Sri Lanka: Hayleys PLC (HAYL) makes news in leisure industry

Adding more spice to Sri Lanka’s booming leisure and tourism industry, the local conglomerate Hayleys PLC (HAYL: LKR223.00) acquired 51% of the issued share capital of Hotel Services (Ceylon) PLC (SERV, LKR24.75), the first five star city hotel in Sri Lanka last week and made a mandatory offer to acquire all remaining ordinary shares yesterday.

Hotel Services is the holding company of Ceylon Continental Hotel which is amongst the leading 5 star hotel operators in the capital of Sri Lanka with a total of 250 five-star rooms. The hotel is located in 4 acres of freehold land within the heart of Colombo in close proximity to the commercial hub of the country.

HAYL purchased 89.76 mn shares of SERV last Friday (12th March 2010) at LKR21 per share from three parties including Green Care International Limited (a company run by SERV’s chairman Mr Nahil Wijeysuriya) and East West Properties PLC.

HAYL, established in 1878 has its major interests in Global markets and manufacturing, Agriculture & Agri businesses, Transport & Infrastructure, and Consumer & Leisure. It is one of the local conglomerates which have a strong presence in manufacturing with +55% contributions to the top line. Hayleys Exports (HEXP: LKR39.50) is the global market leader in coir fibre manufacturing whilst Haycarb (HAYC: LKR169.50) is world's largest coconut shell based activated carbon producer with a 16% share of the global market. The company’s agri business varies from producing farm inputs to processed fruit & vegetable and the plantation sector which comprises of two plantation companies (KVAL: LKR54.00 and TPL: LKR32.00).

Furthermore the company has diversified into leisure sector through its subsidiary Carbotels Ltd (a strategic partnership with Jetwing group) and jointly owns a portfolio of hotels located at strategic locations in Sri Lanka. Going forward, HAYL management is keen to venture aggressively in the leisure sector making it one of the main sectors with properties under their own control and management whilst exiting from its minority stakes. As a part of the above strategy HAYL disposed its stakes in Vil Uyana (Sigiriya) and Sea Shells (Negombo) a few months back and yesterday (17th March 2010) sold a 26% stake in Light House Hotel (LHL: LKR62.50) for a total consideration of LKR726 mn resulting a total capital gain of LKR480 mn at a per share gain of LKR40. Furthermore according to the company they are willing to dispose its stakes in other hotels such as Tropical Villas (Bentota) and The Beach (Negombo) whilst retaining Hunas Falls (Kandy) where they have a controlling stake.

Entering the City hotel network of plus 3000 rooms HAYL has already hired expert hoteliers to make the Continental Hotel the best among the other players and reap benefits of the post war tourism boom. The company believes that their destination management arm along with the aviation sector would also provide added incentives in uplifting the hotel occupancy.

Despite the LKR41.9 mn net loss of SERV posted for 1-3QFY10, which could be mainly attributable to security restrictions around the hotel (which were removed recently) we believe this would be a win-win situation for both HAYL and SERV in the coming quarters.

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Colombo Investment Trust PLC (CIT) - The Crown Jewel of CFLB

Colombo Fort Land and Building Company PLC (CFLB) is a fully diversified conglomerate with interest in many sectors. The CFLB group through it complex structure own and control many companies including its flagship listed companies Lankem Ceylon PLC, EB Creasy and Company PLC, Muller & Phipps (Ceylon) PLC, Colonial Motors PLC, York Arcade Holdings PLC, Kotagala Plantations PLC, Agrapathana Planations PLC, Sigiri Village Hotels PLC, Maravilla Resorts PLC. Please read our report on CFLB.
http://www.srilankaequity.com/2010/02/colombo-fort-land-building-company-plc.html

Group Structure of CFLB & CIT

Shareholdings of CFLB
As per the above shareholdings of CFLB the Colombo Investments Trust PLC (CIT) and Colombo Fort Investment PLC (CFI) owns 13.74% (4,947,517 shares) and 10.81% (3,890,076 shares) of CFLB respectively. Further in addition the above direct holdings in CFLB, there is a clear cross holdings between the two companies CIT and CFI. CIT owns 31.69% (1,584,571 shares) of CIT whereas CFI owns 12.95% (732,402 shares) of CIT.

The Top 20 shareholders of CFLB as at 31st December 2009 are as follows;

Net Asset Value (NAV) of Colombo Investment Trust PLC

Importance of CIT to CFLB Shareholders
Majority shareholdings in CFLB is vested between three unlisted companies namely Property Investments holdings Limited, Capital Investments Limited and Financial Trusts Limited. Jointly these three companies control approximately 33.10% and Mr Senthirajah the Chairman of CFLB directly owns approximately 6.22% shareholdings. The two Investment Trusts CFI and CIT approximately control 24.5% of CFLB and further 17.17% is held by the Public (Outside top 20 shareholders).

As seen from the above shareholdings of CFLB it is crucial for the majority shareholders to be in firm control of CIT& CFI. The control CFI can be achieved with the control of CIT as the latter owns approximately 31.69% of CFI. Therefore control of CIT is the most significant to the control of CFLB.

Who Controls Colombo Investment Trust PLC (CIT) ?

It is important to disregard the CFLB's and CFI's shareholdings in CIT when considering the ownership of CIT as shareholders cannot control CFLB and CFI without the control of CIT.

Majority of shares of CIT are presently held by two unlisted companies namely Financial Trust Limited, Property and Investment Holdings Limited. Jointly theses two companies control approximately 49.87%. This was as result of Financial Trust Limited increasing its shareholdings from 32% to current 35% during latter part of FY 2009.

