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Foreign buying leads to mammoth net inflow of Rs. 635.5m

The Colombo bourse continued its positive momentum into the third consecutive week supported by strong foreign buying and increased activity in low value counters such as Fort Land and Vanik Incorporation.

The ASPI and MPI advanced by 24.1 points (1.84%) and 58.7 points (2.99%) respectively, to close the week at 1,337.1 points and 2,021.4 points respectively.

The weekly turnover toppled the Rs. 1 billion mark for the second week in a row and stood at an encouraging Rs. 1.6 billion, at a daily average of Rs. 320.5 million. This is a considerable improvement compared to Rs. 239 million recorded during the previous week.

Among the highlights of the week was the purchase of 4.6 million shares of JKH believed to be by Mr. Raj Rajaratnam at Rs. 105.00, seller being Bank of Ceylon.

According to the newspapers over one million shares of National Development Bank was accumulated by Goldquest International at Rs. 150.00 per share, thus increasing its stake to 9.5%.

In light of these transactions foreign buying was at a high of Rs. 749.3 million leading to a mammoth net inflow of Rs. 635.5 million.

Fort Land, Vanik Incorporation, JKH, SLT and Distilleries were among the heavily traded counters for the week.

Strategic buying and strong earnings retain the momentum

As expected by us, the overall momentum remained positive throughout the week, backed by strong corporate earnings which continued adding fundamental value to the market.

We believe that the strategic parcels involving JKH and NDB contributed towards further boosting investor confidence.

However, the rupee continued to depreciate in the forex markets, amid the political uncertainty. Meanwhile the government raised US$1.44 million through the issue of Sri Lanka Development Bonds after attracting bids worth of US$182.25 million.

Approximately US$91 million of these funds would be used to repay the bond, which is to mature later in the year, and the balance is expected to add fuel to the government coffers.

While endorsing the issue of foreign currency bonds, we maintain our view that government should take new steps to increase Foreign Direct Investments (FDI) in order to halt the fast depreciation in the rupee.

A technical correction

We expect the market to remain mixed and envisage a technical correction, as the ASPI has already appreciated 39 points or 3% over the last two weeks.

Therefore investors should keep an open eye to exploit opportunities for bargain hunting, once the fundamentally strong counters would become available at attractive price levels.

Aitken Spence FY2004 Results

Aitken Spence FY2004 recorded strong growth as net revenues improved by 31% to Rs. 9.05 billion, while earnings jumped up by 143% to Rs. 1.28 billion, compared to last year.

Tourism, Power and Cargo contribute significantly

The main contributions to the full year turnover came from Tourism sector (46% contribution) with Rs. 4.23 billion (31% growth over FY03), Infrastructure development sector (26% contribution) with Rs. 2.40 billion (45% growth over FY03) and Cargo logistics (17% contribution) with Rs. 1.59 billion (20% growth over FY03).

The local operations (80% of group turnover) maintained a growth of 41%. The overseas turnover that showed a dip of around 7% at the half-year mark and recovered slowly to a marginal growth of 5% by Q3, recorded a growth of 14% for the full year.

This is because of the Maldives and Bangladesh operations amounting to 20% of group revenue. The growth was aided by the increased tourist arrivals into Maldives which amounts 581,451 for FY2004.

The local hotel operations of SPEN and the inbound travel sector enjoyed high occupancy rates (49% compared to 41% in FY03) and volumes courtesy of the increased arrivals into the country (SPENCE tourist volume increased by around 37% compared to the 27% increase seen by Sri Lanka as a whole).

We expect a moderate 14% growth in arrival numbers during 2005, and our top line growth projection for the tourism sector for the company is around 17%to Rs. 4.95 billion.

The cargo sector revenue which grew significantly aided by the freight-forwarding segment was a direct result of the increased economic activity seen during the period, as well as the sizable marketing efforts that were put in to this segment. We project a 14% growth in the cargo sector and project the sector revenue to reach Rs. 1.8 billion during FY2005.

