Sri Lanka stock market ends 2009 up 128 percent

COLOMBO — The Sri Lankan stock exchange more than doubled in value in 2009, figures showed Wednesday on the last day of trading for the year. Investors sent the Colombo market soaring on the prospect of peace and investment after the government claimed victory over separatist Tiger rebels in May after 37 years of bloodshed, analysts say. "The end of the conflict is a key factor driving the market," said Saminda Weerasinghe, manager of research at the Acuity Securities brokerage. "The market is going up through local buying pressure." The All Share Price index hit 3,385.55 at the end of trading Wednesday compared to the opening level of 1,484.55 at the beginning of the year, Colombo Stock Exchange figures showed -- a rise of 128 percent. The market is closed on Thursday for a Buddhist holiday. The tiny stock market, which had a car bomb explode at its doorstep in 1997, has emerged as one of Asia's best performers. Mahesh Peiris, a director at Asia Securities, said local investors were banking on better times, particularly in the hotel sector. "What we are currently seeing is people running on the hope-factor," Peiris said. "They are not paying much attention to the fundamentals." Government forces wiped out the leadership of the rebel Liberation Tigers of Tamil Eelam (LTTE) in May this year. The LTTE took up arms in 1972, five years before the country ended a socialist-style system to become the first in South Asia to embrace a free-market economy. Tourism and infrastructure-related stocks have been doing well on the back of expectations that more foreign holiday makers will visit the island, which is also set to rebuild its war-ravaged northeast. The market saw a 41.57 percent decline during 2008 when government forces and separatists were locked in what seemed an unwinnable war, but as troops gained ground early this year, investor sentiment changed. Source-AFP COLOMBO — The Sri Lankan stock exchange more than doubled in value in 2009, figures showed Wednesday on the last day of trading for the year. Investors sent the Colombo market soaring on the prospect of peace and investment after the government claimed victory over separatist Tiger rebels in May after 37 years of bloodshed, analysts say. "The end of the conflict is a key factor driving the market," said Saminda Weerasinghe, manager of research at the Acuity Securities brokerage. "The market is going up through local buying pressure." The All Share Price index hit 3,385.55 at the end of trading Wednesday compared to the opening level of 1,484.55 at the beginning of the year, Colombo Stock Exchange figures showed -- a rise of 128 percent. The market is closed on Thursday for a Buddhist holiday.The tiny stock market, which had a car bomb explode at its doorstep in 1997, has emerged as one of Asia's best performers. Mahesh Peiris, a director at Asia Securities, said local investors were banking on better times, particularly in the hotel sector."What we are currently seeing is people running on the hope-factor," Peiris said. "They are not paying much attention to the fundamentals." Government forces wiped out the leadership of the rebel Liberation Tigers of Tamil Eelam (LTTE) in May this year. The LTTE took up arms in 1972, five years before the country ended a socialist-style system to become the first in South Asia to embrace a free-market economy.Tourism and infrastructure-related stocks have been doing well on the back of expectations that more foreign holiday makers will visit the island, which is also set to rebuild its war-ravaged northeast.The market saw a 41.57 percent decline during 2008 when government forces and separatists were locked in what seemed an unwinnable war, but as troops gained ground early this year, investor sentiment changed. Sri Lanka’s $41 billion economy is expected to grow as much as 6 percent next year from an estimated 3.5 percent expansion in 2009, the central bank said in October. President Mahinda Rajapaksa quashed an uprising by Tamil separatists in May and the island has drawn the interest from investors including Templeton Asset Management Ltd.’s Mark Mobius and Jim Rogers, author of books including “Adventure Capitalist.” The central bank has cut lending rates five times this year to a five-year low as inflation plunged from a record high in June 2008. Rajapaksa has called a presidential election for Jan. 26, two years before his mandate expires, as he seeks to capitalize on the end of the war with the Liberation Tigers of Tamil Eelam in May. Economic Growth Gross domestic product expanded 4.2 percent in the third quarter from a year earlier, the fastest pace in 2009, after gaining 2.1 percent in the three months to June 30, the statistics department said Dec. 18. Sri Lanka’s exports in October declined 4.9 percent, the least this year, as orders increased for the South Asian island’s tea and rubber. Tourist arrivals in Sri Lanka have increased since June. “There are still some big macroeconomic challenges but what we’ve seen at the end of the civil war was a fundamental shift in the circumstances,” said Peter Taylor, a fund manager at Aberdeen Asset Management Ltd. in Singapore, which overseas about $25 billion in Asian assets. “We still find some good value in the banking sector.” Aberdeen holds shares of Commercial Bank of Ceylon Plc , the country’s biggest non-state lender, and John Keells Holdings Plc, which has the largestweighting on the benchmark index. Selling by Raj Rajaratnam, the billionaire Galleon Group LLC founder accused of insider trading, won’t cause an “overhang” on the Colombo Stock Exchange “as there are plenty of buyers in the market,” Eagle NDB’s Meepagala said. Mobius, Rogers Mobius, chairman of Templeton Asset, said last month he’s seeking private equity or strategic investments in Sri Lanka after the end of the war. Rogers also said in August the nation’s stocks may offer better returns as the government is expected to spend more on infrastructure and agriculture. The International Monetary Fund, which granted Sri Lanka a $2.6 billion loan in July, expects the island’s economic growth and credit demand to pick up. John Keells Holdings, also Sri Lanka’s biggest diversified company, and Aitken Spence Plc, the island’s largest operator of resorts, are also likely to post gains in earnings next year, Meepagala said.

