The conducive business environment subsequent to the end of the three decade old conflicts coupled with political stability and positive economic outlook has raised the business sentiments and the corporate earnings during 2HFY10 has been exceptional despite the slow global economic recovery.
The Corporate Earnings have gained in line with the market till 2007 and during the heightened war the corporate earnings have outstripped the prices. However with the complete end of the three decade long war and positive economic outlook the share prices have exceeded the growth in earnings.
SECTORAL CONTRIBUTION
Banks, Finance and Insurance sector has emerged as the major contributor to the corporate earnings contributing for circa 37% of the total corporate earnings in FY10. Diversified Sector has contributed for circa 24% whilst Food, Beverage and Tobacco sector has contributed to circa 17% of the corporate earnings in FY10.
TELECOMMUNICATIONS
Telecommunication sector has made a turnaround from the staid period by posing a +twofold YoY increase in profits to circa LKR1,309.1 mn in 4QFY10. However the FY10 saw a cumulative loss of circa
LKR9,223.6 mn mainly on the back of the massive asset impairments of Dialog Telekom which took place during the year. Further relatively high number of operators triggered stiff competition on tariffs which
reduced the profitability of the industry as a whole. Thereby the industry experienced a more turbulent period from 2008 to 2010 being a deflator to cumulative market earnings.
BANKS, FINANCE & INSURANCE
Banking and finance sector recoded a growth of 65% YoY during 1Q2010 which was driven by favourable macro economic conditions and political stability in the country. We witnessed banks such as Sampath Bank, Commercial Bank, DFCC Bank and Nations Trust Bank recoding impressive results during 1QFY10, which was backed by improved net interest incomes and reduction in provisions. Lanka Orix Leasing, LB Finance were in the forefront of the earnings drive of finance companies whilst HNB Assurance and Ceylinco Insurance spear headed the insurance sector earnings during the quarter. Further in terms of 4Q cumulative earnings the sector recoded a 50% YoY growth which was supported by banking sector counters such as HNB, SAMP, DFCC and NTB, finance companies such as LOLC, LFIN, First Capital Holdings and Asia Capital.
FOOD, BEVERAGE & TOBACCO
Lanka and Ceylon Tea Services, whilst poultry sub-sector counters together with Lanka Milk Foods & Lion Brewery ably shouldered the sector earnings growth.
CHEMICALS
The Chemicals and Pharmaceuticals sector grew by a impressive 370% during 4QFY10 whilst it grew by 55% YoY in FY10. The outstanding results of Haycarb that propelled the growth in the sector was at-
tributable to the organic growth and capital gains which incurred during the period. The exceptional growth of 930% YoY 4QFY10 achieved by chemical industries aided in spearheading the sectoral growth. Further the 200% YoY 4QFY10 improvement of Lankem Ceylon enhanced the sector growth even though Chemnex was holding the market down.
CONSTRUCTION & ENGINEERING
almost 99% of the sectoral earnings whilst Lankem Developments has made a turnaround by improving their earnings two folds YoY to LKR3.29 mn in FY10. Construction & Engineering sector has achieved a 5 year earnings CAGR of 57% which is recorded as the highest sectoral earnings growth in the Colombo Bourse.
DIVERSIFIED
The diversified sector earnings grew by an impressive 88% YoY during 4QFY10 whilst it grew by 54% YoY in FY10. This growth was spearheaded by outstanding results posted by Hayleys owing to the capital gains made from divesting a few hotels under Carbotels and increased contribution Hayleys MGT. Further, Carsons Cumberbatch reported an exceptional growth mainly due to better palm oil returns and profits from the beverage business. Colombo Fort Land reported impressive growth on all sectors especially in plantations
whilst the diversified segmental profit was further supported by John Keells Holdings where the hotel arm performed above expectation. Richard Pieris turned around strongly (276% YoY) during the year and shouldered the sectoral growth.
HOTELS & TRAVELS
The Hotel sector earnings grew by an impressive 319% YoY during 4QFY10 whilst it grew by 643% YoY in FY10. Hotels and Leisure sector is the prime beneficiary of the complete end of the three decade long war, whereby the sector propelled the earnings of the broad market in 2HFY10. 4QFY10 was a turnaround period for almost all the hotels and exhibited tremendous improvement in earnings on the back of circa 54% YoY increase in tourist arrivals during the quarter and improved ARRs and occupancy rates.
INVESTMENT TRUST
The investment trust sector earnings grew by 152% YoY during 4QFY10 whilst the FY10 earnings grew by 143% YoY in FY10. The growth was lead by growth in Ceylon Guardian, Touchwood, Sunshine holdings
and Ceylon investments. Apart from Renuka holdings and Watapota investments which saw sharp dip in earnings during FY10 all other companies in the sector have witnessed significant turnaround.
