-19 impact update to the CSE indicating that it expects sales volumes to be impacted by the ban on the sale of alcohol during the lockdown period. The company expects sales volumes to be impacted even after the ban is lifted due to social distancing requirements and lower income levels.
  • The ban on the sales of alcohol was lifted on 13 May 2020 with the country gradually easing restrictions imposed during the lockdown. However, the sale of alcohol still remains banned at premises where the consumption of alcohol is allowed.
  • We expect DIST volumes to be impacted due to the lockdown and limited access. However, DIST to witness a margin benefit (at GP level) given that locally sourced ethanol will be used for production
  • DIST bottom-line however would be impacted as the margin benefit would not fully offset low volumes
  • DIST’s net profit forecast revised down by -3% to Rs.5,545mn for FY21E (EPS Rs.1.2, -7% YoY) owing to lower sales volume expectations despite short-term margin benefits. FY22E net profit forecast stands at Rs.6,180mn (EPS Rs.1.3, +11% YoY), primarily driven by expectations for higher sales volumes with the expected recovery in the aftermath of the Pandemic.
  • Based on a blended valuation, which takes an equal weightage between DCF and PE methodologies, we have derived a 12M target price of Rs.15.7, which suggests a ~1% upside potential to current price levels and we recommend the share as a HOLD._____________________________________________________

EVENT UPDATE

Tokyo Cement Company (Lanka) – Event Update – Disclosure Regarding 4Q20 Turnover

28 May 2020

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  • On 26 May 2020, TKYO made a disclosure regarding the delay in submission of interim financial statements for the period ended 31 March 2020. It was further disclosed that the Group recorded Rs.8.4bn in turnover for 4Q20 (-23% YoY), whilst at the Company level turnover was recorded at Rs.4.9bn (-36% YoY)
  • However, the guidance given by TKYO for 4Q20 Group revenue is ~9% lower than our initial estimate; our previous Group level revenue forecast for 4Q20 was at Rs.9,189mn, representing a -17% YoY decline. The fall in revenue is due to disruptions faced by the overall construction sector amid island-wide curfews imposed to contain the spread of COVID-19
  • Accordingly, we revise down our FY20E net profit forecast by -2% to Rs.1,926mn (vs. a net loss of –Rs.112mn in FY19), amid downward revisions to revenue expectations. Meanwhile, net profit forecast revised up by +4% to Rs.704mn (-63% YoY) for FY21E, amid the recent stabilisation seen in the LKR against US$, resulting in lower pressure on TKYO’s clinker import bill. Net profit forecast broadly maintained at Rs.1,861mn for FY22E, with growth primarily driven by an anticipated pick-up in cement volumes
  • Meanwhile, we forecast 4Q20E NP in the range of Rs.300mn – Rs.330mn (+77% YoY to +94% YoY); EPS in the range of Rs.0.7 – 0.
  • TKYO’s voting share rose +37% over the past 12M though declining -17% during the past 3M (vs. -8% and -14% of ASPI). TKYO’s non-voting share rose +39% over the past 12M and declined -3% during the past 3M. The voting share trades at a forward PER of 16.3X for FY21E and 6.2X for FY22E
  • Based on a DCF valuation, we have derived a 12M target price of Rs.29.6 for the voting share, which suggests a potential upside of ~4% to current price levels, and rate the share as HOLD
  • Both retail and bulk volumes are expected to remain weak through 2020E, while further currency depreciation is expected to tighten GP margins. A re-rating of the share will depend on the stabilisation / appreciation of the LKR against US$, or a faster recovery of local cement consumption

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BANKING SECTOR UPDATE

19 May 2020

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  • This report discusses the COVID-19 relief measures granted for businesses and individuals through the banking sector, and additional measures introduced to prevent the adverse impact on the sector
  • Also, we have included our revised forecasts adjusted for said measures along with worse-case scenarios for key banks