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Seven Reasons Not to Invest in the Stock Market in 2010

Year-end is high season for stock market predictions. When to get in, what stocks to buy, whether to buy gold and on and on.

Can you name a single "guru" who told investors to get out of the markets before the crash of 2008 -- and to buy back in before the recovery of 2009? If the talking heads can't call the worst recession since the Great Depression and one of the fastest recoveries in 80 years, why should you rely on their current predictions?


Instead of relying on these emperors with no clothes, here are seven reasons why you shouldn't invest any money in the stock market in 2010.

Reason #7: If you don't understand the difference between investing and gambling.

Investing is for the long term. Gambling is for those seeking immediate gratification. If you don't have at least five years before you will need 20% of more of the amount you plan to invest, stay out of the stock market.

Reason #6: If you think you can time the markets.

Market timing is nothing more than rank speculation. There's no evidence anyone has the ability to time the markets. Most market-timing newsletters last about four years before going out of business. If these "experts" can't consistently time the markets, neither can you.

Reason #5: If you think you can pick stock "winners."

Stocks are fairly priced, based on all available information about them, which is transmitted instantly to millions of investors. It's tomorrow's news that moves stock prices. Do you know tomorrow's news? Then don't try to pick stock winners.

Remember Lehman Brothers, Washington Mutual, Worldcom and Enron (among many others). Many investors thought these stocks were "winners." They all filed for bankruptcy.

Reason #4: If you think you can pick a winning mutual fund.

Good luck. Only one in three mutual funds will beat their benchmark in any one year, and more than 95% will fail to do so over a 10-year period. Those are lousy odds.

Reason #3: If you intend to rely on the advice of a broker or adviser who claims the ability to "beat the markets."

Unfortunately, this includes virtually every broker and the vast majority of advisers. A comprehensive study recently compared the returns of investors using brokers and advisers with those who invested on their own. The mutual funds selected by brokers cost more and performed worse than those selected without their "expertise." The study also found brokers didn't provide superior asset allocation or help correct bad investor behavior, like chasing performance.

The conclusion is inescapable: "Market-beating" brokers (and advisers) are a peril to your financial well-being. 

Reason #2: If broker misconduct causes you losses and you want a fair and impartial forum to resolve your dispute.

You won't get one if your account is with a broker in this country. Instead, you'll be required to submit to mandatory arbitration before the Financial Industry Regulatory Authority. One member of the arbitration panel will likely be employed by the securities industry. You will have no right to a trial by a jury of your peers.

A recent study found most participants in these arbitrations perceived them to be unfair. A current commissioner of the SEC is reported to have stated her opposition to mandatory arbitration, joining many consumer groups that oppose compelling consumers to arbitrate their disputes before forums of questionable impartiality.

Reason #1: If your goal is to make a "killing" in the markets.

It's far more likely the markets will have you for breakfast. Based on all available data, most investors would be far better off if they never invested in the stock markets and bought Treasury bills or a short- or intermediate-term bond index fund instead. In stark contrast, investors who simply captured market returns, with a globally diversified, risk-appropriate portfolio of low-cost index funds, did just fine. Only 10% of individual investors fit into this category.

Daniel Solin

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Retirement Columnist

Dan Solin covers retirement investing for DailyFinance. He is a Senior Vice-President of Index Funds Advisors (ifa.com) and the author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read...

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In Perspective – 2009

The year 2009 recorded a sharp positive shift in post independent Sri Lanka’s political environment, with the end of a 3 decade old separatist conflict. Therefore with the complete defeat of the LTTE terrorist organization in May 2009 Northern and Eastern provinces which accounts for one third of the resource rich land mass and two thirds of the coastal belt has been freely integrated in to the main stream democracy.

Provincial elections were already conducted in the Eastern province whilst restoring political stability within the region. The economy grew by 1.8% in 1H2009 whilst we expect GDP to grow by 3.5% in 2009, despite the global recession, which adversely affected export and trade sectors of the economy. Further inflation continued to decline, mainly on the back of stringent monetary policy measures adopted by the Central Bank and easing of commodity prices in the international market complemented by rising domestic supply which resulted with the point to point inflation falling to a five year low of 0.7% in September 2009.

In view of the declining inflation, slowdown in the domestic economy and the projected benefit of  integrating the North and East to the main stream economy, the Central Bank took measures to somewhat relax its monetary policy stance to support economic growth. Accordingly, interest rates in the market have declined throughout 2009 where the 3 month Treasury bill rate was at 7.25% end of November.

Further the government had directed all state banks to cut lending rates by nearly 700-750 basis points to 8%-12% end October 2009 onwards. Subsequently the Central Bank further requested the private banks also to cut their lending rates. Despite such a request it has not thus far made an adverse impact on the banking sector since the sectoral net interest margins are still intact with the deposit rates which also have been cut in line with downward revisions in lending rates.

With the approval of a USD2.5 bn IMF concessionary loan for Sri Lanka in 2H2009, the successful USD500 mn sovereign bond issue in October 2009, near USD1 bn foreign direct investments and foreign investment in Treasury bills/bonds and inflow into the equity market has significantly improved the external reserve position.

From a reserve position sufficient to finance just 1.5 months of imports in early 2009 the external reserves had grown to USD 5.2 bn by end of November 2009, sufficient to finance nearly 6 months worth of imports. Further the foreign worker remittances have also grown by a near 11% YoY in 1-3Q2009 and are projected to surpass USD 3 bn in 2009E. Subsequently the current account recorded a surplus in the first half of 2009 whilst Balance of Payments (BOP) recorded a significant surplus of USD 2 bn end September 2009.