LAND & PROPERTY
A 172% YoY growth in 4QFY10 and a 42% YoY increment for FY10 was lead by the sector heavyweight Overseas Realty. Overseas Realty contributed over 75% of the total quarterly earnings of the sector whilst
showing an increase of 72% YoY for 4QFY10. Property Development shouldered the earnings during the year whilst East West turned around strongly (up 1791% YoY).
MANUFACTURING
The manufacturing sector earnings witnessed a 67% YoY growth during 4QFY10 whilst it saw 91% YoY growth during FY10. The growth was driven by Chevron Lubricants (up 97% YoY) on the back of bet-
ter margins whilst Royal Ceramic also lent support (up 86% YoY in FY10). Lanka Ceramic, Lanka Wall tiles and Grain Elevators saw im pressive growth in their bottom line mainly driven by increased consumer spending. However, Pelwatta Sugar weathered a challenging period (down 569% YoY in FY10) where it has been a drag on the sectoral performance whilst ACL cables too have negatively impacted the growth (down 101% YoY in FY10).
PLANTATIONS
The sector has grown two-fold in 2010/FY10 to LKR1,937.8 mn owing to high tea and rubber prices which prevailed since mid 2009 despite low output levels. During 1Q2010/4QFY10, the sector saw net earnings of LKR1,313.7 mn versus a loss of LKR391 mn in the corresponding period previous year which could be mainly attributable to the escalated rubber prices where companies with exposure to rubber benefited immensely.
OIL PALMS
The sector has recorded an impressive two fold growth in net earnings for 1Q2010/FY2010 which could be mainly attributable to the remarkable performance in Bukit Darah; the holding company of 4 oil palm companies which operate plantations in Malaysia along with holdings in the Carsons Cumberbatch group. Rising oil palm prices (which were at a drop in 2008 due to global recession) strengthen the performance in the four oil palm companies. Further, for the year FY2010 sector has recorded LKR3.2 bn from the LKR894 mn posted last year.
SERVICES
A fivefold increase was seen in services sector during 4QFY10 and +400% YoY increase in earnings for FY10 whilst Health care sector recorded 201% YoY increase during 4QFY10 and 148% YoY increase during FY10. Services sector growth was spearheaded by the impressive improvements in earnings of Asiri Group Hospitals and Nawaloka Hospitals
STORES & SUPPLIES
The stores & supply sector witnessed an over whelming 233% YoY growth during 4QFY10 whilst FY10 earnings grew by 245% YoY mainly on the back of strong growth seen in E B Creasy (up 579% YoY in FY10).
TRADING
The trading sector earnings grew by 32% YoY during 4QFY10 whilst it grew by an impressive 272% YoY in FY10. This growth was spearheaded by exceptional results posted by Browns where the FY10 earnings have grown by 113% YoY, however there was a downward trend in quarterly performance. With the latest tax and tariff reforms implemented in June 2010 there seem to be a favorable prospect for the trading sector in the near future.
MOTORS
Motor sector recoded an impressive +300% YoY increase during 4QFY10 and FY10. Sector growth was driven by Diesel and Motor Engineering Company, United Motors and Colonial Motors. Further the recent 50% import duty reduction on motor vehicles will also have a positive impact on its top line growth in the future.
FOOTWEAR & TEXTILES
The Footwear and Textile sector trended downwards 31% YoY during 4QFY10 whilst it grew by an impressive 97% YoY in FY10. Hayleys MGT spearheaded the entire sector with outstanding results whilst contributing over 100% of the total sectoral earnings in 4QFY10.Ceylon Leather is on the path of recovering from a loss making run whilst presenting profits for 4QFY10 as well as FY10. On the other hand Kuruwita Textiles added pressure on the Footwear and textile sector with a 177% YoY dip in 4QFY10 dragging
the earnings of the company into negative figures.
POWER
The sector has marked a turnaround in 1Q2010/4QFY10 recording a net profit of LKR744.8 mn whilst resulting a cumulative 4 quarter profit of LKR356.8 mn. This is mainly attributable to the improved performance in Lanka IOC, which contributed negatively to sector performance in 2008/FY2009. The three other companies which are mainly into hydro power generation have shown improved earnings from the corresponding period previous year. With the market re-rating to a new and higher valuation plane with the positive macro environment the market is currently trading on 4 quarter trading multiple of 19.8x. Given our expectation of near 30-35% YoY growth in corporate earnings in FY11 the market PER would fall to circa 15.0x.
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