Therefore we could determine that the shareholdings of Financial Trust Limited is the key to the control of CFLB. Financial Trust Limited is an unlisted company and the shareholdings are not available to the public. In the event if the control of Financial Trust Limited becomes unclear due some unforeseen reason then most important company within the CFLB group undoubtedly is the CIT. Therefore one could consider Colombo Investment Trust PLC (CIT) to be the Crown Jewel of the CFLB group.

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Sri Lanka tourism reaches dizzying heights

Tourist arrivals for February 2010 reached a high of 57,300, surpassing February 2009 arrivals by a resounding 67.7 percent. While certainly February has always been the peak month of the Sri Lankan Tourism calendar, this year it is not only the increase in numbers but also the relative increase in yields that is noteworthy. For many years during the conflict, hoteliers had to resort to discounting to fill their rooms, but not so this year. Hence earnings from tourism should also show a healthy increase (these figures are only available quarterly).

Several hotels reported 100 percent occupancy levels for the month, no mean feat under any circumstances. Resorts in the Negombo area had the highest overall occupancies of close to 90 percent occupancy, while most of the other areas also recorded a very high occupancy levels. In fact, there was a considerable overbooking in resort areas, and many hotels have now suspended forward sales for the next few months in an effort to manage the situation.

All markets show healthy increases for the month, with western Europe (71.7 percent YOY increase), Middle East (127.4 percent), east Asia (93.7 percent), and south Asia (66.6 percent) leading the growth.

Hence, as expected, 2010 has got off to a flying start with the first two months having 108,057 arrivals compared to 72,637 last year for the same period, a 49 percent increase.

In preparation for the next winter season (which is expected to be very good), several hotels have already planned refurbishing activities during the forthcoming summer months from May to October 2010. Information collected by the Tourist Hotels Association indicates that close to 1,000 rooms will be temporarily "out of stock" due to refurbishing/upgrading activities in several leading resort hotels. In the Negombo region alone, there will be refurbishing activities in Club Hotel Dolphin, Blue Oceanic Hotel, Sea Shells Hotel, and Goldi Sands Hotel. Other hotels undergoing various forms of upgrading/refurbishing are Airport Garden, Taj exotica, The Blue Water, Cinnamon Grand, Mt. Lavania, Club Oceanic, Palm Garden, Riverina, Coral Sands, Hotel Sigiriya, Cinnamon Lodge, Berjaya, and Saman Villas. It is estimated that close upon Rs 3.0 Bn will be spent on refurbishing and upgrading the product according to the survey.

This is indeed a very good sign. The Sri Lankan Hotel product has over the years lost out to its regional competition, because everyone was in a survival mode, not having surplus cash to plow back for refurbishing/upgrading activities. With price revisions in the offing, it is imperative, therefore, that the product offering is improved to guard against the destination losing its "value for money" proposition.

However, it also noteworthy that it is mostly the larger hotels that are taking this initiative. With much larger stakes in the industry and more "corporate muscle," they have better access to capital than most of the SME sector. The SME sector comprises almost 60 percent or more of the THASL membership, and it is this sector that needs urgent support right now. The government needs to come out with an urgent short-term plan to help refurbishing of hotels by way of incentives, including duty-free imports of capital items for refurbishing and also some form of preferential interest bearing loans for the SME sector.

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Sri Lanka Insurance industry in good shape

The insurance industry has performed well despite the global recession recording growth in the long term and general insurance sectors.

The first quarter of 2010 looks promising for the insurance industry with more investments generating economic activities due to establishment of peace. The country’s risk management is in a good shape where insurance companies are part of the financial market, Sri Lanka Insurance Board Chairman Udaya Sri Kariyawasam said.

Investment in Government Securities by insurance companies has recorded a growth in 2009 compared to 2008. In 2009, the long term insurance contributed for Rs. 62,078,117 million and general insurance Rs. 15,441,944 million.In comparison in 2008 long term insurance contributed for Rs. 48,405,115 million and general insurance Rs. 15,955,553 million.

The National Insurance Trust Fund has decided to reduce premium pertaining to terrorism cover by 75 percent from April 1 this year. This will be a boost to the insurance industry.

A Policy Holders Protection Fund has been created with the cess collected from the insurance companies.

The accumulated fund as at end December 2009 was Rs. 755 million.

There are 18 private insurance companies and a rating system will be introduced shortly based on a checklist to increase credibility. The overall gross written premium on insurance has not increased according to the growth in the per capita income.

The gross written premium from long term (life) and general insurance business in 2009 is added up to Rs. 57,919 million as compared to Rs 58,166 million in 2008 due to global recession.

The Insurance Board of Sri Lanka (IBSL) will carry out a modernization process to its supervisory system from rule based supervision to risk sensitive capital model.

With the implementation of this model it will enhance the ability of insurance companies and the supervisory authority processes to focus on risk rather than rules. “This will provide a more flexible framework for maintenance of the regulatory minimum capital regime,” the IBSL report said.

The risk sensitive capital model will contribute to strengthen the risk management system of insurance companies and to have a supervisory system in line with international standards which supports a risk oriented management of insurers, the report said.

The insurance industry penetration is 10 percent.

There is a thriving market in the North and the East. With the peaceful environment, nine insurance companies have set up 42 branches in these provinces and the insurance industry is making steady progress.


Performance of the insurance industry in 2009

The insurance industry is regulated in terms of the provisions of the Regulation of Insurance Industry Act, No.43 of 2000 (RII Act). The Insurance Board of Sri Lanka (IBSL) was established under this Act in order to develop, supervise and regulate the insurance industry in Sri Lanka.

Over the past year, the IBSL has embarked upon several activities to develop, supervise and regulate the insurance industry with a view to ensuring that the best interest of the policyholders and potential policyholders.