The rupee, which continued to depreciate against the US dollar to its lowest level in April 2009 (5.5%
depreciation) strengthened thereafter as a result of foreign fund inflow. However with the Central Bank
wanting to maintain export competitiveness, created a de facto peg with the US Dollar and plugged a further
depreciation in the Dollar.

Furthermore despite Sri Lanka beginning 2009 on a tough note with the military conflict in full swing, global economic issues trickling down in the local economy and the inherent challenges within the slowing domestic economy, the government has continued its infrastructure involvement spree. During the year 3 flyovers were completed at Kelaniya, Nugegoda and Dehiwela at a total investment of LKR1,067 mn, whilst 3 bridges were handed over to the public at Manampitiya (302 m), Arugambay (160 m) and Kinniya (the longest bridge in the island – 396 m) at a total cost of LKR 3,345 mn.

Furthermore, the northern railway track was extended to Madawachchiya and another phase was successfully completed of the four lane Southern highway.

Going forward the government has initialized massive infrastructural projects some of which would come in to play by the end of 2010E. Some of them are;

• Construction of the Hambanthota port with an total investment of +USD1 bn with the objectives of shipping, transshipment, ship building, bunkering, handling of large scale fuel products and catering to increased exports and imports.
• 900 Mw Norochcholai coal power plant – The first phase to be connected to the national grid by mid 2010.
• 300 Mw thermal power plant in Kerawalapitiya and 150 Mw hydro power plant in Upper Kothmale.
• Development of the South terminal of Colombo port and capacity enhancement of Jaya Container terminal.
• The 25 Km Colombo – Katunayaka highway has also commenced construction at an investment of LKR 32,120 Mn.

Market ’09...The Year of HOPE...

The Colombo bourse was steered by the military victories in 1H2009; with Sri Lankan troops checkmating the LTTE separatists the market edged upwards creating a mirror image of the war victories. Country’s liberation on the 18th May 2009 made the market to leap ahead of expectations and gain 25% within a month from the end of war. Thereafter improving economic data, low interest rates and government stimulus measures amounted to a helpful backdrop for the SL equity market in the seven months to 18th November 2009, resulting in recording almost two fold gains for the ASI. Colombo bourse revised the history on the 18th November rallying through the highest ever ASI of 3,188.8 points, whilst marked another milestone by surpassing LKR1.028 bn (LKR1 trillion) in terms of market capitalization on the 6th of October.

The accelerated market rally was impeded with the announcement of the arrest of the Billionaire Raj
Rajaratnam, who was charged with insider trading. The market could not recover as Raj Rajaratnam and
Galleon scandal was followed by a political uncertainty in the country, which made the investors to take
defensive positions. However with the announcement of the dates for the presidential election and the
confirmation of the Common Opposition Presidential Candidate, the investors came out of their defensive
positions and the market started to pick up. The market has gained 102% YTD. On the 18th December the
bourse re-wrote history overriding the previous record of 3,139.7 points by reporting an ASI of 3,188.7

IPOs and Performance

With the post war investor friendly environment three companies namely Namal Acuity Value Fund, Hemas
Power and Renuka Agri Foods declared there IPOs, whilst Seylan Bank came up with a public offering.
The strong investor appetite for fresh IPOs led all three to be oversubscribed

Sectoral Performance

The market capitalization surged 95.6% YTD to LKR1,028.7 bn (vs. LKR526 bn) following the end of war and the improving macroeconomic environment. The growth was shouldered by the key sectors such as Banks & Financial Services, Construction and Manufacturing, Diversified, Hotels and Travels, Trading and Chemicals and Pharmaceuticals.

The Financial Services, Chemicals and Pharmaceuticals, Constructions and Diversified sector prices grew on
the back of anticipation for strong earnings growth, whilst Hotel Sector prices were improved on the back of
being an industry poised to grow with the end of terrorist conflicts and increase in tourist arrivals.

Market overview & strategy

Earnings outlook 
The three decade old conflicts, the biggest hindrance for the local economy has been removed. The only dampener is the overhang of the gloomy global economies. But, the end of the war will present a unique opportunity for Sri Lankan companies to grow domestically despite the external uncertainties, and reap benefits when the global economies revive.

Further, with the positive macro developments and opening up of one third of the land mass and two third of the total resource rich coastal belt for economic integration coupled with the gradual recovery of global economy and relatively low cost of borrowing trickling down to the corporate sector, we expect the corporate sector earnings to rise by circa 35% - 40% YoY from 2010E onwards.

We believe that the anticipated higher corporate earnings from 2010E onwards are not yet fully factored into the market valuations. Therefore, although the market indices have reached all time high levels, further upside is inevitable with micro and macro changes taking place in the environment.

Market outlook
The market is expected to grow and exhibit strong performance during 2010 mainly driven by strong corporate earnings and strengthened macro outlook of the country. The escalation of global crisis and recession has ebbed the need for maintaining high rates to attract foreign investment into the short term bond market window. The 91 Treasury Bill rate have progressively come off declining from 17.2% from the beginning of 2009 to 7.51% as at mid December 2009.