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EVENT UPDATE

Dialog Axiata (DIAL) – COVID-19 Impact Analysis
10 May 2020

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  • DIAL is one of the least affected stocks on the CSE from a core earnings point of view during the COVID-19 pandemic, given the essential nature of the service. However, the share fell -31% in 2020YTD and -33% MoM owing to an overall market sell-off and due to anticipated weaker LKR outlook.
  • The telecommunication sector will benefit from strong demand for 4G data and fixed-broadband as online connectivity and remote access will be boosted due to the COVID-19 pandemic. However, DIAL’s CEO indicated that the company would focus on directing its near-term capex to address the demand for 4G data and fixed-broadband, in order to serve the rising demand.
  • The management further stated that even though servicing 70% of their prepaid clientele remained a challenge owing to the ongoing curfews / lock downs etc., DIAL has addressed the matter to an extent with the deployment of mobile branches since of late.
  • CEO indicated DIAL’s near-term key capex focus, capacity augmentation via fiberizing base stations, may take at least another 3 months. However, ban on imports remains a bottleneck when it comes to DIAL’s equipment imports.
  • Given the anticipated reduction in overall disposable income, we forecast DIAL’s top line to contract -3% for 2020E. Whilst around half of its DTV costs are borne in US$ (although DTV revenue is in LKR) for content acquisition, Group’s net debt exposure of US$156mn results in an estimated Rs.4.5bn FX cost given our spot mid CBSL LKR forecast of Rs.210.7/US$ as at end 2020E.
  • Whilst DIAL has ceased providing free extra channels via its DTV provision to its current clientele as of now, the management indicated it resulted in a net revenue foregone amounting to Rs.200mn during the period ended 30 April 2020. From a data and voice free give away 7-day bundles offered; DIAL indicated around 15mn packs were activated during April 2020.
  • In light of these recent developments, we revise down DIAL’s NP by -60% and -3% to Rs.5,219mn (-52% YoY) and to Rs.14,563mn (+179% YoY) for 2020E and 2021E respectively. Revisions are largely attributable to reduced revenue growth, increased finance costs and reduced EBITDA margins.
  • 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.9.9, yielding a +16.1% upside potential to the current stock price.
  • Despite relatively insulated nature of DIAL’s core income from COVID -19, the share may likely correct further upon the commencement of the market on 11 May 2020, owing to DIAL’s vulnerability to LKR’s external value and selling pressure expected from fund managers who are likely to run out of liquidity in the near term.
  • 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.

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MARKET UPDATE

Market re–opens – What to expect
10 May 2020

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  • Following a seven-week closure, the CSE is now set to open on 11th May 2020
  • With 12-month Treasury bill yields likely to trend downwards further, Sri Lankan economy is expected to shrink during 2020E
  • Whilst the fiscal deficit of the country may head towards double digit levels, external debt sustainability will remain key with regards to the recovery of the economy and the markets
  • Whilst inflation will continue to trend downwards in 2020E, negative BOP balance would exert pressure on LKR
  • Whilst the CSE has declined -25% during 2020YTD, a further downside cannot be ruled out
  • This report captures the key sector impact and potentially interesting counters in the CSE

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MARKET UPDATE

COVID – 19 : Impact Disclosure by Select Companies
1 May 2020

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  • Listed companies continued to release statements on impact from COVID-19 on current operations and outlook of their businesses as per the directive by Colombo Stock Exchange’s (CSE)
  • This document captures the disclosures made by key companies within 28-30 Apr 2020
  • Most corporates indicated that it is too early to assess the full impact from COVID-19 due to the uncertainty from multiple fronts
  • Meanwhile, Sri Lanka recorded a higher number of COVID-19 cases as of late and our forecasts will continue to depend on the rapidly evolving COVID 19 status, which may require further adjustments owing to the severity of the epidemic

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MARKET UPDATE

COVID – 19 : Impact Disclosure by Select Companies
27 April 2020

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  • Following the Colombo Stock Exchange’s (CSE) directive to issue disclosures on the impact from COVID-19, listed companies have started to release statements on current operations and outlook of their businesses
  • This document captures the disclosures made by key companies so far and our revised forecasts and valuations where necessary

The situation is continuing to evolve with Sri Lanka recording higher number of COVID-19 cases as of late. Forecasts will continue to depend on the rapidly evolving COVID 19 status, which may require further adjustments owing to the severity of the epidemic curve