During the previous year, the IBSL has strengthened its monitoring process in order to ensure the financial stability of insurance companies and insurance brokers.

By virtue of powers vested in the IBSL in terms of Section 15 of the Act, eighteen (18) Insurance Companies (Insurers) registered with the Insurance Board of Sri Lanka (IBSL), are presently underwriting insurance business.

Eleven of them are composite companies, five of them engage in General Insurance business and two companies engage only in Long Term (Life) Insurance business. When a company is registered to transact in both Life Insurance and General Insurance business, those companies are recognised as composite companies.

The IBSL has granted registration to People's Insurance Limited and Continental Insurance Lanka Limited as insurers to carry on General Insurance Business with effect from 2 December 2009 and 18 December 2009 respectively.

With the entrance of People's Insurance Limited and Continental Insurance Lanka Limited in to the industry, the no. of companies which are engaged in General Insurance Business have risen to 16.

Ceylinco Takaful Limited has been temporarily suspended for a period of one year commencing from 9 December 2009 to 8 December 2010 by the IBSL in terms of Section 18 (2) of the Act.

During the period under review, 43 insurance broking companies were registered with the IBSL in terms of Section 82 of the Act. Samson Insurance Brokers (Pvt) Limited has been granted registration as a new broking company with effect from 24 April 2009.

Meanwhile, in terms of Section 84 of the Act, the registration granted to Insurex Insurance Brokers Co. (Pvt) Limited in respect of Life and General Insurance Business was cancelled by the IBSL with effect from 30th October 2009. Insurance broking companies and insurance agents as intermediaries have made a valuable contribution to the industry.

GWP of insurance companies
The Per Capita Income of Sri Lanka grew from $1000 in 2004 to $2200 in the year 2009 and the Gross Domestic Product (GDP) for the 3rd quarter of 2009 recorded a positive growth rate of 4.2 per cent.

This economic performance has to be considered as a very satisfactory achievement considering the global economic recession that was prevalent during the last year. However, the overall gross written premium on insurance has not increased accordingly.

The Gross Written Premium (GWP) from Long Term (Life) and General Insurance Business in 2009 is added up to Rs. 57,919 million. In the year 2008, the overall gross written premium was Rs. 58,166 million.

GWP of insurance broking companies
Forty-three insurance brokers operated during 2009, concentrating mainly on general insurance business. Their premium contribution of Rs. 8,867 million was lower than the previous year which was Rs. 8,975 million.

Total assets of insurance companies
Total Assets of insurance companies as at 31 December 2009 was Rs. 180,989 million. Assets of long term insurance business amounting to Rs. 120,899 million of the total, whereas assets of general insurance business amounting to Rs.60,089 million.

Investment in government securities by insurance companies

In terms of the RII Act, 20% of Technical reserves of General insurance and 30% of Life fund should be invested in government securities by the insurers. The IBSL has strengthened its monitoring process by collaborating with the Department of Public Debt of the Central Bank in order to examine the investments made by insurers in the government securities.

Complaints handling and Investigation
The number of complaints received by the Insurance Board of Sri Lanka (IBSL) over the last five year as indicated below has varied in number. In 2006 with the set up of the Insurance Ombudsman scheme by the Insurance Association of Sri Lanka (IASL) with the approval and concurrence of the IBSL encouraged the policy holders and other aggrieved parties to refer their complainants to the Insurance Ombudsman.

However, the IBSL entertained appeals from parties aggrieved by the decision of the Insurance Ombudsman, complainants relating to ambiguous wording in policy documents and matters relating to ethical conduct of the industry.

With the decision taken in September 2009 the policyholders now able to directly address their complaints to the IBSL for recourse, hence the number of complaints received by the IBSL has seen an increase in the year 2009. In this short period, the Investigation Unit has conducted numerous inquires and have been able to settle issues between parties.

Policy Holders Protection Fund
The CESS collected from insurance companies is deposited into the Policy Holders Protection Fund, established in terms of Section 103 of the RII Act. The amount lying to the credit of the Policy Holders Protection Fund is invested in Treasury Bills. The accumulated amount in the fund as at 31 December 2009 was Rs.755 million.

SRCC & T Fund
The SRCC & T Fund was created in order to provide insurance covers to the insurance policyholders who are exposed to risks arise due to strike, riot, civil commotion and terrorist activities within the geographical limits of Sri Lanka which could be obtained as an extension to the basic insurance policies issued by the insurance companies presently operating in Sri Lanka and which are members of SRCC & T fund.

On account of the end of war against terrorism, the National Insurance Trust Fund (NITF) has decided to reduce the premium pertaining to Terrorism Cover by 75% from 1 April 2010. As a result of this reduction in the premium the construction industry and other such projects may consider having insurance policies for their businesses and properties which in turn will be a boost to the insurance industry.

New Legal Enforcements

1. The new quarterly reporting formats for insurance brokers for gathering all information required to assist prompt intervention is finalised and will be effective from quarter beginning 1st April 2010.

2. The new solvency margin requirement for general insurance business is awaited by the legal draftsman department for gazetting very shortly.

3. Accepting insurance business in violation of the RII Act, only individual could act as insurance agents and the IBSL have observed that insurance companies accept insurance business from institutions who act as agents and pay commission. Therefore any violation of this would be looked at by the IBSL seriously.

Risk sensitive capital model for the insurance industry supervision
The IBSL after carefully analysing the international experience on insurance supervision has taken a decision to carry out a modernisation process to its supervisory system which focuses on the concepts of risk sensitive capital model for insurance industry supervision with the assistance of the World Bank.