We expect the rates to bottom out and to remain at lower levels where the 3 months rate is expected to be at circa 12% by the end of 2010. Furthermore, as a result of the increased capital inflows and higher liquidity position in the banking system, banks would be pushed towards lowering their lending rates, which would revive both corporate and retail, debt backed investments. Given the falling cost of borrowing, the corporate profit growth could bolster, the broad economy would grow faster with construction, banking, consumer, tourism and property sectors spearheading the revival. Backed by the decelerating trend in recent past, we believe the inflation would remain at single digit levels in 2010E. However with the enhanced contribution (increased supply of goods and services) from recently liberated Northern and Eastern provinces and the much anticipated recovery of the global economy, there would be demand pull effects on inflation which would make the inflation higher than the current levels.

Having considered all the above factors we expect the inflation to stabilise around 10% by the end of 2010.With secured foreign reserve positions and improved foreign currency inflows, Sri Lankan Rupee is set to strengthen. However with the intervention of the Government via the de-facto peg against US Dollar, we believe the currency would be maintained without sharp appreciation. Hence it is deemed that the Colombo bourse would sustain its positive momentum for the next couple of years given the strong corporate earnings potential coupled with macro environment being upbeat and increased foreign investor interest.

Sector outlook 
The instant post war focus would be on reconstruction and housing in the previously war affected areas. This would stipulate the demand for construction and allied manufacturing industries in the country. With the end to the terrorist conflict the Sri Lankan hotel and tourism industry is finally set for buoyant growth. Thus we believe 650,000 tourists in 2010 could easily be achieved. However our estimates could be rather conservative in contrast to the Cambodian tourist industry which grew to around 1.5 mn arrivals p.a. soon after the end of conflicts and insurgencies. Further, with much diversity within a strategically positioned, relatively small island in the Indian Ocean, Sri Lanka has strong unparallel upside for its hotel industry. The still stumpy occupancy levels and average room rates (ARR) of the city and resort hotels are expected to witness a boost and thus paving way for earnings upside. We anticipate the city hotel occupancy in 2010 to be plus 80% and that of the resorts to be around 70%. Meanwhile the ARR are expected to rise by approximately 15% during the year. Thanks to the peace dividend the trade with the North and East that has thus far been muffled would play a significant role in the mainstream economy and would increase the domestic demand and expand the available market space. Hence we believe the retail/consumer sectors would benefit significantly. Further, the increased capital inflows, investments and improved economic activity would positively impact the wealth of the economy. Thus, the banking sector would witness an upswing in 2010.

In addition, the Conglomerates would be in the forefront of investor interest with their wider exposure to the economy and high market capitalisation. The already apparent foreign interest in the diversified companies
would drive the sector counters further up.

Our favourite sectors would be the banking, hotels, consumer, manufacturing, property and diversified. We
see pockets of strong growth in key sectors such as Banking (Hatton National Bank, Commercial Bank,
National Development Bank, Sampath Bank), Hotels (Asian Hotels & Properties, Aitken Spence Hotel
Holdings, Keells Hotels), Consumer (Cargills, Distilleries, Nestle, Lion Brewery), Manufacturing sector
(Lanka Tiles, Royal Ceramics, Chevron Lubricants, Tokyo Cement, ACL cables) Diversified Sector
(John Keells Holdings, Aitken Spence, Hayleys, Hemas Holdings), property (Overseas realty) and
Chemical & pharmaceuticals (Chemical Industries Colombo).


Courtesy - Asia Securities Research

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Sri Lanka’s Economy Grows Fastest Pace This Year

Sri Lanka’s economy expanded at the fastest pace this year as the end of a civil war and five-year low interest rates spurred consumer and company spending. Stocks rose to a record.

Gross domestic product rose 4.2 percent in the three months ended Sept. 30 from a year earlier after gaining 2.1 percent in the previous quarter, the statistics department said in a statement in Colombo today.

The defeat of Tamil Tiger rebels in May this year after 26 years of war has encouraged some of the island’s biggest companies including John KeellsHoldings Plc and Aitken Spence Plc to expand their business. The central bank has room to maintain rates at current levels because of low inflation, Governor Nivard Cabraal said last month.

“The end of the war has rejuvenated economic activity in Sri Lanka,” said Bimanee Meepagala, an analyst at Eagle NDB Fund Management Co. in Colombo. “As the infrastructure in the war-affected areas gets put in place and credit demand picks up, we will see the growth momentum really take off.”

The International Monetary Fund, which granted Sri Lanka a $2.6 billion aid in July to rebuild roads and schools, expects the island’s $41 billion economy to pick up from this year.

Stocks Rise

Sri Lanka’s benchmark Colombo All-Share index increased 1.7 percent to close at 3,188.82, the highest-ever for the measure of 231 companies. The index has doubled this year and is the world’s best performer after Russia.

Sri Lanka’s rupee, which has gained 0.7 percent to 114.35 against the U.S. dollar since the end of the fighting in May, was little changed today.

The island’s services industry expanded 5.1 percent in the third quarter from a year earlier, according to today’s report. Farm output decreased 0.9 percent and industry grew 4.4 percent.

“Peace is the key factor that drove the economy during this quarter,” Nalani Kumarasinghe, deputy director at the statistics department, said today.

“Domestic trade is up steeply due to the north and east resurgence and lower interest rates have helped drive investment,” she said.

John Keells, Sri Lanka’s biggest diversified company, said last month it will invest about $100 million to build new resorts to benefit from an economic resurgence after the war.

Companies Expand

Aitken Spence Plc., Sri Lanka’s biggest operator of resorts, plans to expand its hotel and shipping businesses while Commercial Bank of Ceylon Plc, the nation’s biggest private lender by assets, aims to extend more loans in the island’s northern and eastern regions, which were recaptured from the Tamil Tigers.

