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| Monday, 29 November 2004 |
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HNB Stockbrokers' weekly market review Market activity low amid IPO fever The market remained sluggish, as both the ASPI (All Share Price Index) and the MPI (Milanka Price Index) showed marginal improvements in modest trading, as the investor attention was centered on the Initial Public Offer (IPO) of Lanka IOC Ltd. The ASPI rose by 9.6 points or 0.65% to close the week at 1494.8 points compared to last week, while the MPI closed the week at 2124.3 points up by 32.4 points or 1.55% compared to last Friday's closing. The total turnover for the week was substantially low, totaling just Rs.358.9 million. Though this week consisted of only 4 trading days, a considerable decline in turnover could be seen by comparing the average turnover level for the week, which stood at Rs.89.7 million with last week average turnover level of Rs.132.9 million. Though weekly activity remained low, a considerable level of buying was seen in selected blue chip counters, namely JKH, SLT and Aitken Spence. Approximately 419,000 shares of JKH were seen trading on Wednesday, while 766,900 SLT counters traded for the week. On Tuesday, 89,600 shares of Aitken Spence exchanged hands at a price range of Rs.334 - Rs.340. Foreign investors were net buyers for the week, amounting to Rs.16.1 million. Foreign purchases totaled to Rs.65 million, while foreign sales for the week stood at Rs.48.9 million. Foreign participation for the week was 31.7% of total activity. The heavily traded counters for the week were Royal Ceramics, Vanik Incorporated, SLT, Blue Diamonds and Kelani Tyres. Focus now on IPO During the week's trading, the attention deviated from the budget proposals to other developments such as upcoming Initial Public Offer (IPO) of Lanka IOC Ltd. As expected by us the indices remained volatile during the week, in thin trading, as some investors were returning to cash to subscribe to the shares of Lanka IOC Ltd. We expect the issue be oversubscribed on the November 29, the day of its opening. An in-depth analysis into the Lanka IOC is made available in our detailed research report, "Ship shape - steady". We expect the market sentiment to remain subdued over the coming weeks, but the indices are subjected to fluctuations in a wide range in thin trading. The Impact of Budget 2005 Outperforms expectations, but execution is the key The budget proposals were a pleasant surprise to the investing community who were expecting a more pessimistic budget. The govt. has tried to balance the benefits to the public sector while stimulating the growth through investments and incentives to the private sector. However, the execution of these proposals remains the key to the success of the budget. The 40% salary increase to public servants (costing Rs.19 billion during 2005, in the first phase) could reduce the burden on the cost of living but at the same time lead to a demand-fuelled inflation The agricultural sector reforms can be viewed as a genuine effort to revive the sector although the payback is likely to be in the long term The export sector and the industrial sector have been given incentives to stimulate growth, affecting GDP positively in the short to medium term. A 0.2% transaction fee has replaced the 15% capital gains tax implemented last year. This coupled with the removal of VAT on financial services for stockbroker firms will help keep the momentum going in capital markets. Furthermore, relief was offered to sectors such as apparel, agriculture and hotels, while other sectors such as banking, imports, motor and food and beverages were affected negatively. We project overall GDP growth for 2004 at 5.4%. The budget deficit for 2005 stands at Rs.171 billion and this will be bridged with foreign and domestic borrowings of Rs. 153.4 billion, privatisation proceeds and foreign grants However we are of the opinion that maintaining the deficit at 7.6% of GDP is a challenging task, especially considering the existing pressure on the macroeconomic indicators such as exchange rate, interest rates and inflation. We project the overall budget deficit at Rs.189 billion or 8.3% of GDP for 2005, with a Rs.10.5 billion or 2.6% shortfall in revenue from its projected level of Rs.389.5 billion or 17.2% of GDP. An in depth analysis of the above is available on our latest research report titled 'Budget 2005: The Impact' DFCC results for 1H FY2005 Earnings down 7% DFCC Bank registered a 2.9% dip in net profits during the 1H of FY2005, compared