The main objective of this project is to develop and support the implementation of a risk sensitive minimum capital regime which is consistent with the industry risk profiles, practices and market dynamics for the insurance industry in Sri Lanka in consultation with the industry and under the collaborative control of the IBSL.

The current supervisory system which is commonly known as the "Rules Based Supervisory System" is focused on establishing reasonable rules that scrutinise aspects such as the solvency margin, investments, minimum capital requirement, etc.

With the implementation of this new risk sensitive capital model for the insurance industry supervision, it will enhance the ability of insurance companies and the supervisory authority processes to focus on "risk rather than rules" and to provide a more flexible framework for maintenance of the regulatory minimum capital regime.

Further, it will contribute to strengthening the risk management system of insurance companies and to have a supervisory system in line with international standards which supports a risk oriented management of insurers.

A comprehensive report on Market Analysis ensuring that the project is consistent with the local market conditions was handed over to the IBSL by the consultants recently.

Market development activities
During 2009, the IBSL conducted several awareness programmes on insurance island-wide in order to educate the general public, students and business community. IBSL made use of the print and electronic media on numerous occasions to disseminate important information to the public and the media and published a number of press releases, press notices, paper supplements, etc. in the press and uploaded them to the official website of the IBSL.

Further, IBSL has made available free of charge, a number of other publications such as booklets and brochures giving valuable information pertaining to the subject of insurance. The IBSL has focused on creating awareness in the subject of insurance among the public would be beneficial to the insurance industry which will in turn help increase the insurance penetration.

(Source: Insurance Board of Sri Lanka)

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Asia seen as growth driver for voluntary CO2 market

Fear of Western-imposed carbon tariffs on goods and services from Asia is likely to drive growth in offsetting emissions by large firms in the region, a voluntary carbon market executive said.

The market, worth USD 705 million in 2008 and likely much less in 2009, relies on businesses to voluntarily manage their carbon emissions, for example from the energy they use to produce and transport goods around the globe.

Western companies can buy carbon offsets from clean-energy projects in developing countries, which boast a high number of plants that capture methane from landfills or wind farms for example.

The offsets then allow these companies to cut their overall carbon footprint, or production of greenhouse gases, such as carbon dioxide.

While this concept is new to many Asian firms, there is a growing realisation that customers in the West will scrutinise the carbon content of goods and services, said Jonathan Shopley, managing director of The Carbon Neutral Company, a UK-based offset company.

"It's about requirements in Western markets," Shopley told Reuters in an interview in Singapore.

This was likely to prompt companies to make greater efforts to curb emissions arising from production, as well as a rise in offsetting, both to please their customers and differentiate themselves from the competition.

There are effectively two carbon offset markets. The compliance market, in which companies must buy offsets to keep their emissions below a certain cap, and the voluntary market.

Each offset set represents a tonne of avoided pollution from carbon dioxide, the main gas responsible for raising the temperature of the planet.

"I think the failure of Copenhagen to get to a binding target has fragmented the market into regional responses," he said of last December's UN climate talks.

"You're already hearing from the US that (it's) thinking about a carbon tax on the border. This is going to drive demand for product assessments," Shopley said.

Indian firms, in particular, understand the cost of carbon, as the country is the second largest source of UN-backed carbon offsets from clean-energy projects.

"They're manufacturing and exporting goods into Europe and the U.S., where there is a clear message the carbon content of your product going to become important. It's coming from Walmart, Tesco, Macy's, Marks & Spencer," he said.

Growth from low base

In Europe, the voluntary carbon market is driven by corporate social responsibility, while in the United States, it is more of a pre-compliance market ahead of mandatory national or regional regulation on curbing greenhouse gas emissions.

Overall, the voluntary market struggled last year because of the financial crisis and is estimated to have shrunk by over 60 percent in 2009, according to Bloomberg New Energy Finance.

Hurdles to a U.S. federal emissions trading scheme, continued uncertainty about the future of the global carbon markets and pessimism about clinching a global climate deal this year in Mexico has disappointed investors.

"If we look at our business as an indicator, it was just above level over 2008 and 2009. We didn't see any massive growth at all," Shopley said.

He forecast a rise in the number of Asian companies that measure their greenhouse gas emissions, before offsetting, as businesses around the globe join the fight against climate change.

"We're working with between 20 and 30 companies in Asia," said Shopley. Of these, five were offsetting at an average of about 5,000 tonnes per year.

These five clients had chosen offsets backed by the Voluntary Carbon Standard and UN offsets, called Certified Emissions Reductions, he said.

"In terms of the number of clients that we expect to be measuring and reporting greenhouse gas emissions (in Asia), I think that will increase ten-fold at least over a year or so."

He said interest in offsetting was emerging from South Korea, Sri Lanka, Malaysia and Indonesia.

Source - Reuters

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Ceylon Theatres (CTHR) - inspired by the ingrained family values inherited over generations

History

Ceylon Theatres PLC was established in 1928 for the purpose of exhibiting, importing and

distribution of motion pictures, with the late Sir Chittampalam A. Gardiner as its first Chairman
and Managing Director.

Under the guidance of the late Sir Chittampalam A. Gardiner, the Company acquired a
controlling interest in Millers PLC. in 1945, which in turn acquired a controlling interest in
Cargills (Ceylon) PLC in 1946. In 1971, the Company, after the demise of its founder Chairman,
made a decision to concentrate on the cinema industry and divested its controlling shareholding
in Millers PLC, thereby losing control of Cargills (Ceylon) PLC.

When the late Mr. Albert A. Page was appointed the Managing Director of Ceylon Theatres
PLC in 1980, the Company was facing grave difficulties due to the establishment of the State
Film Corporation which took over the import and distribution of motion films in the industry. To
counter the adverse business climate faced by the Company, Mr. Albert A. Page set out to regain
control of Millers PLC and through it Cargills (Ceylon) PLC. Under the stewardship of the late
Mr. Albert A. Page, a great visionary, the Group then further diversified into Food Processing,
Property Development, Financial Services, Ceramic, Tiles and Plantations sectors.