Cabraal has cut lending rates five times this year to revive growth as inflation plunged from a record high in June 2008 to a five-year low in September. On Dec. 14, he maintained the reverse repurchase rate at 9.75 percent and held the repurchase rate at 7.5 percent.

Consumer prices in the capital, Colombo, rose 2.8 percent in November from a year earlier after gaining 1.4 percent in October. Cabraal aims to keep inflation below 10 percent this year and next to spur spending.

Appropriate Rates

Policy rates are at an appropriate level to support growth and are likely to remain at current levels “in the near future,” Cabraal said in a Nov. 26 interview.

“This will result in quite a bit of activity mid next year, especially in areas like housing that came to a grinding halt over the last 24 months because people couldn’t afford to borrow,” Ajit Gunewardene, deputy chairman at John Keells, said in an interview in Colombo on Dec. 14. “We’re expecting property development to kick in countrywide.”

The central bank wants to help lift growth to as much as 6 percent in 2010 from 3.5 percent in 2009. Commercial bank loans rose to 1.18 trillion rupees ($10.3 billion) in September, the first expansion this year, from 1.17 trillion rupees in August.

President Mahinda Rajapaksainstructed state banks to slash lending rates by about 7 percentage points from Oct. 28 to government employees, farmers, small businesses and industries including fisheries and tourism. Non-state banks followed by reducing their rates too.

Sri Lanka, which makes garments for Marks & Spencer Group Plc, The Gap Inc. and Victoria’s Secret, will also see a recovery in overseas orders from the first quarter of 2010, Cabraal said last month. Sri Lanka’s exports have dropped for 10 consecutive months.

By Anusha Ondaatjie - Bloomberg

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Hayleys PLC -Turnaround on the cards

Hayleys PLC (HAYL) is one of Sri Lanka's largest and most diversified conglomerates and has been in existence for more than 125 years. The group has its major interests in export oriented manufacturing, Agriculture & Agri businesses, Transport & Infrastructure, and Consumer & Leisure. HAYL is one of the few local conglomerates which has a strong presence in manufacturing with a +50% contribution to the top line.

Hayleys Exports (HEXP: LKR23.50) is the global market leader in coir fibre manufacturing whilst Haycarb (HAYC: LKR107.00) is the world's largest coconut shell based activated carbon producer with a 16% share of the global market. Dipped Products (DIPD: LKR80.00),the highest contributor to the group's top-line and Hayleys MGT Knitting Mills (MGT: LKR32.75) are leading producers of natural rubber gloves and knitted fabric.

HAYL's agri business varies from producing farm inputs to processed fruit & vegetable and the plantation sector which comprises of two listed plantation companies Kelani Valley Plantations PLC (KVAL: LKR51.50) and Talawakele Tea Estates PLC (TPL: LKR20.00). Furthermore the company has diversified into the leisure sector through its subsidiary Carbotels Ltd (a strategic partnership with Jetwing Hotel Group) and jointly owns a portfolio of resort hotels located at strategic locations in Sri Lanka. The Company's presence in the transportation and infrastructure business include logistic solutions, power & energy and supply of industry inputs.

We believe the group is currently on the verge of a revival on the back of its diversified business model coupled with its new management with relatively aggressive growth strategies. Its strong presence in the manufacturing arena especially in purification and hand protection products would be more lucrative in the coming years owing to its strong focus on value addition given the much anticipated global economic recovery. This would be further supported by Hayleys MGT which has marked a 20% YoY growth in turnover despite the low demand conditions and the Fibre sector which has started recovering from losses made during the previous years.

In addition the transportation sector which faced a temporary set back due to the prevailing global economic woes is expected to bounce back strongly with projected increase in trade activity given the positive twist in Sri Lanka’s macro economic scenario. Further upside is available for HAYL with the revival in local tourism (tourist arrivals up since the end of war in May 2009) given the strategic stakes held in the key resort hotels and the increase in its intrinsic investment value. The group performance would be further boosted by a much expected rally in rubber prices on the back of global economic recovery.

Having considered all the above factors which would derive sustainable earnings growth, we forecast FY10E net profit to grow by a sharp 163.7% YoY to LKR820 mn and projected FY11E net earnings to grow by a conservative 16% YoY to LKR951.2 mn. Share is attractive on 14.4X projected FY10E earnings and 12.4X forecast FY11E net profit whilst trading on 0.9X PBV.

Financial Performance
The group has recorded a 11% CAGR in turnover on the back of strong perfomance in the global markets and manufacturing sector which enjoys strong positioning in the international markets. The trunover was further supported by healthy contributions from agricultural sector and transportation sector during the past years, but since FY09 the two sectors were severly affected by the global economic slowdown.

We forecast the top-line to grow by a 8% YoY in FY10E and a conservative 5% in FY11E on the back of strong perfomance in the manufacturing sector coupled with improved contribution from reviving leisure sector, agri business and transportation sectors. The bottom line of the company has recorded a negative growth owing to the high cost structure coupled with the high cost of borrowing. However during 1HFY10 the group has recorded a four-fold net earnings growth on the back of cost rationalisation strategies and falling debt servicing costs. However HAYL’s operating profit has recorded a growth except in FY09 due to increases in distribution and administration expenses. Going foward, we forecast an operating profit LKR3.5 bn in FY10E and LKR3.8 bn in FY11E backed by the healthy contribution from the top-line coupled with efficient cost structure.

