Stock Market Forbes ABN AMRO Business Roundup
For the trading week ended Friday 4th of June 1999
— Selling pressure dominate market conditions
— A possible slip in Oil prices next year adds to LLUB’s appeal
— Maskeliya still a good bet in the plantation sector
— Increase in interest ratesSelling pressure dominant market conditions — Activity levels improved somewhat registering a moderate weekly turnover of Rs. 205Mn. However selling pressure from all quarters dominated market sentiments dragging the market indicators further down. Foreign selling accounted for 36% of overall activity level resulting in a net outflow of Rs. 66.3 Mn. Market benchmark ASPI reflected negative sentiments shedding 24.0 points to close at 536.3. Even bluechips were not spared as MPI registered a loss of 31.8 points. We regard this sell down in some of the resilient bluechips to be unwarranted and recommend investors to capitalise on these conditions invest in stocks like LLUB, DFCC, JKH, Tokyo Cement & Dockyard.
A possible slip in Oil prices next year adds to LLUB’s appeal — in December 1985 oil prices stood at US$27.5 per barrel but declined to US$8.5 at the end of 1998. This resulted on OPEC agreeing in March to cut back output by 2.1 Mn barrels per day resulting in oil prices recovering to about US$ 15 per barrel. However increased contributions from Middle East countries coupled up with a reduction in demand from Asia is expected to render these measures ineffective, dragging the prices further down next year. If this trend continues, consequent reductions in base oil prices will reflect favourably on LLUB’s margins resulting in better returns. At present LLUB yield returns well above T-bill rates adding further to it’s lucrativeness in the prevailing bearish market conditions.
Further reconfirming our buy recommendation, LLUB 1Q results registered a 42% increase in profits from comparative levels last year recording a net profit of Rs. 159.5 Mn. Despite heartening demand in a depressed the market stock continues to trade at very low P/E ratios of 2.8x, 2.5x & 2.3x on FY99, FY00 & FY01 earnings. Moreover we estimate a fair value of Rs. 112.1 based on DCF valuation, which indicates an upside potential of above 100% from current market price.
Maskeliya still a good bet in the plantation sector — on the back of low tea prices in the last quarter coupled up with low quality production due to poor weather conditions resulted in company net earnings registering a 53% decline in FY99 from FY98 levels. Despite this we believe Maskeliya to hold a competitive advantage over it’s peers due to it’s nil exposure to the rubber segment & it’s most fertile plantations situated in strategic tea plantation location with some of the highest yield levels in the country. Our top picks in a sector which we an underweight on are Balangoda & Maskeliya.
Increase in interest rates-The 3,6 & 12 months — T-bill interest rates moved up from 11.73% 12.00% & 12.58% last week to 11.79%, 12.04% & 12.63%.
Bartleet’s Weekly Market Commentary
* The market continued with its downtrend owing to regional inatabilities coupled with profit taking or should we say loss minimizing. The holiday on Monday didn’t help the market in anyway either. The ASI and MPI declined 10.5 points and 24.9 points to close the week on 536.3 and 864.4 respectively.
* Turnover for the short trading week remained a moderate Rs. 205Mn with an average daily turnover of Rs. 51.3Mn, up 36% WoW. The weeks trading saw large parcel of HNB, NTB, Sampath, Aitken Spence, Lanka Lubricants and Lanka Ceramics changing hands. Market capitalization dropped further to close the week on Rs. 106.6Bn.
* Foreigners remained net sellers with a net outflow of Rs. 51Mn thus accounting for 36% of sales during the week and only 4% of purchase. Sri Lanka, which is only looked at as a subsequent investment by many large funds, is at the receiving end despite strong fundamentals due to mounting tension between India and Pakistan.
* The market has set the stage for big funds to take strong positions in the chips trading at significantly discount levels. With foreign investors failing to capitalise on this excellent opportunity, we feel that the domestic institutional investors should give the much-awaited initiative to the bourse and hence boost the level of activity. We also believe the concept of foreign dependence should move away to domestic dominance with the intention of strengthening the capital market, which is at present driven largely by few foreign funds. The inception of fresh domestic funds therefore would no doubt enhance the stability of the market at the same time providing a strong direction to the existing investors who have been on the side line for most of the time.
* With the quarterly and annual results now being released, many companies having recorded satisfactory levels of earnings, failed to renew investor interest on the bourse on the back of poor sentiment. The diversified companies recorded a drop in earnings as expected, owing to their exposure to the plantation sector, which saw a massive decline in prices.