In 2008, the Group engaged in a restructure of operations, with Ceylon Theatres and Millers
merging into a single entity, and the operations of Millers being transferred to Cargills. The
restructuring, consolidated the operations into individual sectors, thereby bringing greater focus,
operational efficiency and flexibility for future growth and expansion.

Effective Holdings in Group Companies

Food and Beverage
Cargills (Ceylon) PLC is Sri Lanka’s largest modern retail player. Cargills Food City, Cargills Express and Cargills Big City modern retail outlets have above 50% market share in the sector. It is also a significant player in the FMCG sector with three of the fastest growing manufactured food brands in the island, Cargills Magic, Cargills Kist and Cargills Supremo. The company’s logistics arm distributes own - brands as well as international food and non-food brands across the 25 districts. Cargills also holds the franchise for KFC in Sri Lanka. The Cargills agribusiness model has gained global recognition for its inclusive and sustainable value chain.

Real Estate
CT Land Development and CT Properties are formidable players in Sri Lanka’s Real Estate sector. CT Land Development owns the country’s premier shopping and entertainment complex Majestic City, while CT Properties has just completed the development of ‘Empire’ of the tallest residential building structures in the island. Several other township and development projects are in the pipeline. Bandarawela Hotel, the only hotel in the Group remains a highly patronized get-away spot in the hill country.

Ceramics, Tiles and Wooden Flooring
The Group’s interest in the sector includes mining for ceramic raw material as well as retailing of ceramic and allied products through its subsidiary Lanka Ceramics. The companies in the sector are industry pioneers with Lanka Tiles being the first floor tile manufacturer in Sri Lanka for both domestic and export markets. Lanka Walltiles is the only wall tile manufacturer in the country. Parquet manufactures wooden flooring.

Plantations
Ceytea Plantation Management is the holding company of a Listed Subsidiary Horana Plantations. Horana Plantations has leasehold rights to 16 tea and rubber estates, constituting approximately 7,500 ha of land. Its newly refurbished plantation bungalows in Neboda and Lindula have expanded the Groups interests in the leisure sector.

Financial Services
CT Smith Stockbrokers is one of the leading brokering firms in Sri Lanka. CT Capital primarily engages in providing a diverse range of capital market solutions and financial advisory services. CT Fund Management manages Comtrust Equity Fund which is structured to yield optimum results for investors.

Entertainment
Ceylon Theatres has been associated with the Sri Lankan entertainment industry for over 75 years. CT Films operates the most patronized Cinemas in the country including the Regal and Majestic in Colombo along with Regal Cinemas in Negombo and Kandy.

Packaging
Uni Dil packaging offers a full turnkey packaging service from design to delivery. The company supplies both to the domestic and export market. Uni Dil caters to manufactures, retailers and end-users in Tea, Apparel, Food and Catering, Ceramics, Agriculture and Rubber industries.

Financial Position

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Hatton National Bank (HNB) - Net profit up 58% YoY in FY 2009

HNB income has grown by 6% YoY to LKR 40.5 Bn from LKR 38.5 Bn. The top-line growth of the HNB Group is supported by strong cumulative 1-3Q FY09 performance, which shows an 10% increase YoY where it has grown to LKR 31 Bn from LKR 28 Bn. This has offset the dip in 4Q top-line performance where it has dropped by 6% to LKR 9.6 Bn from LKR 10.3 Bn.Net profit for FY09 has grown significantly by 58% YoY to LKR 4.5 Bn from 2.8 Bn. The increment on bottom-line is primarily due to the impact by 4Q performance, which shows a 156% increase YoY to LKR 1.8Bn from LKR 0.7 Bn. Therefore 40% of FY 09 bottom-line is contributed by 4Q FY09 net profit whilst for FY08 the same percentage stands at 25%.The comparatively strong 4Q FY09 performance relative to total yearly earnings in terms of an increase in 15 percentage points can be attributed to improved NII and reversing of provisioning for bad/doubtful debts and loans written off.

An increase of 11% YoY to NII on 4Q FY09 is on the backdrop of 4Q interest income dropping by a relatively smaller percentage (7%) compared with the drop of interest expenses (18%) YoY basis. Reduction of policy rates as per Government directives in October 09 was the primary reason for the aforementioned.

Furthermore interest income was driven down by the marginal dip in performing loans and advances as at the end of FY09, which stands at 4% YoY.NII for FY09 show an increase by 16% YoY to LKR 14.5 Bn from LKR 12.5 Bn.

HNB has been engaging in banking activities in Sri Lanka for over 120 years and it has the widest coverage in terms of number of Branches Island wide, which stands at 186 customer centers. In terms of asset base amongst the banking sector it takes up the second position behind Commercial Bank Plc with an asset base of LKR 287.5 Bn as at end of FY09 .Total assets have grown by 9% YoY from LKR 263 Bn.HNB is present in both northern and Eastern provinces of Sri Lanka with a branch network of 20, which is a relatively strong presence compared with other entities in the Banking sector.HNB aims to improve its island wide branch network by increasing number of customer centers to 200 by the end of FY10. This will have a positive
impact on expanding credit and improving deposit base.

Deposit base of HNB has increased by 13% YoY in FY09 to LKR 213.8 Bn from LKR 189.8 Bn and 4Q growth is 5% from LKR 203.8 Bn. Even though the Government of Sri Lanka did reduce policy rates, the strong brand identity of HNB coupled with low levels of public confidence in deposit taking institutions within financial sector of Sri Lanka had contributed to the said improvements to the HNB deposit base. Further Savings and other Deposits show greater increases in percentage terms and are at 18% and 56% respectively.

