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Issue over-subscribed fourfold on opening day
Flood of applications chase NTB shares

The Nations Trust Bank (NTB) initial public offer which was opened and closed on Friday was deluged with a flood of over 7,000 applications pumping in Rs. 1.2 billion for Rs. 235 million worth of ten-rupee shares offered at Rs. 12 each.

"It was far beyond our expectations," John Keells Holdings Chairman Ken Balendra said yesterday. "The strength of the promoters and the fact that the shares were reasonably priced was the draw."

About 6,500 applications were for between 1,000 to 10,000 shares, the majority of them covering thousand shares. There were about another 1,000 applications for larger share volumes exceeding 10,000. In money terms, the larger applications from companies and high net worth individuals dwarfed those for a smaller number of shares.

John Keells Holdings (25%), Central Finance (20%) and the International Finance Corporation (15%) are the main promoters of NTB.

There is still a question mark hanging over whether the issue will qualify for investment relief by individual investors. Up to March 31 this year, individuals (not companies) investing in new shares issued by quoted companies are entitled to investment relief. The NTB promoters have got a quotation on the Colombo Stock Exchange and indicated that they will complete allotments before the March 31 deadline.

But the shares will be traded only after that and whether Inland Revenue will agree that they qualify for investment relief remains to be seen. The department had been non-committal on the subject despite the efforts of the promoters to obtain a ruling that could have been incorporated in the prospectus.

But analysts point out that the relief was offered to encourage companies to get quoted and for already quoted companies to offer new shares. In that context, it is argued that investment relief should be granted.

The fact that there was a rush on the NTB shares despite there being no major advertising or pushing by the promoters are a clear indication, analysts said, for good reasonably priced shares to be sought by investors. Also, it has been stated that the underwriters will get a preferred allotment.

The basis of allotment will be decided in consultation with the regulators. The promoters were thinking in terms of allowing a fixed proportion of the shares to those applying for between 1,000 and 10,000 and scaling down the larger applications. The possibility of a lottery for the former category had also been mentioned.

If there was a clear ruling on the investment relief factor, the promoters believe that the rush for these shares could have been twice what it was. Balendra said.

b
Will CTC shareholders get the pie?
Analysts project Rs. 510 m. capital gain from Eagle sale

Share analysts have computed a Rs. 510 capital gain for Ceylon Tobacco Co. Ltd. from the sale of its 63.8% stake in CTC Eagle Ltd. which has been announced as pending and said that CTC is likely to pay out the lion's share of the proceeds to its shareholders.

In a market report on Ceylon Tobacco, Asia Securities said that at the disclosed price of USD 0.625 a share, the proceeds from the sale of 12.7 million shares at an exchange rate of Rs. 72 at the time of the transaction would bring in approximately Rs. 574 million to CTC coffers. Given the bonus share issues since its founding, the effective cost of a CTC Eagle share to CTC is Rs. 5.

Asia which quoted senior management of CTC saying that no decision had yet been taken on how the proceeds of the sale would be utilized said that the expected the major part of the proceeds to be paid to shareholders. This conclusion was based on the fact that CTC has historically maintained a generous dividend payout of around 80%, and British American Tobacco Industries controls 85% of CTC.

Reporting that CTC had posted strong 51% earnings growth in 1998 to Rs. 863 million, Asia said that this had been possible due to gains from internal restructuring, lower tobacco leaf prices and a sharply lower effective tax rate.

The CTC share had gained 28% over the last two months, out-performing the market by 42%, the report said noting that this plus a generous Rs. 5.50 per share dividend meant that even at the current price of the share, the dividend yield will be an excellent 13.4%.

Asia expected subdued earnings growth this year following the increased excise duty on cigarettes imposed by the last budget but said that the share could out-perform the market if the sale of CTC Eagle goes through.

"Furthermore, given the defensive nature of the industry and signs of increasing difficulty in obtaining smuggled cigarettes at discounted prices, we are upgrading our recommendation to buy," the report said.

