HNB Stockbrokers' weekly market review: Retail dominance to continue

The market retained an upward movement for the week, with both indices showing improvements from the previous week's closing levels. The ASPI fell on Tuesday to 1733.9 points but regained towards the latter part of the week, to close at 1738.6 points, up by 0.43% or 7.5 points. The MPI retained a similar trend as the ASPI, falling on Tuesday but showing an upward trend for the rest of the week. The MPI was up by 0.72% or by 16.8 points to close at 2350.2 points.

The turnover stood at Rs. 2.07 billion over the four trading days, with an average daily turnover of Rs. 517.2 million. This is a considerable 29.1% decrease, compared to the week before. The major contributor towards turnover was Asia Capital, contributing approximately Rs. 276.3 million.

The counter appreciated by a considerable 61.8% to close at Rs. 22.50 per share.

Approximately 13.6 million of Asia capital shares traded with the major portion of 10.3 million being traded on Thursday. Reefcomber saw its share price shoot up by 80.4% to close at Rs. 25.30 per share. Tuesday alone saw the share price rise by Rs. 12.25, with approximately 4.6 million shares traded.

The counter contributed approximately Rs. 117 million towards the turnover. Merchant bank contributed approximately Rs. 177.4 million towards the turnover, with around 5.1 million shares trading, while the earlier week's heavily traded counter, Ceylinco Seylan experienced less investor interest with around 6.7 million shares being traded.

The share price depreciated by 7.3% compared to the week before, to close at Rs. 15.75 per share on Thursday. The counter contributed approximately Rs. 116.8 million towards the turnover.

Foreign investors were net buyers, standing at Rs. 43.7 million. Foreign purchases stood at Rs. 257.8 million. While, foreign sales stood at a low of Rs. 210.5 million. Foreign participation remained at 11.3% of total activity, showing a 13.1 % decline in the participation level. Among the most heavily traded stocks are Asia Capital, Seylan Merchant, Nawaloka Ceylinco Seylan and Royal Ceramics.

No major development in the macro environment

The magnitude of speculative driven trading reduced compared to the previous week, but some counters still continued to experience a sudden price hike. Most of these stocks that rose considerably within the day's trading, failed to hold on to such high prices but succumbed to profit taking. We expect the indices to remain volatile in the coming week, with the overall trend still pointed towards the positive direction. We advise investors to accumulate fundamentally strong stock presently, so as to be in a position to reap in benefits as and when positive developments occur.

DFCC results for 9M FY2005

DFCC Bank registered a 4.6% dip in net profits during the first nine months of FY2005, compared to the same period of FY2004, after writing off Rs. 62 million as a provision for Tsunami damage. The Bank recorded a 9.2% growth in total interest income, supported by an encouraging 29% YOY growth in net loans and advances to Rs. 30.1 billion. Net loans and advances grew by 16.2% since March 31, 2004, thus in our opinion DFCC's loan book warrants further growth potential backed by new project financing and commercial lending at DFCC Vardhana Bank.

Other income recorded a 34.5% growth to Rs. 792 million, compared to the first 9 months of FY2004, with the income from sale of investment securities improving by 101% to Rs. 159 million.

Dividend income jumped by 52% to Rs. 222 million. Operating expenses grew by 50%, mainly due to expansion costs of DFCC Vardhana Bank. The premises and equipment increased by 58%, while the VAT component jumped up by 56% and operating expenses also included an Rs. 43 million with respect to the goodwill written off (on the acquisition of DFCC Vardhana).

The bank recorded a reasonable growth of 6.6% in net profit after provisioning but before any share of profits from associates, to Rs. 1.03 billion compared to the corresponding period last year. DFCC's associate Commercial Bank, continued to contribute towards DFCC's profitability, as the share of profits from associates and subsidiaries amounted to Rs. 448 million, accounting for 30.2% of the profit before taxation.

We estimate a marginal dip (2.5%) in net profit to Rs. 1.26 billion during FY2005, with forward multiples of 10.2x. However, we project a 7.3% growth in earnings during FY2006, backed by the post tsunami lending opportunities. The PER based on such earnings stand at 9.5x.

DFCC has already made progress in commercial banking activities through its newly acquired commercial banking arm, DFCC Vardhana Bank. It is still a young enterprise among the commercial banks, thus real growth could be expected starting FY2006.

DFCC Vardhana Bank's loss of Rs. 23 million for the current period has been consolidated with DFCC group results for the period under review. The reasons for this loss can be attributed to large increases in operating & interest expenses and depreciation charges. Meanwhile, the DFCC is expecting to improve efficiency and effectiveness of resource utilisation by migrating DFCC Vardhana bank in to same information technology platform by mid 2005.

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 6.6x (stocks covered in our universe) and further it trades at a 30% premium to its forward book value of Rs. 172.75 as at March 31, 2005. We therefore maintain our recommendation, hold at current price levels.