Investments held for both trading and maturity show considerable growth YoY. Investments held to maturity show a growth of 102% YoY for FY09 where a change to positions on Government securities has primarily contributed to it. Government securities held to maturity have increased to LKR 53.5 Bn from LKR 25.1 Bn resulting in an increase of 113% YoY. Investments held for trading show a 745% YoY for FY09 where significant changes to both positions on Government and other securities can be observed ,where it is at 1061% and 176% YoY respectively.

Non Performing loans(NPL) show a greater drop i.e. 8% YoY for end of FY09 indicating that the bank has improved it’s efficiencies on loan recoveries. The provision of LKR 2.6 Bn that was made against the exposure to Kabool Lanka (Pvt) Ltd of approximately LKR 2.8 Bn has been recovered fully, with final payment being booked in FY09. This amounts to a majority of recoveries for FY09 out of total recoveries of
LKR 743 Mn. A reversal of provisioning for bad/doubtful debt and loan loss (in FY09 income statement LKR 35.3 Mn) has positively contributed to the bottom-line, which is a decrease of 104% YoY compared to provisioning costs of LKR 856.3 Mn for FY08.

An approximate decrease of loan loss provisioning by LKR 2 Bn for FY09 has resulted in current levels of loan loss provisioning to stand at LKR 7.38 Bn. Provision cover (provision/NPL ratio) has decreased by 10.1 percentage points to 59.1%. We expect this to be approximately the same for FY10 and FY11 forecasts.

HNB improved its total cost/income ratio for FY09 by 5 percentage points to decrease it to 79% from 84%.The growth in income by 6% YoY is the primary cause for the improvement of said ratio as Total cost has remained stable at LKR 32 Bn .The efficiencies that are expected to occur with the implementation of the new Banking Software System (Finacle© provided by Infosys) experience a lagging effect as personnel cost/income ratio is constant for FY08 and FY09 where it is approximately at 10%. Number of employees, which currently stands at 4302, will not be increased significantly even though HNB will expand its presence by opening more branches, especially in north eastern Sri Lanka resulting in greater levels of operational efficacy.

CASA Ratio of HNB has been consistently improving over FY09. For end of 1Q FY09 it was at 41% which has improved to 45% at the end of 4Q FY09 yielding in greater operational efficiencies. CASA for HNB is approximately identical to banks of similar size but it is significantly better when compared with other institutions within the banking sector albeit with a smaller asset base giving HNB a competitive advantage.
(CASA ratio is the sum of current and savings deposits as a percentage of total deposits)

HNB has maintained adequate capitalization requirements.CAR (Tier 1) is at 10.85% and CAR (Total) is at 12.92% as at 31 Dec 09 for the group. Bank CAR (Tier 1) is 11.1% and CAR (Total) is 13.16% .Both Bank and Group CAR show YoY increases.

HNB voting stock is fairly valued and currently trades at 10.49X and nonvoting stock, which is more attractive, trades at 7.79X on 2010 EPS. PBV is at 1.63X.Maintain BUY

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Nations Trust Bank (NTB): The young and the dynamic...

Nations Trust Bank was established in July 1999 through the acquisition of the Colombo Branch of Overseas Trust Bank Ltd and it has grown in leaps and bounds using acquisition and mergers as its primary growth strategy.

Today the bank is considered as one of the most customer oriented financial institutions where it operates 38 branches, 9 leasing centers, 41 ATMs, 6 Personal banking centers and internet banking as well. The bank accounts for an asset base of LKR71 bn which has enabled them to enjoy a market share of near 3%. The young and dynamic financial institution offers a wide range of services in terms of Personal Banking, Corporate Banking, SME Banking and American Express Credit card.


Overview
Nations Trust Bank’s (NTB) net profit has grown by 5% YoY to LKR181.2 mn in 4Q2009, broadly inline with our forecast supporting 2009 net earnings to grow by 16% YoY to LKR 686.1 mn. The net profit growth in the last quarter was driven by a 23% YoY increase in net interest income and a 8% YoY reduction in operating cost. With interest rates on the decline the banking sector outlook remains positive with loan growth expected to gather momentum from 1Q2010 on-wards, NTB’s net interest margins is expected to be intact at around 4.9%. We are maintaining our forecast 2010E net profit at LKR969.7 mn and projected 2011E net earnings at LKR1,296.9 mn. Thus the share is attractive on 8.9X forecast 2010E net profit, 6.6X projected 2011E net earnings, 1.2X PBV.

Interest income has dipped 23% YoY. NTB’s interest income has dipped 23% YoY toLKR2,706.3 mn in 4Q2009, mainly due to a 41% YoY dip in interest income from other interest earning assets to LKR881.3 mn. Though the fixed income portfolio (held to maturity) has grown by 104% YoY, the dip in Treasury bill rates has impacted the income from fixed income securities. Further interest income was also negatively impacted by 11% YoY drop in interest income from loans and advances mainly due to the contraction of the loan book.

Interest Expenses has dipped 38% YoY to LKR1,685.7 mn. Interest expenses has dipped 38% YoY to LKR1,685.7 mn mainly on the back of a 61% dip in fixed income security expenses due to reduction in government treasury bill and bond rates but the interest expense on deposits grew by 10% YoY to LKR990.0 mn.

Net interest income has increased by 22.5% YoY to LKR1,020.6 mn. Despite interest income having dipped by 23% YoY interest cost has dipped at a faster pace by 38% YoY and has weathered the negative impact from reduction in interest income.