to the 1H of FY2004. The Bank recorded a 4.9% growth in interest income, supported by an encouraging 29% YOY growth in net loans and advances to Rs.28.2 billion. Net loans and advances grew by 9% since March, 31, thus in our opinion DFCC's loan book warrants further growth potential backed by new project financing and commercial lending at DFCC Vardhana Bank. Interest expense increased marginally by 3.5% only, due to the low deposit rates and this resulted in a 6.5% surge in net interest income to Rs.872 million. Other income on the rise Non-interest income recorded a 51% growth to Rs.494 million, compared to the 1H of FY2004, with the income from equities improving by 157% to Rs.285 million. Furthermore, DFCC Vardhana Bank contributed Rs.27 million to the other income. Operating expenses grew by 64.5%, due to the 63% jump in premises and equipment, 105% increase in VAT and 91% surge in other overheads. The increase in premises and equipment could be attributed to the inclusion of a depreciation charge in connection with DFCC's new banking software, "Net symbols". Jump in other overheads was largely due to the increased advertising expenses in DFCC Vardhana Bank. Despite the increase in operating expenses, cost to income ratio has reduced to 57%from 69% (during the corresponding period of the previous FY), backed by the increase in the revenue. Provisions dip 31% The provision charged to income for the current period was Rs.135 million, 31% less than what they provided during the corresponding period of last year. Like most other banks, DFCC too increased its provisions during the latter part of the FY2003 as it provided Rs.401 million for the full year. We forecast a total provision to be Rs.363 million during FY2005. Commercial Bank represents 21% of DFCC's bottom line The bank recorded an almost flat growth in profit after provisioning but before any share of profits from associates to Rs.646 million. DFCC's associate Commercial Bank, continued to contribute immensely towards DFCC's profitability, as the share of profits from associates and subsidiaries amounted to Rs.272 million, accounting for 43% of the profit before taxation. However a careful analysis indicate that Commercial's contribution to profit after tax amounted to Rs.113 million, representing only 21% of the PAT. This is due to Commercial's heavy tax burden and we expect its effective corporate tax rate to be at 31% during FY2004. The 27.79% stake in Commercial Bank is mainly a strategic asset to DFCC, but its contribution towards DFCC's profitability via its associate status still remains significant. Net profits dipped by 2.9% to Rs.539 million with an annualised EPS of Rs.18.84, based on these earnings the stock is trading at PE multiples of 10.9x as for the historical earnings. We estimate a marginal dip (2.5%) in net profit to Rs.1.26 billion during FY2005, with forward multiples of 9.9x. However, we project a 7.3% growth in earnings during FY2006, with the PER of 9.2x. DFCC recently announced a 1: 3 bonus issue, which increased its share capital to 57.15 million shares, thus improving the liquidity by 33%. Further, the Bank has already taken steps to strategically re-model itself as a diversified financial institution. Gradually progress into commercial banking As reported in a previous update on DFCC dated January 29, the Bank has already made progress in commercial banking activities through its newly acquired commercial banking arm, DFCC Vardana Bank. It is still a young enterprise among the commercial banks, thus real growth could be expected starting FY2005. During the period from January 2004 to June 2004 DFCC Vardhana Bank's, loss of Rs.8 million has been consolidated with DFCC group results for the period under review. Meanwhile, DFCC Vardhana has increased its presence to 7 Branches and has showed growth in its loan book since March 2004. Its loan book stood at Rs.1.76 billion as at September 30, and the Bank recorded a net loss of Rs.20 million during the 6 months to September 30, 2004. We would be closely evaluating the developments in commercial banking activities and its returns to DFCC's bottom line in the coming years. Meanwhile, the counter is currently trading above the Banking sector forward PE of 7.1x (stocks covered in our universe) and further it trades at a 19% premium to its forward book value of Rs.172.75 as at March 31, 2005. We therefore maintain our recommendation, Hold. The views based herein are expressed with no malafide 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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