Noritake sells out but relationship will continue
Ceylon Theatres add 15% to Lanka Ceramics stake

The Ceylon Theatres Group bought a sizable parcel of 3.5 million ten-rupee shares of Lanka Ceramics Ltd. (LCL) on the Colombo Stock Exchange (CSE) on Thursday raising its stake in the company from 18% to 33%, broking sources said.

These shares belonged to Noritake whose entry into the ceramic industry here, utilizing high grade kaolin available locally, signalled its development into a significant export earner from both tableware and tiles.

Noritake selling off its stake in LCL was described as "rationalisation" of Japanese interests in the company. But LCL itself owns 24% of the continuing Noritake operation here, which the Japanese consider one of their best performing tableware factories outside Japan, and in the words of LCL/Uni-Walker sources, "the relationship continues."

Although 4.5 million LCL shares were transacted on Friday, the Ceylon Theatres Gro up (including Cargills and Millers) did not take all the shares. About a million shares were taken by a foreign client of CT Smith Stockbrokers which is also connected to the Ceylon Theatres Group.

Uni-Walkers who are the biggest shareholders of LCL with a 35% stake in the company recently entered into a management agreement with LCL under which Uni-Walker Management Services Ltd. will manage the ceramics company at a fee of 1% of turnover and 5% of net profit.

The 5-year management agreement is renewable for a further five years depending on performance.

Although LCL had lost Rs. 30 million on a turnover of Rs. 669 million in 1997/98, the company is considered to have considerable potential and the Ceylon Theatres interests say that their entry would give value to all shareholders of the company. Analysts expect LCL losses which have been trimmed slightly in the current financial year to be further reduced by March 31.

Ceylon Theatres sources said that they will be making an announcement on the floor of the CSE about their LCL share acquisition within the required time frame.

CDIC and MLL smoke peace pipe

The Capital Development and Investment Company Limited (CDIC) and Mercantile Leasing Limited (MLL) have settled their long-standing litigation with both parties reaching agreement under which all pending actions instituted by them have been withdrawn, CDIC has informed the Colombo Stock Exchange.

The two companies will each bear their own cost under terms of this settlement which was reached after CDIC became a subsidiary of the National Development Bank (NDB).

CDIC is also the single biggest shareholder of MLL with a 19% stake in that company. The NDB now holds management control of MLL.

Analysts said that the settlement was logical in the light of NDB playing a dominant role in the affairs of both companies.

The original dispute arose over CDIC being deprived of certain bonus debentures by MLL which was disputed by CDIC which instituted court action. As the legal process ground on, MLL got a district court judgement of Rs.200 million against CDIC which the latter company was vigorously appealing.

These issues have now been settled in the context of the NDB's role in both companies, analysts said. CDIC will not be getting the bonus debentures over which the dispute was sparked.

Slower growth of exports in 1998

By Kanes
The rate of export growth in 1998 - 11.7 per cent - was the lowest in the last seven years. In the two years, 1997 and 1995, it exceeded 20 per cent a year. The fall in export growth rate in 1998 has resulted from a decline in the growth rates of both agricultural and industrial exports. Agricultural exports grew at 12.1 per cent - the lowest rate in four years compared to 17.8 per cent in 1997, 25.3 per cent in 1996 and 22.4 per cent in 1995. Industrial exports show the lowest growth rate in five years - 13.0 per cent as opposed to 22.0 per cent in 1997. The growth rate of imports was also the lowest in five years - 10.4 per cent as compared to 14.7 per cent in 1997. The country's trade deficit in 1998 was Rs. 75,615 million which exceeded that of Rs. 71,833 million in 1997. Private remittances (net) however increased by 27.4 per cent to Rs. 41,084 million in 1998. The country's total foreign exchange reserves rose by 11.8 per cent to 193,318 million; in dollar terms however they rose by only 1.2 per cent. The official reserves in dollar terms actually declined in the year by 2.2 per cent but this was more than offset by a rise in the commercial bank reserves.