Further it is noteworthy that NTB has managed to grow its zero cost demand deposits by 23% YoY to LKR4.7 bn, whilst the low cost CASA deposit base accounts for 24% of total deposits where the high cost time deposits account for 76% of the total deposit base.

Non interest income has dipped by 20.2% YoY. Non interest income has dipped by 20.2%YoY to LKR360.9 mn in 4Q2009 due to forex earnings having fallen by 63.3% YoY to LKR50.6 mn and other income also fell marginally to LKR310.3 mn.

Operating cost has decreased by 8% YoY in 4Q2009. Operating costs have fallen by 8% YoY to LKR1,381.5 mn, mainly due to a 8% YoY decrease in personnel costs to LKR813.4 mn. (which could be attributable to the reduction in number of employees) Further the overhead costs have also dropped by 9% YoY which has supported the overall operating cost reduction. Presently operating cost per branch stands at
LKR21.2 mn per quarter.

Operating profit has risen 36% YoY to LKR409.3 mn in 4Q2009. NTB’s operating profit has grown by 36% YoY to LKR409.3 mn in 4Q2009, where this was supported by the 23% YoY growth in net interest income and 8% YoY reduction in operating cost.

Provisioning cost has increased 55% YoY to LKR 158.9 mn in 4Q2009. Total provisioning cost increased 55% YoY to LKR 158.9 mn mainly due to a 64% increase in specific provisions. Further the gross NPL ratio for NTB is at 8.5% and the net NPL ratio is at 4.7%.

Total tax bill has risen 78% YoY to LKR228.1 mn in 4Q2009. Value Added Taxation on banking income has increased by 94% YoY to LKR57.9 mn whilst tax on consolidated profit has also increased by 73% YoY to LKR170.2 mn pushing up the total tax bill by 78% YoY to LKR228.1 mn in 4Q2009. Thus the effective tax rate in 4Q2009 is near 55%.

Net profit up 5% YoY to LKR181.2 mn in 4Q2009. Consequently a 22% YoY increase in net interest income and a 7% YoY reduction in operating costs NTB’s net profit has risen by 5% YoY to LKR181.2 mn in 4Q2009 whilst 2009 net profit is up 16% YoY to LKR686.1 mn.

Forecast 2010 net profit maintained at LKR969.7 mn. With interest rates on the descend (3 month Treasury Bill rate having fallen to 8.33% from 21.3% in January 2008) the banking sector outlook remains positive with loan growth expected to gather momentum1Q2010 onwards, NTB’s net interest margins is expected to be intact at around 4.9%, whilst the young and dynamic bank is set to grow in the coming years. Therefore, we are maintaining our forecast 2010E net profit at LKR969.7 mn (up 41% YoY) and projected 2011E net earnings at LKR1,296.9 mn (up 34% YoY).

Share is attractive on 8.9x forecast 2010 net profit. The share is attractive on 8.9X forecast 2010E net profit, 6.6X projected net 2011E earnings, 1.2X PBV. BUY.

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Colombo Dockyard (DOCK): the Odyssey of Excellence….

Ship builder and repairer, Colombo Dockyard (DOCK), has improved its cumulative net earnings by 48% YoY to LKR2,156.6 mn in 2009, albeit the net earnings for 4Q2009 has dipped by 24%YoY to LKR336.5 mn. DOCK’s 4Q2009 net profit has been lowered by 390% YoY increase in depreciation, amortisation and impairment costs. Further DOCK boasts of strong outlook with its order book being full till 2012, ship repairing business is expected to recover in 2010E with the recovery of the world shipping recession and the heavy engineering division is expected to make strong contribution to the bottom line in the coming years.

Company Overview
DOCK was initially incorporated to repair vessels calling at the Colombo Port by the Government of Sri Lanka (The national carrier, Ceylon Shipping Corporation owned 75% of the company whilst the balance 25% was held by Ocean Shipping Enterprises of Singapore). Due to critical financial issues faced by the company in the 1980s the Government privatised the company where the majority stake (51%) was transferred to Onomichi Dockyard Co Ltd of Japan.

Today the company is a total marine solutions provider in ship repairs industry whilst being recognised as one of the best small scale shipbuilding yards in the world, which has recorded a continuous earnings growth for the past 05 years. At present the company conducts its operations in four broad arenas, namely;

Ship repairs
This is the core business of the company with a contribution of 50% to the top-line and the highest yield generator. DOCK has the capacity to provide total marine solutions in ship repairing for all types of commercial vessels. It has 4 dry docks ranging from 9,000 to 125,000 Deadweight tonnages (DWT), where the largest caters to tankers, bulk carriers and offshore drill rigs.

Ship building
Ship building is the second highest contributor to the group’s revenue and earnings. At present DOCK is recognised as one of the world’s best ship building yards having started three decades ago as a tug and speed boat manufacturer. The company has the ability to manufacture diverse vessels, meeting the stringent requirements stipulated by International Classification Societies, while surpassing the expectations of its
clientele.

DOCK’s ship building arm mainly caters to India, where +50% of the revenue is generated and Singapore with a revenue contribution of +18% followed by Sri Lanka, Japan and Maldives etc. According to industry sources the Company’s order book is full up to 2012 with majority of the orders placed by India. We have learnt that DOCK’s order book stands confirmed without any cancellation enabling it to maintain its current
ship building momentum till end 2010.

DOCK, which is renowned for its efficient services and on time deliveries, continuously searches avenues to improve its processes to extend capacity. In addition, the company plans to change its focus from mass production towards complex tailor made vessels, to achieve better margin through a competitive advantage over their technical expertise.