Stocks Included

  • Hemas Holdings (HHL) – Key sectors are functioning (though at a lower scale) and expected to recover rapidly than others. With a -32% decline in the share so far in 2020 and likely market weakness, there would be opportunities to grab the share
  • Sampath Bank (SAMP) – Core income streams expected to remain weak in the near term. NPA pressure will not be limited to 2020E, as there can be stress beyond moratorium periods
  • Lion Brewery (Ceylon) (LION) – Sales volumes and EPS to be impacted further due to a decline in tourism and income levels. The company is to resume operations once the curfew is lifted in the Gampaha district
  • Ceylon Tobacco Company (CTC) – Topline to be impacted by lower sales due to the lockdown. However, decline in topline to be offset by increased efficiency measures to be taken by CTC
  • Chevron Lubricant Lanka (LLUB) – Retail segment sales and export sales are impacted by COVID 19. However, LLUB is currently supplying to certain essential sectors under the Industrial Segment

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EVENT UPDATE

CBSL’s Bank Rate reduced by 500bps to 10%
17 April 2020

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  • The Monetary board of the Central Bank of Sri Lanka (CBSL), decided to reduce its Bank Rate by 500 basis points from 15% to 10% w.e.f.16 Apr 2020. The Bank Rate is an administratively determined rate that could be used in periods of emergency for financial institutions that are likely to face liquidity issues.
  •  The reduction of the Bank Rate is however not expected to impact interest rates as it could be used only by distressed financial institutions to fulfil their liquidity shortfalls (e.g.: to meet the liquidity requirement of a deposit run).
  • Out of Sri Lanka’s US$4bn near term debt repayment requirement, US$2.7bn will be financed via India and China whilst the remainder i.e. US$1.3bn will have to be adjusted against Sri Lanka’s Gross Official Foreign Reserves (GOFR) after settling whatever received from IMF (under its Rapid Financing Facility) and as grants on account of COVID-19, which amounts to slightly less than US$200mn as of now. The GOFR stood at ~US$7bn as at 15 April 2020.
  • Given the neutral impact of the Bank Rate reduction to broader interest rates, we maintain our 12-month Treasury yield forecast at 6.5% as at 31 Dec 2020 (12m T yield stood at 7.0% as at 15 Apr 2020).
  • Despite the recently appreciated LKR, we maintain our LKR forecast at Rs.210.7/US$ as at 31 December 2020 on account of the muted ISB market in the near term.

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EVENT UPDATE

Expense cuts by Hemas Holdings (HHL)
16 April 2020

  • Local media reported that Hemas Holdings (HHL) has taken number of measures to cut costs and stay agile to face the challenges brought up by COVID-19 pandemic. The revisions will be applicable for May-Jul 2020 and will be reviewed again in Jul 2020
  • In a memo to staff, HHL group CEO has indicated that all board members (including the CEO) will take a 50% pay cut whilst promoter directors will take a 100% pay cut. Meanwhile, Managing Directors across the Group and Corporate Office functional heads will take a 35% salary cut
  • HHL has not slashed salaries of staff across the board at the moment. Instead, the memo has indicated that salaries of specific businesses that will have no revenue for next few months, will be subject to salary cuts
  • The quarterly bonus that is due in April will not be paid and there will be no increments at the moment. However, this will be reviewed again in July based on company’s position
  • HHL will halt discretionary expenditure, capital expenditure, recruitment and an efficiency program will be implemented across the business
  • HHL had a staff cadre of 8,095 as at 31 Mar 2019, out of which 1,436 were from manpower agencies. Permanent cadre was 5,951 and contract staff was 708. We estimate that HHL has incurred ~Rs.3.8bn for salaries and wages for FY19.
  • HHL also incurred ~Rs.2.7bn on capex in FY19 (both on PPE and intangible assets)
  • Our current NP forecasts for HHL is at Rs.1.4bn for FY20E (-55% YoY), Rs.2.4bn for FY21E (+67% YoY) and Rs.3.6bn for FY 22E (+53% YoY)

http://www.ft.lk/front-page/Hemas-goes-for-multiple-initiatives-to-cut-costs-stay-agile-midst-COVID-19-shocks/44-698863