Agricultural Exports

Agricultural exports constituted 23 per cent of the value of the country's total exports; they grew at 12.1 per cent in 1998 as compared to 17.8 per cent in 1997 partly on account of, lower prices and partly because of reduced production. While tea production increased marginally by 1.2 per cent in 1998, rubber production fell by 1.5 per cent and coconut production declined by 2.7 per cent. This was aggravated by a fall in the prices of tea and rubber. The price of tea which was $2.28 a kg in December 1997 at the Colombo auctions was $1.74 in December 1998 while the world market price of tea fell from $1.11 per lb. to $0.95 in the same period. The world price of rubber on the other hand was marginally lower - $0.38 per lb. - as compared to $0.39, this was, however, lower than the price of $0.81 per lb. three years ago. Coconut oil price in the world market has risen from $0.28 per lb. to $0.36 in 1998 but the price is almost the same as it was three years ago.

The sharp currency depreciation in South East Asia appears to have made its agricultural exports more competitive, for example Indonesian tea, Philippine coconut and Malaysian, Thai and Indonesian rubber, but whether Sri Lankan exports of tea, rubber and coconut have been affected by this is not yet clear. In the case of tea, sudden and sharp reduction of Russia's purchases had more to do with the fall in price of tea than competition from Indonesia but then the Russian economic crisis was triggered by the Asian crisis. Rubber prices were falling even before the Asian currency crisis; it had fallen from $0.80 per lb. in June 1995 to $0.57 in June 1997 and whether the further fall to $0.38 was accelerated by the South East Asian currency depreciation is unclear. In the case of coconut oil, as shown earlier there was a rise in prices and this makes it doubtful whether it was affected by the Asian crisis.

It is likely that some of Sri Lanka's exports of agricultural and fisheries products to East and South Asia would have suffered a fall on account of the recession prevailing in the countries of this region. This includes exports even to Japan which is also gripped by a deep economic crisis. Figures of exports to these countries in 1998 have not yet been published.

Industrial Exports

Industrial exports formed 75 per cent of the total value of the country's exports in 1998. They had risen by 24.1 per cent in 1995 but in 1996 power cuts caused by the prolonged drought resulted in the growth rate falling to 13.2 per cent. There was a recovery in 1997 to 22.0 per cent but this was short-lived as the export growth declined to 13.0 per cent in 1998. The main cause of this decline is the marked fall in the export growth rate of textiles and apparel which constitute 52 per cent of the value of total exports. Their exports increased by 27.6 per cent in 1997 but by 18.5 per cent in 1998. Facts and figures are not yet available to see whether garments and textiles are facing keener competition from East and South-East Asian countries which have depreciated their currencies and whether the slower growth in 1998 was a result of this competition or other factors. The fall in the value of exports of petroleum products by 18.8 per cent and of industrial products other than textile and garments, petroleum products, food and beverages leather and rubber products by 13.4 per cent too would have contributed to the slowing of industrial exports growth.

The East Asian crisis has perhaps adversely affected Sri Lanka's exports of gem and jewellery more than any other export. Exports of all gems and jewellery in 1996 amounted to Rs. 17.4 billion with diamonds accounting for Rs. 9.4 billion; in 1997 exports declined to Rs. 13.4 billion or by 23 per cent and in 1998 they fell further by 9 per cent to Rs. 12.2 billion. Diamond exports in 1998 were Rs. 8.1 billion or 14 per cent less than in 1996. The main factor causing this slump in diamonds and other gems and jewellery appears to be the recession in Japan and other East and South-East Asian countries which formed Sri Lanka's largest export market.

Imports

Sri Lanka's imports increased by 10.4 per cent to Rs. 381,944 million in 1998 - or less than the increase in exports which was 11.7 per cent. The import of investment goods increased by 21.8 per cent, of consumer goods by 13.9 per cent and of intermediate goods by 5.0 per cent. A favourable factor in 1998 was the decline in the world market price of staple food imports. Price in US dollars fell by 2.8 per cent from $235.51 to $228.95 per metric ton of rice, by 19.8 per cent from $186.16 to $149.40 metric tons of wheat and by 21.8 per cent from $333.63 to $260.98 per metric ton of white sugar. Further, the world market price of crude oil fell significantly by 47.1 per cent from $20.51 to $10.86 a barrel in 1998 on account of an increase in global production in the context of a declining demand due to the Asian economic crisis. It was this fall in import prices which contributed to the slower growth of imports; in fact, imports in dollar terms rose by only 0.9 per cent. Imports of intermediate goods in dollar terms fell to 4.0 per cent reflecting inter alia the decline in world market price of crude oil and the slower growth of textile imports needed for garments.