Global Markets and Manufacturing
This is the largest sector in the group which contributes around 50% of group revenue and profits. The group has 4 listed entities under this sector which enjoys strong positioning in the global market space. Turnover of the sector has recorded a 27% CAGR. This is largely attributable to the strong performance in DIPD and HAYC followed by MGT and HEXP.

Despite the unsatisfactory global conditions, all the companies in this sector have been able to remain strong and mark healthy contributions to consolidated earnings. With the recovery from the global economic slowdown coupled with the company’s continuous efforts in new product development and cost rationalization, we believe the global markets and manufacturing sector would drive earnings in the group which depicts a strong upside.

Dipped Products PLC (DIPD: LKR80.00), a subsidiary of HAYL is a fully integrated and globally acknowledged rubber glove manufacturer providing a continuing stream of high value new product innovations in protective hand wear. Currently DIPD exports its products to +60 countries and enjoys a 5% global market share for natural and synthetic latex based domestic,industrial and medical gloves. The company operates 6 production facilities in Sri Lanka and one in Thailand with marketing operations in Italy.

DIPD is the highest contributor to the group’s top line with around +25% contribution, with fluctuating profit margins. High input prices (mainly rubber), energy costs and currency depreciation pressurized the company in FY08 (where it has recorded the lowest profits in 05 years). However with the fall in commodity prices lead by the global recession in mid FY09 coupled with the strong demand that remained for the medical glove production (where other products experienced reduced demand) DIPD recorded a two fold growth in its bottom-line. The company is continuously looking into cost rationalization methods by way of using energy saving machinery and minimizing the reliance on fossil fuels to improve its bottom-line.

Haycarb PLC (HAYC: LKR107.00) a 67.7% subsidiary of HAYL, is the world’s largest coconut based activated carbon producer and accounts for over 16% of global production. Activated carbon is used widely for gas and water purification as well as in gold recovery.

The Company has a capacity of 20,000 MT per annum with 04 production plants located in Sri Lanka, Thailand and Indonesia whilst operating marketing offices in Thailand, Indonesia, Australia and the USA. In addition to its activated carbon production business its subsidiary “Puritas” an ISO 9001 certified company, prevents and remedies environmental pollution in local industry. They offer solutions for raw water treatment, liquid effluent and sewage treatment, solid waste management, noise abatement and air pollution control.

HAYC has been the second highest contributor to the group’s top-line with a near 14% for the last 4 years whilst achieving a net profit growth of 110% YoY during 1HFY10. The Company continuously searches for avenues to improve its processes whilst experimenting on value added products. Furthermore HAYC emphasizes more on environmental protection and reduction of carbon footprint of applications in all its developments.

Hayleys Exports PLC (HEXP: LKR23.50), the market leader in the coir fibre industry has more than 300 patents in its favor. The segment is export oriented with sub categories of Surface Care, Industrial Fibre and Bedding & Cushioning. The coir fiber sector which suffered due to higher raw material costs and lower global demand during FY06-FY08 is expected to rebound strongly from FY10 onwards with the sharp fall in input costs. Further with Sri Lanka maintainig a de-facto peg with the US doller has increased the price competitiveness of local exports, whilst HEXP would thus become a direct beneficiary of that scenario.

Hayleys MGT Knitting Mills PLC (MGT: LKR32.75), manufacturer of knit fabric for international markets which is an accredited supplier of Marks & Spencer, NEXT, BHS, TESCO, etc. The company has posted strong results during the past 05 years except FY09 which was a bad year for the apparel industry due to negative effects caused by the global economic downturn. Turnover of 1HFY10 has dropped by 20% YoY on the back of price reductions and lower demand from its key markets in USA and Europe.

However the company has recorded a bottom-line growth of 25% YoY owing to effcient input management and cost rationalization exercises. Hayleys MGT has a production capacity of 4 million meters of fabric per month and plans to become one of the most versatile fabric manufacturers in the region and explores possibilities of setting up another manufacturing facility outside Sri Lanka.


Agriculture and agri business
This sector consists of the subsectors Agri inputs, Agri products and Plantations where the sub sectors have contributed to the total turnover 11%, 3% and 8% respectively in FY09. Agricultural business, the second highest contributor to consolidated earnings has grown at a CAGR of 11% YoY in terms of revenue and 10% in terms of profits. This again would be another sector with a strong potential given the end to the terrorist conflict which has opened up one third of the resource rich land mass of the country in the northern and eastern provinces. Further with global tea prices holding ground and rubber prices expected to rally (given the expected recovery in the global economy and rise in crude oil prices ), HAYL is projected to benefit from the revival in the plantation sector given its holding in two plantation companies.

Agri Inputs supplies variety of farm inputs, fertilizer and micro irrigation systems through a distribution network covering 90% of the country’s farm supply retail outlets. HAYL has achieved a significant growth in turnover during the past five years mainly driven by increased crop extents particularly in the paddy sector, due to
favourable weather conditions, good paddy prices, and government initiative to promote and support paddy farming. The end of the terrorist conflict will create many opportunities to the sector especially in the North and east, with the release of one third of the resource rich land mass of the country.

Agri Products is in to exporting processed and semi processed fruit and vegetable produce and producing of seeds. HAYL is the biggest fruit and vegetable exporter (26 countries) with about 25% of the market and its main customers being McDonalds, Burger King, Unilever and Heinz. The sector has been recording improving results in the past few years but the performance fell sharply in FY09 on the back of an overvalued rupee, high inflation and interest rates. Further input costs also rose on the back of high oil prices in the first half of FY09. However the company has marked a healthy improvement during 1HFY10 due to increased activity levels. Looking forward the company is exploring new export opportunities, even as the growing local market is expanded and developed.