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ECONOMIC UPDATE

Sri Lanka GDP Growth 4Q2019
07 April 2020

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  • 4Q2019 GDP growth recorded at +2.0% YoY primarily due to growth witnessed in the Industrial and Service segments
  • Agriculture sector (7% of 4Q2019 GDP) recorded a decline of -4.1% YoY in 4Q2019 (vs. +8.2% YoY in 4Q2018 and +1.0% YoY 3Q2019)
  • Industry sector (23% of 4Q2019 GDP) recorded a growth of +1.4% YoY in 4Q2019 (vs. -3.4% YoY in 4Q2018 and +3.5% YoY 3Q2019)
  • Services sector (55% of 4Q2019 GDP) recorded a growth of +2.7% YoY in 4Q2019 (vs. +4.2% YoY in 4Q2018 and +2.1% YoY 3Q2019)
  • GDP growth forecast revised down to -3.8% YoY for 2020E and to +4.4% YoY for 2021E
  • At an average exchange rate of Rs.195.9/US$ for 2020E and Rs.214.9/US$ for 2021E, we expect per capita GDP of US$3,293 and US$3,241 for 2020E and 2021E respectively

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EVENT UPDATE

Teejay Lanka (TJL) – COVID-19 Impact Analysis
09 April 2020

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  • Teejay Lanka (TJL, formerly Textured Jersey Lanka) is one of Sri Lanka’s largest fabric manufacturers specialised in weft knit fabrics, with total capacity of 75 tons per day across both local and Indian operations. TJL predominantly serves six strategic partner brands, PVH, M&S, Lbrands, Lidl, Intimissimi and Decathlon, especially in the intimate apparel and premium clothing segments. Moreover, it further strengthened its core client group through recent strategic partnerships with Uniqlo (3rd largest apparel manufacturer with dominant presence in Asia) and Nike.
  • TJL is one of the worst affected stocks on the CSE (fell -39% MoM, while ASI is down -22% MoM) in the wake of the COVID-19 pandemic, due to its exposure to heavily affected Western markets such as the US, the UK and Italy.
  • Speaking to the management, we understand that the impact of the virus on near term financial performance is expected to be more detrimental than our previous anticipation as communicated in our 11 March and 25 March strategy reports.
  • The management stated that volumes would be affected in the near term due to order cancellations from key clients. However, being a fabric manufacturer, TJL has the flexibility to allocate resources to produce protective gear, masks and essential clothing. TJL is actively pursuing necessary regulatory approvals to produce protective face masks and expects to obtain the relevant approval by the mid of April 2020. TJL also mentioned that it is taking necessary efforts to curtail non-essential capex and overhead costs.
  • As per Sri Lanka Apparel Export Association, COVID-19 is expected to negatively impact apparel export earnings by at least ~US$1.5bn in 2020E (Sri Lanka earned US$5.3bn in apparel and textile earnings in 2019). Moreover, Brandix Lanka, one of the leading apparel exporters in the country, announced suspension of compensation to its board of directors and salary cuts to its executive level employees for a period of six months in an effort to protect its business from the market downturn caused by COVID-19.
  • In light of these recent developments, we revise down our FY21E revenue forecast by -63% to US$68.7mn and FY21E net profit forecast by -75% to US$2.8mn.
  • Based on a blended valuation approach, which takes an equal weightage between DCF and PE methodologies, we have derived a 12M TP of Rs.24.9, yielding a +7% upside potential to the current stock price.

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EVENT UPDATE

Expense cuts by John Keells Holdings (JKH)
07 April 2020

  • Local media reported that John Keells Holdings (JKH) has signaled to its staff that it will take measures to reduce all forms expenses, including salaries, to face the challenges brought up by COVID-19 pandemic
  • In a memo to staff JKH management has indicated that the directors will take a 60% pay cut whilst the members of the Group Executive Committee will take a 35% pay cut. All of the staff in executive cadre, who are earning a basic salary above Rs.50,000 will also be subjected to a pay cut of 5-35% depending on the salary levels. The revisions will be applicable for Apr-Jun 2020 and will be reviewed again in Jun 2020
  • Further, the group has decided to cut travel allowances for next three months and recovery of internally managed provident fund loans will be suspended.
  • JKH will halt recruitments whilst capex (other than essential capex) will not be incurred during this time
  • JKH had a staff cadre of 20,713, out of which 6,790 were outsourced personnel. Out of the 13,923 internal employees, permanent cadre was ~8,285. We estimate that JKH has incurred ~Rs.6.0bn for salaries and wages for FY19. On the assumption of a 10% saving, cost saving for the three months is estimated at ~Rs.150mn
  • JKH also incurred ~Rs.13.8bn on capex in FY19 (both on PPE and intangible assets)
  • Our current NP forecasts for JKH is at Rs.8.7bn for FY20E (-37% YoY), Rs.14.6bn for FY21E (+68% YoY) and Rs.21.2bn for FY 22E (+46% YoY) – significant boost in FY21E due to property recognition at Cinnamon Life, including for sales proceeds so far. We have not made any forecast revisions based on the decision by JKH and will inform if there are any changes