The East Asian Crisis

The East Asian crisis tends to exert an unfavourable effect on our exports through increasing competitiveness of East Asian exports - on account of sharp currency depreciation - and declining demand for our exports - because of the recession. While the impact of the former is not fully clear, that of the latter is seen in the fall in our exports to the countries in East and South-East Asia and Russia. Whether our largest export - garments - has slowed in 1998 on account of the increasing competitiveness of East Asian exports or other factor needs to be further studied. The recession created in East Asia on the other hand has contributed to reduced demand for fuel and raw materials thereby causing a decline in price of crude oil and other intermediate products. This has been favourable to Sri Lanka as it has helped bring down the cost of some of our major imports.

The effect of the East Asian crisis is clearly evident in the slump in our stock market, the depreciation of our currency and the fall in foreign capital investment. The CSE all share index which had reached a peak of 870 in July 1997 slumped to 672 in February 1998 and to 578 in February 1999 or a fall of 34 per cent. In the last twelve months alone (February 1998 - February 1999) it fell by 15 per cent even more than that of Bombay - 0.9 per cent - but less than that of Karachi - 47 per cent. Market capitalization has dropped by 10 per cent from Rs. 124.2 billion a year ago to Rs. 111.5 billion now. There was a net outflow of foreign funds amounting to Rs. 1,472 million in the first 10 months of 1998.

The Sri Lankan rupee has depreciated by 9.9 per cent between February 1998 and February 1999. This was higher than the depreciation of 7.6 per cent between February 1997 and February 1998. It is likely that the greater depreciation resulted from the sharp depreciation of East Asian currencies. Figures of foreign capital movements for 1998 have not yet been published but all the available evidence indicates that there should have been a fall in foreign direct investment. Some of Sri Lanka's largest foreign investors like South Korea, Malaysia have preferred to keep their investment plans on hold while Japan is not in a position to invest abroad on a large scale.

Our leading economic policymakers belittled the East Asian economic crisis in 1997 and announced that the sound management of the economy of the government would insulate the country from its adverse effects. Similarly, they dismissed the reduction in tea purchases by Russia as a temporary measure and failed to realize the gravity of that country's economic crisis. The recent events and the current economic trends indicate that neither has "sound economic management" protected the country from the unfavourable effects of the East Asian crisis nor has the fall in Russian tea purchases been a temporary phenomenon.

Customer deposits makes success story possible
HNB maintains growth record to notch highest ever profit

The Hatton National Bank (HNB) has continued to record profit growth during the year ended December 31, 1998 posting an after-tax profit of Rs.683 million, the highest in its history and a 24% increase over 1997.

"Considering the difficult economic conditions experienced both locally and internationally, the financial performance of the bank was satisfactory", Mr. Chrisantha Cooray, the bank's chairman said.

The year under review had seen the bank's income growing 10% to Rs.6.7 billion with the growth mainly attributable to increased income on assets. HNB's total asset portfolio stood at Rs.64.6 billion at the end of last year, up from the previous year's Rs.52.6 billion.

"The continued growth in assets helped your bank to maintain its position as Sri Lanka's largest private sector commercial bank", Cooray told shareholders in his annual review.

HNB's growth was mainly funded by customer deposits. They have increased from Rs.39.3 billion in 1997 to Rs.46 billion last year. Also, the bank had successfully raised a billion rupees through the capital market in 5-year unsecured subordinated redeemable debentures earmarked for long term housing loans.

Cooray said that their loan portfolio including leasing grew by 19% to Rs.36.1 billion last year with the growth mainly achieved by lending to Foreign Currency Banking Unit (FCBU) clients and under the Shanthi housing loan scheme.