Plantation sector comprises of two plantation companies listed on the Colombo Stock Exchange namely Kelani Valley Plantations (KVAL: LKR51.50) and Talawakelle Tea Estates PLC (TPL: LKR20.00). Together the sector manages 44 tea and rubber estates with a total extent of nearly 20,000 Ha which has produced 5% of the country’s tea and 4% of its rubber output during 2008.

The sector suffered during the past few years due to the drop in commodity prices (lead by the global economic slowdown, especially the drastic drop in rubber prices) and decline in the crop yield caused by the unfavorable weather conditions. However with the tea prices reaching all time high levels in September 2009 backed by the global shortage in tea and improved demand from Middle East and CIS countries has ended the unprofitable run amoungst the tea plantations. But both the companies was not in a position to reap the full benefit of high prices due to the near 40% wage increase to estate laborers. (The Collective Agreement was revised in September 2009 with effect from 1st April 2009) This was a LKR254 mn hit on the consolidated income statement which comprises of arrears wage component (from 1st April to 30th June) and the retiring gratuity provision (LKR164mn). This lead the industry average cost of production to rise by a near 20% YoY despite the low energy and fertilizer prices (due to global economic downturn). However with the lump sum cost of gratuity payment already booked in, we believe KVAL is positioned to benefit from the wider gross margins 4QFY10 onwards, whilst concurrently increasing the contribution to the consolidated net income of HAYL.


Consumer and leisure
This sector comprises of two sub segments namely Consumer Products and Resorts where the total turnover and profits have recorded a negative growth on the back of unsatisfactory economic conditions prevailed in the country. However, HAYL would be a beneficiary of the revival of local tourism (with the complete end to the 3 decade long terrorist conflict) which has renowned properties in strategic locations in the island. Furthermore, HAYL disposed two of its hotel associates during 1HFY10 as a result of portfolio rationalization initiatives which gave rise to significant capital gains.

Agency Business This is the trading arm of the conglomerate which carries sales and distribution of leading international brands such as P&G, Fujifilm, and Phillips etc. The sector is further divided into three categories namely consumer lighting, information & imaging, and P&G and healthcare. Consumer products have recorded volatile earnings during the past 5 years mainly due to changing income levels of local consumer base.

Resorts Through its subsidiary Carbotels (Pvt) Ltd (ownership of a 70% stake) HAYL has a strategic partnership with one of Sri Lanka’s leading hotel companies, Jetwing Group. The company has a portfolio of hotels covering the strategic location of the country including The Light House Hotel (LHL, LKR20.00), a member of the Great Spa Hotels of the world.

During the first half of FY09, HAYL divested its interests in two hotel companies as a result of the group’s portfolio rationalization initiatives. The sector suffered severely during the past decades owing to the +25 years long terrorist conflict which hindered the potential of the local tourism industry. However with the complete end to the war (in May 2009), the tourism sector would be one of the prime sectors to rebound and
already there are positive sign of turnaround backed by the increasing number of tourist arrivals to the country since June 2009.


Transportation and Infrastructure
This sector consists of 3 subsectors, namely transportation, industry inputs and power & energy with a contribution of 12%, 2%, and 0.3% to the total turnover in FY09. The total turnover of the segment has grown by a CAGR of 4% YoY where FY09 has recorded a marginal dip due to lower activity levels driven by the global recession. Furthermore, the sector has recorded a dip of circa 15% YoY in turnover in the 1HFY10 owing to poor performance in the logistics and support services and travel sectors (which were impacted negatively from the global recession coupled with the slow-down in manufacturing activity). The operating profits have also dipped during the last 3 years despite the growth in turnover on the back of increased competition and downward pressure on the rates But looking forward we anticipate the impact of the global recession to reduce in the coming years as its key markets have already shown signs of recovery. Therefore we expect the sector to contribute in a greater way to the turnover in the coming years.

Transportation mainly involves in integrated logistics, logistics support services, marine services, agency representation and travel/aviation. The sector has recorded improving turnover levels during the past 5 years. The container depot has performed above expectations where container volumes grew by 9% in 2008 whilst aviation and travel divisions recorded its highest profit in FY09. However it should be noted that the impact of the global recession will be reflected in the next year and the company expects it to be severe.

Analyzing the 1HFY10 results we see a drop of turnover compared to same period last year making the management forecasts inline with the results. Industry Inputs is a key player in supply of raw materials and auxiliaries to Sri Lankan manufacturers of paints, rubber products flavours, fragrances and food ingredients
and on the technology side supplying diesel power generating units and electronic systems. The sector has done well in the domestic business in FY09 but we see a drop compared to last year on the back of reduction in power generator sales and building electronics, due to a fall in general construction activity. Overall the segment has grown during the past 3 years except for FY09, where the 1HFY10 has continued with a drop
of 10% YoY in turnover.

Power & Energy has added 5.4Mw of generating capacity to Sri Lanka's national grid in the FY09. The sector has performed poorly due to the low energy levels generated by its plants. However HAYL continues to strengthen their power and energy segment whilst presently developing a 5.5Mw hydro power plant financed by Asian Development Bank) and having received the regulatory approvals for a 10Mw wind power facility in North West of Sri Lanka. Therefore we anticipate much better results in the next year. When comparing 1HFY10 turnover with the same period in the previous financial year we see a 40% growth. We anticipate much better results in the next few years with the new plants being connected to the national grid, which will give stable revenues and cash flows to the group.