 

Sri Lanka business leaders slash their pay 60-pct over Coronavirus

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BANKING SECTOR UPDATE

SLFR and SDFR reduced by a further 25bps to assist economic activity
04 April 2020

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  • CBSL held an emergency meeting to take policy action again on the eve of 03 Apr 2020
  • SDFR and SLFR reduced by 25 bps each resulting in 100bps each cumulative 2020YTD cuts for both windows
  • We revise down our LKR forecast to depreciate -10.5% to Rs.200.7 as at 31 December 2020 whilst the 12-month Treasury yield forecast is revised down by -50bps to 6.5% as at 31 Dec 2020 (12m T yield stood at 7.4% as at 04 Apr 2020).

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BANKING SECTOR UPDATE

Banking sector Capital, NPA requirements and other timelines relaxed
30 March 2020

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The Monetary Board of the Central Bank of Sri Lanka (CBSL) has decided to introduce several regulatory measures to provide flexibility to Licensed Commercial Banks (LCBs) and Licensed Specialized Banks (LSBs) to provide certain relief to businesses and individuals affected by the COVID-19 crisis. Accordingly, the Monetary Board introduced the following measures to provide further space for banks.

  1. Allow Domestic Systemically Important Banks (D-SIBs) and non-D-SIBs to draw-down their capital conservation buffers by 100bps and 50bps, respectively, to facilitate smooth credit flows to the economy and COVID-19 affected borrowers to sustain their businesses in the immediate future.
  2. Withdraw the requirement to classify all credit facilities extended to a borrower as non-performing when the aggregate amount of all outstanding non-performing loans granted to such borrower exceed 30% of total credit facilities.
  3. Allow banks to recover loans in Rupees, as the last resort, in circumstances where recovery of loans in foreign currency is remote, subject to banks ensuring certain conditions are met.
  4. Permit banks to give an extension of 60 days, to borrowers who are not entitled to any other concessions, to settle loans and advances which are becoming past due during March 2020 and not to consider such facilities as past due until the end of this 60 day period.
  5. Allow banks to consider all changes made to payment terms and loan contracts from 16 March 2020 to 30 June 2020, due to challenges faced by customers amidst the COVID-19 outbreak as ‘modifications’ instead of ‘restructuring’ for the purpose of classification of loans & advances and computing impairment.
  6. Defer the requirement to enhance capital by banks which are yet to meet the requirement by end 2020, till end 2022.
  7. Reset the timelines for addressing supervisory concerns, if necessary, by prioritizing on the severity/importance of the concerns raised. Banks which are required to meet timelines to address supervisory concerns/findings during the period up to 30 May 2020, are granted a further period of 3 months for addressing such supervisory concerns.
  8. Extend the deadline for submission of statutory returns to the Bank Supervision Department by two weeks and the publication of quarterly financial statements by one month, until further notice.

In addition to the capital buffer draw down proposal, other proposals are likely to contain the expected sudden increase of NPAs to a significant extent whilst deferring of capital enhancements (up to Rs.20bn) for banks by two years will likely to benefit PABC (Rs.13.3bn*), UBC (Rs.17.5bn*), ABL (Rs.11.9bn*) and CargB (Rs.10.6bn^) as the revised timeline allows further natural retention for these LCBs.

Given that the above revisions are likely to create some space for banks and not likely to improve bottom-line owing to an anticipated local recession, we do not revise up our LCB NP forecasts for 2020E.