Heavy engineering
This is a fairly new business to DOCK but it has been successful in capturing several landmark projects in Sri Lanka as well as in the Republic of Maldives. A few services provided by this segment are; Petro Chemical Installations, Power Station Installations, Heavy Steel Structures & Other Specialised Services. We believe the company has a huge potential in this area especially for their expertise in steel structure with the large number of infrastructure development projects in the North and East coupled with power station installations. DOCK re-launched its heavy engineering arm Dockyard General Engineering Services (Pvt) Ltd (DGES) to exploit the potential opportunities utilising their highly skilled work force, led from the front by qualified and vastly experienced engineers. DOCK has already undertaken heavy engineering projects in power and other sectors to be completed during 2009/2010.

Off shore engineering
Recently DOCK ventured into offshore engineering, a higher-end repair and maintenance projects such as repairing Mobile Offshore Drilling Units etc. The company has successfully completed many projects for Sri Lanka, India and the Maldives. Backed by the strategic partnership with Saudi Arabia, the company is in a position to win orders and cater to the offshore oil drillers of the Middle East. In addition, the company would benefit if Sri Lankan oil explorations become a success.

Fourth quarter net revenue slid marginally to LKR3,768.4 mn. DOCK’s net revenue has slid marginally to LKR3,768.4 mn in 4Q2009 albeit cumulative2009 net revenue surged by a sharp 21%YoY to LKR13,498.1 mn. Ship repair revenue has dipped 12% YoY 7% QoQ on the back of the recession in the shipping industry which we deem to appease by end 2010. However ship building revenue has soared and the re-launch of DGES the heavy engineering arm has also immensely supported the top line.

Gross profit decreased by a moderate 4% YoY to LKR506.8 mn in 4Q2009. DOCK’s cost of sales have remained static YoY at LKR3,261.6 mn in 4Q2009 and a large portion of costs recognised relates to the ship building segment which was a revenue driver during 4Q2009. Further, prices in the commodity market have stabilised, which negatively affected the cost of sales as DOCK had already procured and also entered into agreements to purchase steel. Consequently, gross profit decreased by only 4%YoY to LKR506.8 mn in 4Q2009 whilst cumulative 2009 gross profit surged by a sharp 35%YoY to LKR3,513.6 mn. However gross margins contained from circa 14% in 4Q2008 to circa 13% in 4Q2009. Notwithstanding the decrease in the quarterly margins the yearly gross margin has surged by 3% YoY to 26% IN 2009.


EBITDA up by a staggering 57% YoY in 4Q2009. EBITDA has increased by 57% subsequent to the circa 270% YoY decrease in operating costs/income. Further the cumulative 2009 EBITDA has improved to LKR2,683.1 mn supported by the static operating costs/income reported for the year. Furthermore the EBITDA margin has increased to 20% from 16% the year before.

4Q2009 net profit down by 24% YoY to LKR336.5 mn. The net profit for 4Q2009 has slid 24% YoY to LKR336.5 mn on the back of realization of depreciation, amortisation and impairments during the quarter which are attributable for the whole year. Albeit the cumulative 2009 net profit has recorded a staggering upturn of 48% YoY to LKR2,156.6.

Forecast 2009E net profits are in line with the actual with a moderate variance of 6%. Considering the increased ship building activities supported by heavy and off-shore engineering projects, we forecast 2010E net profit to LKR2,508 mn (up 16%YoY on the back of scheduled delivery of three Multi Purpose Platform Supply Vessels (priced at circa USD30 mn each).

The company is well reputed for the timely delivery of orders where in most occasions it delivers before the specified timeline. However with the capacity constraints of the dry docks in the Colombo Port the company is looking to venture more into offshore docks to overcome this bottleneck. Furthermore, with the appointment of the new Chairman, who is the former chief of Mitsui Cement, we believe there could be further improvements in processes where the company could be able to accept more orders and service them effectively. (The order book for ship building is full up to 2012).

The share is attractive and trading on 8.5X forecast 2010E earnings and just 2.7X pro
jected 2010E PBV - maintain BUY

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SRI LANKA: ASI LEAPS A STEP FORWARD…

With the extended bull run witnessed during this week, we believe the market would consolidate at current levels whilst continuing to generate healthy turnover levels during the coming weeks. We further expect the market to be driven by local high net worth; retail and institutional participants where the primary interest would be on mid cap stocks in the short run.

Going forward, with the positive macro developments and anticipated increase in economic activity coupled with the gradual recovery of global economy trickling down to the corporate sector, we believe the corporate sector earnings would rise by circa 30% YoY from 2010 onwards . This would be further strengthened by the policy decisions of the Central Bank to ease off foreign exchange controls, maintaining low interest rates, development of North and East etc.

Whilst the recent gains on most of the counters have been based on company fundamentals, a few others have gained more on speculations and rumours. Thus we strongly recommend investors to focus on companies with sustainably high ROCEs and earnings growth potential.

The market currently trades on trailing 4 quarter earnings multiple of 20.4X. However, given our expectation of higher corporate earnings from 2010 onwards we believe further long term upside is inevitable with the micro and macro changes taking place in the environment.

Our favourites would be the banking, hotels and consumer sectors, whilst diversified and manufacturing sectors could become secondary market movers. We see pockets of strong growth in key sectors such as Banking (Hatton National Bank, Commercial Bank, National Development Bank, Sampath Bank, Seylan Bank), Hotels (Asian Hotels & Properties, Aitken Spence Hotel Holdings, Keells Hotels, Stafford Hotels, Serendib hotels), Consumer (Hemas Holdings, Distilleries, CW Mackie), Manufacturing sector (Lanka Tiles, Royal Ceramics, Chevron Lubricants) and Diversified Sector (John Keells Holdings, Aitken Spence, Colombo Fort Land).

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