Valuation

Forecast FY10E earnings to grow by 163.7% to LKR820 mn. Given the strong contributions from the global manufacturing business, expected revival in agri business and stable performance from the transportation business, we forecast FY10E net profit of HAYL to reach LKR820 mn (grow by a strong 163.7% YoY) whilst projected FY11E net earnings expected to grow by a conservative 16% YoY to LKR951.2 mn.

Share attractive on 14.4X forecast FY10E net profit. Share is attractive on 14.4X projected FY10E earnings and 12.4X forecast FY11E net profit whilst trading on 0.9X PBV.

With its diversified business model and the new management (where the conservative strategies would soon convert in to aggressive expansion oriented ones), we believe the group would mark a turnaround in the coming years. Furthermore HAYL’s strong presence in manufacturing arena (where Haycarb being the largest coconut shell based activated carbon producer with a profit increase of 125% YoY in 1HFY10 followed by other manufacturing businesses), leisure business which is poised for a tremendous growth with the complete end to the terrorist conflict and the plantation arm which is currently enjoying high tea and rubber prices would further support the sustainability of the earnings. In addition, with the much anticipated recovery of the global economy the sectors such as Fibre and transportation which were severely affected would further strengthen the earnings .- BUY

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Frontier markets to be hidden treasure of 2010

Frontier markets could become the sweet reward of 2010 if investors are willing to take risks in underdeveloped, illiquid and potentially unstable markets.

Large emerging market economies have been a major linchpin of the global recovery this year as they have reduced and diversified their exposure to the global credit crisis by cutting interest rates and selling reserves without sacrificing growth.

Investors have poured cash into emerging markets, pushing up the MSCI emerging market index 72% so far this year.

But some investors see the developing markets of Brazil, Russia, India and China, a grouping known as BRIC, as oversaturated and overpriced. Instead, they are looking for other markets in which to put their money to work.

So for investors with a higher tolerance for risk, frontier markets are diamonds in the rough.

"There is tremendous amount of interest in investing in the second-tier markets that come after the BRICs because of the growth opportunity that has presented itself as a result of the economic downturn," said Steven Bailey, chief operating officer at Frontier Strategy Group, a Washington-based information services and advisory firm focused on emerging markets.

According to the International Monetary Fund, Group of Seven rich world countries is expected to show a 1.3% rise in gross domestic product in 2010, compared to 5.1% economic growth in emerging economies.

China leads the pack with GDP expected to grow by 9% next year, but other smaller and less developed countries have seen their markets soar.

Sweet returns at a risk

Markets such as Sri Lanka, which has seen its stock index surge almost 94% this year and its currency rise to a seven-month high as a result of the end of a 25-year civil war in May, are attractive for frontier market investors.

Sri Lanka's local government debt market is also strong, with a 5-year bond yielding close to 11%.

"What we are beginning to see as this crisis has unfolded and the recovery is underway, is the returns that investors get on Eurobonds have dwindled away," said Stuart Culverhouse, chief economist at frontier markets brokerage Exotix, London.

"Instead, people are beginning to look at the local debt market as a way of getting more superior returns," he said.

Frontier markets generate higher returns but the risks are high. Positions may be difficult to exit quickly, and corruption, dismal accounting practices, and the expropriation of assets are all real threats.

Nevertheless, investors are being enticed by frontier markets because they have lagged behind the more advanced emerging markets.

"Some frontier markets were fairly well insulated from the economic downturn because of abundant natural resources, as well as the fact that a lot of those markets didn't have access to western financing so they weren't as exposed to the downturn," Bailey said.

According to fund tracker EPFR Global, emerging market equity funds have attracted $56.8 billion this year, putting them on track to eclipse the record $50 billion in 2007. A year ago funds saw cumulative outflows of $40 billion.

However, late last month's Dubai's debt delay proposal caused investors to slow their move into emerging market equity and riskier bond fund groups.

Ripe for growth

Nevertheless, telecom sector funds last week had their best week since the second quarter of 2007 -- an industry that is ripe for growth in frontier markets.

Frontier countries are witnessing greater spending power by their middle classes for the first time, which is driving growth in consumer consumption and financial services.

Sub-Saharan Africa is a leading example where sectors such as telecoms, financials and commodities have seen high growth.

Nigeria, with the biggest equity market in the sub-Sahara after South Africa, and with the continent's largest population at 140 million people, has the right mix to create strong returns in these sectors, analysts said.

"The number of telecom subscribers is rising 25% per year in Nigeria," said Christopher Hartland-Peel, head of Africa equity research at Exotix.

Commodity-based economies such as Ghana and Angola are also "diamonds in the rough", with Ghana the world's second-largest cocoa producer and Angola surpassing Nigeria to become the continent's biggest oil producer.

Argentina, downgraded to "frontier" status from "emerging" earlier this year by MSCI because of ongoing controls on capital flows, has returned 58.7% year-to-date and its economy is likely to recover further as the country is expected to settle its 2002 defaulted debt with creditors.

"We are seeing a huge amount of flows into all sorts of emerging markets. For the first time in the history of the Depositary Receipts product there is a true interest in frontier markets," said Anthony Moro, managing director and head of Emerging Markets for BNY Mellon Depositary Receipts.

The only concern, Moro said, is the relative small size of the market, which could limit portfolio flows. "They are not ready for prime time but these frontier markets are certainly on the radar screen."

Courtesy - Reuters

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