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EVENT UPDATE

Change in Liquor and Tobacco Corporate Tax Rate

27 March 2020

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  • In the Pre-Election Budgetary Position Report it was stated that corporate income tax on Liquor, Tobacco, Cigarettes will remain at 40%
  • On 21 January 2020 it was proposed to reduce the corporate income tax rate applicable to Liquor, Tobacco, Cigarettes to 28% from 40% previously
  • Subsequent to the proposal of reducing corporate income tax to 28%, Ceylon Tobacco Company (CTC), Lion Brewery Ceylon (LION) and Distilleries Company of Sri Lanka (DIST) ETR expectations were revised down accordingly. However, with the tax rate remaining at 40% we have revised down our EPS expectations for CTC, LION and DIST

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MARKET UPDATE

Pre-Election Budgetary Position
27 March 2020

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  • The Ministry of Finance (MoF) of Sri Lanka announced that the fiscal deficit for 2019 would be 6.5% of GDP at -Rs.1,016bn – higher than the initial target of 4.4%, attributable to lower revenue due to slowdown in economic activity in the aftermath of Easter Sunday Terror attacks.
  • The MoF further stated that the budget deficit would have passed 8.0% in 2019 if the outstanding dues of Rs.367bn were settled during the year
  • Meanwhile, government Debt to GDP stood at 82.9% of GDP as at 31 Dec 2019, which accounted to Rs.13,031bn. Total foreign currency debt was 50% of total government debt (US$35bn)
  • According to the MoF, forecast fiscal deficit for 2020E is at -Rs.1,255bn (7.5% of GDP)
  • Total revenue and grants to decrease -7% YoY to Rs.1,775bn in 2020E, with total taxes expected to decline -10% to Rs.1,565bn
  • Total expenditure estimated to rise +4% YoY to Rs.3,030bn in 2020E, with recurrent expenditure forecast to increase +5% YoY to Rs.2,420bn. MoF indicated that the capital expenditure will be reassessed and prioritized to focus on high impact projects that has significant economic and financial benefits to the country
  • Budget deficit is expected to be funded 42:58 by foreign: local borrowings in 2020E.

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MARKET UPDATE

Colombo Stock Exchange
11 March 2020

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CT CLSA – Market Update – Twin Impact from COVID-19 & Low Crude Oil Prices – 11 March 2020

  • The CSE All Share Index (ASPI) is now at 5,205, down -15% in 2020YTD mainly on the back of an avalanche of negative news flow including fears of the coronavirus and falling oil prices. Unlike some select regional markets, all is not lost for Sri Lanka though, given strong fundamentals and a number of tax cuts announced recently to revive the economy
  • The ASPI is currently at an oversold position on the back of nearly US$28mn in net foreign selling.
  • The continued sell-off has been triggered by nagging fears of the COVID-19 spreading worldwide as well as recent sell-off in the global oil market. However, Sri Lanka remains an outlier within its regional peers, given that still the spread of COVID-19 within Sri Lanka is largely under control with only two reported COVID-19 cases thus far
  • The market is now trading at PE multiples of 9X – 10X on 2020E -2021E earnings and is below the mean of past decade PEs

Sri Lanka remains a winner within the region!

  • Sri Lanka has only 2 confirmed cases of COVID-19. Tourist arrivals are expected to decline however with its key markets such as China and Europe being impacted by the epidemic
  • Continued fears on COVID-19 should not really affect Telcos and energy-based manufacturing companies given the anticipated cost savings amid falling commodity and oil prices
  • Falling oil prices and softer commodity prices are positive for Sri Lanka given it imports nearly all of its oil requirement and lower import costs are likely to help its BOP in the near term. Note that there is a +0.6 correlation between the Commodity Research Beureau’s CRB Index and Sri Lanka’s headline inflation

Policy Space already created!

  • With massive tax cuts announced during late November 2019 and January 2020, the Government of Sri Lanka (GoSL) has taken steps to increase disposable income of the general consumer in order to stimulate consumer growth thus far. If the GoSL is successful in containing the spread of COVID-19 (compared to its regional counterparts) as it has been thus far, a possible recovery in credit and consumption to materialize earnings expectations of the overall economic players in the near to medium term

Actionable plays!