"Our bank is one of the largest income tax payers among the financial institutions in the corporate sector. Our income tax liability for 1998 will be Rs.175 million compared to Rs.172 million in 1997 and the contribution to government revenue was Rs.613 million," he said.

Cooray said that his board has decided to declare a final dividend of 25% on top of a 20% interim already paid continuing a high dividend pay out policy. The company made a 1 for 2 scrip issue last year. HNB paid a 50% dividend to shareholders in 1997 and its lowest dividend payment in ten years was 30% in 1993. A 40% dividend rate has been maintained in seven of the last ten years.

Cooray said that if an investor purchased 1,000 HNB shares on January 1, 1994 at a cost of Rs.375,000, it would today be valued at Rs.462,407.

"While this return may not appear very attractive, it was achieved despite the All Share Price Index declining 39% from 986 at the end of December 1994 to 597 by 1998. The HNB share has outperformed the commercial banks sector by approximately 10% per annum over the last five years", Cooray said. He noted that last year the HNB share appreciated 16% while the ASPI lost 15% in the same period.

The chairman also announced that HNB will begin construction of its corporate headquarters on T.B. Jayah Mawatha in the early part of this year. Their new International Division in Colombo Fort is nearing completion and will be ready for occupation by mid 1999.

The bank which opened 10 branches and one extension office last year has increased its branch network to 95. HNB plans to open 8 more branches in Sri Lanka and two overseas representative offices in Karachi and Madras and appoint an agent in the Maldives for collection and payment of credit card transactions.

Managing Director Rienzie Wijetilleke said that HNB had, despite the economic uncertainties, continued its lending activities to build a sound portfolio and aggressively mobilise deposits on terms favourable to the bank. The profits achieved during the year had been posted despite the provision of Rs.245 million for bad and doubtful debts and Rs.115 million for the diminution in the value of quoted investments.

Wijetilleke said that HNB had registered an increase of 32% in its NRFC/RFC deposit base which had in 1998 grown to Rs.8 billion from Rs.6.1 billion in 1997 mainly as a result of extensive marketing carried out both in Sri Lanka and in the Middle East.

Import trade volumes indicated 12% growth while export trade volumes showed an overall increase of 36%. The CEO stressed that these growth levels were significant as they have been achieved during a period when overall import growth was only 10.4% and export growth 11.7% in rupee terms.

The Stassen Group of Companies and Brown & Company are the largest shareholders of HNB which owns extensive freehold properties in various parts of the country valued at nearly Rs.1 billion. As at December 31, 1998, there were 2,960 registered shareholders on its books.

The directors of HNB are: Mr. J. Chrisantha R. Cooray (Chairman), Dr. V.P. Vittachi (Deputy Chairman), Messrs. Rienzie T. Wijetilleke (Managing Director), D.H.S. Jayawardena, M.V. Theagarajah, S.E.A. Jayewickreme and R.K. Obeyesekere.

Surplus balance of payments expected in 1998

Despite a decline in export growth and lower direct investments the 1998 balance of payments is expected to record a surplus of US $ 37 million, a John Keells Stock Brokers research report said.

It attributed the favourable situation to a decline in imports, higher private remittances and private long-term inflows.

Although export growth during the year was down to 2% from 13% in 1997, the decline in the growth of imports has resulted in the trade balance being held in check, the research said.

The report estimated the trade deficit to stand at $ 1.2 million in 1998. It expected net sales receipts during the year to remain high although growing marginally from 1997. The improvement was largely attributed to recovery in tourism.

Private remittances which grew 10% in 1997 are expected to have grown 13% last year the report said. Since there were no large privatisation inflows and other direct investments last year, the capital and finance accounts balance in 1998 is expected to reduce. The previous year, foreign funds were received by the NDB for its lending activities and from the placement abroad of NDB shares. Also, the sale of a 35% Sri Lanka Telecom brought in almost US$ 377 million.

Large scale inflows in 1998 included 100 million dollars floating rate notes raised by the government and 65 million dollars raised by the DFCC.

The report expected the current account deficit to increase to 4% of GDP this year from an estimated 2% in 1998 due to a slowing economy and fall in exports.