The infrastructure development sector driven by the power plants at Horana and Matara saw a significant increase over last year with both the plants coming in to full operation. Company believes that the power sector would attract steady revenue, thus they are looking at possibilities of further growth in this sector.

Furthermore Spence teamed up with Caterpillar Power ventures of USA, to construct another power plant in Embilipitiya with a capacity of 100MW. The plant is expected to be generating power by March 2005.

Thus the power sector revenue will see a significant jump in FY2006where we expect the revenue from the sector alone to be Rs. 8.8 billion,which is a 267% jump from our FY2005 projection of Rs. 2.49 billion.

The manufacturing sector recorded a moderate performance, with the turn around in the garment factories now under the full control of SPENCE.

We expect the sector to grow steadily at a moderate pace and the revenue projection for FY2005 is at Rs. 943 million, which is up 15% from the Rs. 820 million this year.

Profit on sale of UAL and ACW has helped to improve earnings. The operating profits at the end of the year stood at Rs. 2.04 billion, which was up 90% from previous year.

Infrastructure development contributed with Rs. 654 million (27%), the Services & Other with Rs. 537 million (22%), Tourism with Rs. 893 million (37%) and the Cargo sector with Rs. 244 million (10%).

The services (& other) sector included a non-recurring item of Rs. 166 million, which was the profit on disposal of shares of Union Assurance and ACW Insurance.

Tourism and power are expected to contribute the most towards the bottom lines in the next few years. Our Profit Before Tax (PBT) projection for the tourism sector in FY2005 is Rs.882 million which is a moderate 3% growth over FY2004.

With the high growth of 76% achieved in FY2004 we do not expect the earnings to grow in the same magnitude in FY2005.

Nevertheless with the planned refurbishments in Kandalama, Triton and Tea Factory during 2005, we expect the rates to improve and give an earnings growth of 5% to Rs. 929 million in FY 2006.

This would further improve to Rs. 1.2 billion in FY2007, which is a growth of another 27%. In the power segment we expect the PBT to remain flat at Rs.504 million, during FY2005 since both the power plants (20MW each) would be operating in the same capacity as it did in FY2004.

The finance cost for the year was at Rs. 277 million and we see this increasing up to Rs. 428 million in FY2005 mainly due to the borrowings for the new power plant as well as the additional funds that may be needed for the refurbishment work in the hotel properties.

The total earnings for the year grew 143% to Rs. 1.28 billion, resulting an EPS of Rs. 47.25 yielding a PER of 6.2x. The net assets per share at end March 2004 was at Rs. 243.56 resulting in a PBV of 1.2x at a share price of Rs. 295.00.

Fundamental view still holds

Our earnings projection for FY2005 is Rs. 1.289 billion, which is a marginal 1.1% over last year. With the tourism sector not expected record a major surge after the high growth last year, and the power sector not operating additional capacity, our growth estimates remain flat for FY2005. This gives an EPS of Rs. 47.77 and PER declines to 6.2x.

However the FY2006 earnings projections are at a mammoth Rs. 1.96 billion, which is up by a significant 52% over FY2005.

This is mainly due to the 100MW plant in Embilipitiya, which is expected to generate one full years profits, and projected price hike in the hotel and tourism sector, after the 2005 refurbishments. This results in an EPS of Rs. 72.62 and the PER comes down a highly attractive 4.1x.

Earnings multiples based on FY2004 earnings are at a low of 6.2x, making the counter attractive even in the immediate term. Furthermore it is expected to come down to 4.1x within the next two years. Thus we maintain our recommendation, a Buy on SPEN supported by the company's positive fundamental outlook.

The views based herein are expressed with no mala-fide intension to any party whatsoever based on already published data and from the information obtained by the research team. No matter published as above creates any liability of any kind whatsoever on HNB Stock Brokers Pvt Ltd or its associates.

The views cannot be reproduced in any form without the explicit (written or otherwise and photocopied) permission from HNB Stock Brokers (Pvt) Ltd.

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