  • We believe the market is oversold at current levels and the best way to play the market would be via relatively big cap high upside potential counters

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MARKET UPDATE

Colombo Stock Exchange
18 February 2020

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  • Despite steady earnings growth witnessed in the past few years, valuations have fallen to levels witnessed in the last stages of the civil conflict in 2009
  • Earnings have witnessed a steady growth, with TTM earnings recording a CAGR of ~3% during 2012 -2019. Exception being 2019, when earnings witnessed a slight decline following the Easter Sunday terror attacks, which had a direct impact on many sectors including Leisure and Construction
  • We believe that the decline in valuations is due to lack of investor confidence on political stability, which is anticipated to return post-Parliamentary elections in April 2020
  • Further, recent tax cuts on construction and consumer sectors are likely to assist in the revival of sector earnings. However, Leisure sector is likely to be impacted for a pro-longed period due to a decline in tourist arrivals from China, following the coronavirus (Covid-19) outbreak in December 2019

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EVENT UPDATE

IRDSL reverses Taxes on SLDBs
17 February 2020

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  • As per the announcement dated 12 February 2020 by the Inland Revenue Department of Sri Lanka, the interest income from SLDBs were exempted from taxes w.e.f. 01 Apr 2018. In line with the new ruling, already recognized liabilities to be reversed in 4Q2019.
  • URL: http://www.ird.gov.lk/en/Lists/Latest%20News%20%20Notices/Attachments/220/WHT12022020_E.pdf
  • Out of major listed investors in SLDBs, top three private Commercial Banks, i.e. COMB, HNB and SAMP remained significant. Given that SAMP has already reported a tax reversal amounting to Rs.500mn (as per media reports) for its 14 February 2020 released 4Q2019 results, this update focuses on the potential (likely) earnings increases of COMB and HNB only.
  • With SAMP reporting a SLDB holding of ~Rs.60bn as at 31 Dec 2019, we estimate COMB and HNB’s estimated SLDB holdings to be ~Rs.69.2bn and Rs.118.9bn as at 31 Dec 2019 respectively. Thus, the estimated tax reversal owing to the 12 February 2020 dated IRD announcement is estimated at Rs.577mn and Rs.991mn for COMB and HNB respectively.

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EVENT UPDATE

Changes in Corporate Taxes
21 January 2020

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  • The Cabinet of Ministers has granted approval for the proposal by Hon. Prime Minister Mahinda Rajapaksa as the Minister of Finance, Economic and Policy Development in order to restructure corporate tax rates w.e.f 01 Apr 2020
  • The changes to tax proposals are expected to reduce overall government revenue. However, the exact details on the reduction of revenue and ways to mitigate the impact is yet to be disclosed by the GoSL
  • Meanwhile, the potential increase in earnings from tax reduction is expected to result in higher economic activity, which would partially offset the revenue loss of the GoSL
  • The market impact on the new disclosure would be positive, with across the board earnings expected to increase

The document discusses potential earnings impact of companies under our coverage

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ECONOMIC UPDATE

Cabinet Approves Removal of the Debt Repayment Levy
20 January 2020

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  • On 20 January 2020, the Inland Revenue Department of Sri Lanka (IRDSL) announced the cabinet approval for the removal of the Debt Repayment Levy (DRL) with effect from 1 January 2020
  • IRDSL previously announced the removal of Nation Building Tax (NBT) with effect from 1 December 2019
  • However, with the announcement of details of the SME sector benefits from the Banking sector (please refer our update on SME sector benefits, dated 14 January 2020), during last week, the above benefits on the banking sector are expected to be neutralized
  • Thus we expect this announcement to be price neutral on the sector.

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EVENT UPDATE

Banking Sector – Concessions on SME Sector Loan Repayments
14 January 2020

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– Details of the moratoriums / benefits announced
– Only part of benefits gained from recent tax reductions will be utilized
– Investors overselling the sector upon announcement of details

  • From the benefits granted, Capital moratoriums for the performing advances in the SME sector are likely to only result in a cash flow impact (with a minimal interest income impact) for the banking sector
  • Write off of NPL penal interest and eventual write-off of 50% of NPL interest may on the other hand result in incremental revenue as these result in interest in suspense translating to partial income. Even though this exercise may result in a reduction of overall system NPLs for the banking sector, the overall process should be closely monitored in order to pass the benefits to the honest economic agents as opposed to the other.
  • With the announcement of details (upon discussion of same during the second week of January 2020) on the SME sector relief package, the listed licensed banks were sold by most of the investors resulting in their prices falling below the pre- tax concession prices.’
  • Given that the 20 December 2019 initial SME relief announcement stated that “the SME benefits will not exceed the tax benefits gained by the individual banks from their 2020E earnings”, we expect the maximum benefit of the proposed SME relief package to not exceed the tax benefits gained from the recent tax revisions for the sector.