"The overall balance for 1999 would largely depend on the finalisation of the P&O port development venture and the balance divestment of Sri Lanka Telcom", the report said.

Foreigners heavy sellers on CSE in February

Foreign players on the Colombo Stock Market have been net sellers in February when purchases accounted for 23.6% of total turnover and sales 42.3%. Net foreign sales were stated at Rs.121.1 million by the Colombo Stock Exchange in its February report.

The market had moved within narrow margins last month with both the All Share Index and the Milanka Price Index moving down by 3.6 points and 12 points respectively in a month where there was a sharp fall in average daily turnover.

Average turnover recorded in February at Rs.34.1 million was down from Rs.51.3 million the previous month. Total turnover for the month was Rs.647.8 million, the CSE report said.

There have been significant share volumes transacted particularly in hotels. Asian Hotels, Stafford Hotels and Eden Hotel saw large parcels of their shares traded. Other companies where there was heavy trading during the month under review were Vanik, Asia Capital and Ceylinco Securities.

The CSE report said that the Central Depository System (CDS) held 40% of the CSE's total market capitalisation in its books with nearly quarter million local individuals and 1,274 foreign individuals holding CDS accounts. Institutionally, there were 2,391 local accounts and 2,240 foreign accounts registered with the CDS.

Most foreign stock markets lost ground during the first two weeks of February but bounced back in the second half due to speculation about increased interest rates. In Asia, Japan's NIKKEI index shed 1 % during the month, Hong Kong reported 4% growth and Kuala Lumpur shed 8%. On the sub-continent, Bombay was down 2% while Karachi appreciated 3%.

Three Acre Farms profit from poultry take-off

1998 has been one of the best years for the poultry industry in Sri Lanka which had picked up from where it had left off the previous year, one of the biggest players in the field has reported.

Three Acre Farms Limited attributed the growth and buoyancy to be largely due to a stable economic environment, improved tourist traffic and a balanced supply and demand.

"Healthy prices at wholesale and retail levels have helped to uplift the businesses of many farmers and proved that poultry farming is a dependable and stable industry", the company said in a statement to shareholders incorporating the results for the year ended December 31, 1998.

Three Acre Farms which reported a group pre-tax profit of Rs.69.4 million, up 16% from the previous year, said that the profit attributable to shareholders was Rs.53.4 million.

It said that the bottom line was down 10% from 1997 due to higher provisions for deferred tax. But the net asset value per share after appropriation at Rs.27.72 compared favourably with the previous year's Rs.27.41.

The company said that its broadened business base through the acquisition of the assets of Christombu Farms had favourably positioned it to see growth opportunities and achieve a volume growth of over 24% in the supply of commercial day-old-chicks. There had been an output of over 18 million day-old-chicks during the year.

The directors have decided that there will be no final dividend for 1998 on top of the interim dividend of the 20% already paid last December.

They expected the current financial year to be another growth year for the company and said that barring unforeseen circumstances they expect to post improved group turnover and net profits.

Three Acre Farms has an issued share capital of Rs.231 million and Rs.372.6 million in its share premium account.

GST driving people away from insurance - Ceylinco

One of the biggest private sector insurance companies in the country has complained that the goods and services tax (GST) now applicable on insurance premia is driving people away from insurance.

Mr. S. Ratnadas, deputy managing director of Ceylinco Insurance which claims market leadership among private insurers in the general insurance business has said in his company's annual report that GST has had an adverse impact on the general insurance premium.

"It was imposed at a higher rate compared to the rate charged under the (previous) turnover tax system. While the corporate sector was able to absorb the GST paid by them, small time traders, house owners and the large number of clients who buy various personal lines of business were forced to pay a much higher premium," he said.

"Many prospective clients in this category could no more afford to pay the premium and have reluctantly ceased buying insurance protection."

Ratnadas also noted that the defence levy rate had again been increased by 1% last year causing further erosion of profitability.

He also said that the new legislation to replace the Control of Insurance Act of 1962 and subsequent amendments has still not been finalized. "The industry is eagerly looking forward to its implementation which is expected to give insurers more flexibility in the investment of funds," he said.

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