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EVENT UPDATE

John Keells Holdings – Khazanah sells 11% stake in JKH
09 January 2020

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  • On 09 January 2020 Broga Hill Investments Ltd (a special purpose vehicle of Malaysia’s sovereign wealth fund Khazanah Nasional Berhad and second largest shareholder in JKH) divested its 11% stake in JKH (141mn shares). The divestment was carried out at Rs.160 per share totaling Rs.22.7bn
  • The purchase was done by Citigroup Global markets Ltd. on behalf of a global institutional client.
  • The transactions marks the seconds largest in the history of CSE and can be viewed as a vote of confidence in Sri Lanka by foreign investors
  • The JKH share trades at forward PER multiples of 18.7X for FY20E, 10.4X for FY21E and 9.0X for FY22E and trades broadly in line with our break-up estimated Sum of the Parts (SOTP) valuation of Rs.163 per share
  • We do not expect material share price gains in the near term due to recent weak earnings of JKH. Whilst group earnings expected to be boosted post the completion of ‘Cinnamon Life’ project in FY21E, a major catalyst to re-rate the share in the medium term would hinge upon new developments on the Cinnamon Life Project, especially the casino aspect

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SRI LANKA

Outlook 2020
09 January 2020

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  • The stock market is expected to be boosted in the near term owing to the downward movement in interest rates, on the back of the Central Bank of Sri Lanka (CBSL) adopting a loose monetary policy in order to stimulate economic activity
  • Forward market valuation of 10.6X for 2020E is at a discount to a majority of regional peers, on the back of an expected earnings growth of +25% YoY – off a low base. Select key stocks, particularly in banking and consumer sectors offer relatively attractive valuations
  • A relative improvement in political stability following the general elections in early 2020E is anticipated to result in a clearer economic outlook over the medium term. Such political stability may act as a catalyst for attracting investments, and thereby help re-rate market valuations

The report discuss Economic and key sector outlook for 2020E along with few stocks to focus

*** All valuations and market data in this report are as at 31 December 2019***

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EVENT UPDATE

Distilleries Co. of Sri Lanka –  Government of Sri Lanka (GoSL) Ban on the Legal Importation of Ethanol
02 January 2020

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  • The Ministry of Finance and Planning has issued a statement suspending the importation of ethanol for liquor production w.e.f 01 January 2020 on the directives of Prime Minister Mahinda Rajapaksa as the Minister of Finance. Ethanol is the key raw material required for the production of hard alcohol
  • Distilleries Co. 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 import ~50% of its total ethanol requirement, with ethanol comprising ~80% of cost of sales
  • Whilst Prime Minister Rajapaksa indicated that the ban on imported ethanol was ordered given that there is sufficient ethanol being produced within the country, DIST has previously mentioned that it is unable to fully procure its ethanol requirements locally, given supply side constraints and quality issues
  • Prices of locally procured ethanol are estimated to be at least one third cheaper compared to imported ethanol. Owing to this, DIST may see a margin benefit if local ethanol is available in sufficient quantities and no upward price revisions are made by the GoSL to local ethanol in the near term
  • Given the current lack of clarity on the legal implementation of the ban on imported ethanol (via an official gazette) and the potential for an upward revision to locally produced ethanol prices in the near term, we have maintained DIST’s net profit forecast at Rs.6,883mn for FY20E (EPS Rs.1.5, +30% YoY) and at Rs.7,816mn for FY21E (EPS Rs.1.7, +14% YoY) at this point in time
  • In the event that the ban on imported ethanol is passed and supply side constraints relating to locally produced ethanol remain, there is potential for volume pressure for DIST going forward
  • The DIST share has outperformed the broader market over the past 3 months and 12 months, rising +13% and +11% respectively (vs. the ASI’s rise of +7% and +1%), and trades at PER multiples of 12.0X for FY20E and 10.6X for FY21E

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