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Strategy Report 2015

Sri Lanka Strategy Report - January 2015


  • Maithripala Sirisena, the common opposition candidate won the Presidential Elections held and a smooth transition of power took place


  • The 100 day plan includes constitutional amendments, to be implemented via the formation of an interim National Unity Alliance government


  • Macro fundamental outlook positive and would to translate into stronger corporate earnings in 2015E


  • GDP growth strengthening to 7-8%, inflation soft at ~3%, currency relatively stable with modest ~3% depreciation vs. US$


  • Recent declines in commodity prices, particularly oil brings in prospects for most frontier Asian economies, including Sri Lanka


  • Current market valuation of 13.9X 2015E appear fair in view of ~13% YoY earnings growth and economic trajectory poised to deliver stronger results


*** All valuations and market data in this report are as at 08 January 2015***


Hatton National Bank

HNB – N:Rs.195.10, X:Rs.150.00 - Results Summary 3Q2014 - 23 December 2014 

3Q2014 EPS of Rs.6.3 for 3Q2014 (up 7% YoY), above our expectations, resulting in its 1-3Q2014 Net Profit (NP) rising 7% YoY to Rs.6,167mn. NP rose largely on account of a tourism sector NPA recovery amounting to Rs.1.2bn during 3Q2014

§  Net Interest Spreads recover QoQ

§  Loans up on DBU-term loan up take in 3Q2014, deposits fall marginally

§  Prime Grameen (NBFI) was acquired during Nov 2014 at a book multiple of 1.4X


Outlook & Valuations


§  HNB’s NP revised for 2014E by 18% to Rs.7,838mn (up 11% YoY) on account of higher than expected bad debt recoveries. Group’s 2015E forecast is also revised up by 14% to Rs.8,839mn (up 13% YoY) due to higher spread expectations owing to likely faster up take in private credit

§  On revised earnings, HNB voting share trades at a discount to the sector (of 9.2X PER and 1.5 PBV) on PE multiples of 8.8X (PBV - 1.2X) for 2015E. HNB is forecast to offer a recurring ROE of ~14% for 2015E. The significantly less liquid Non-voting share however trades at a 23% discount to the voting share, down from an average discount of 35% during past five years

§  Both Voting and Non-voting shares outperformed the broader market in past three months and YoY

§  HNB’s Voting and Non-voting shares are expected to out-perform the broader market in the short to medium term given its improved risk profile and relatively improved near term earnings expectations amid lower than sector average valuations



Sampath Bank

SAMP - Rs 233 - 3Q 2014 Results Summary - 08 December 2014


3Q2014 EPS of Rs.6.6 (up 30% YoY), slightly above our expectations amid a steeper than expected rise in Non Interest Income (Non II)

  • Pawning exposure fell to 10% of portfolio as at 30 Sep 2014 from 13% as at 30 Jun 2014 and 19% as at 31 Dec 2014


Outlook & Valuations


  • SAMP Net Profit (NP) forecast revised up by 2% to Rs.5,028mn for 2014E (up 38% YoY), factoring the higher than expected growth in Non II in 3Q2014, despite deterioration of Net Interest Spread (NIS). 2015E NP forecast also revised up marginally to Rs.5,426mn (up 8% YoY) with the expectation of improved credit growth


  • The SAMP share has outperformed the market rising 36% in 2014YTD against ASPI’s rise of 23%. SAMP however underperformed the market during the past three months declining 1% YoY (vs. ASPI’s rise of 2%)


  • SAMP currently trades at a discount to the sector at PER multiples of 7.8X in 2014E (PBV – 1.1X) and 7.2X in 2015E (PBV – 1.0X), providing ROEs of ~15% for both years


  • Considering earnings continually lagging behind competitors and regular high contribution of non-core earnings, a discount is warranted for SAMP


  • However, the discount may be too steep given the potential growth and decent ROE levels amid SAMP being a direct beneficiary in private sector credit growth. The relatively inexpensive share would also find favour amongst value oriented investors. Short term price volatility is expected in the market considering the uncertainties surrounding the presidential election that is to take place in Jan 2015

Aitken Spence Hotel Holdings

AHUN – Rs.75.90 - 5 December 2014 - 2Q15 Results Summary

Quarterly Highlights:

  2Q15 reported Net Profit (NP) of Rs.212mn (-32% YoY). 2Q15 recurring NP of Rs.116mn (-63% YoY), below our expectations, mainly due to lower than anticipated returns from the key Maldives and Others (i.e. managed properties) segment

§  Recurring earnings adjusted for the third insurance claim tranche of an estimated ~Rs.100mn received during the quarter for the damaged water villas of Adaaran Hudhurunfushi (which were partly damaged by a fire in July 2013) and adjusting for a gain on loss of control of a subsidiary of Rs.45mn. 1H15 recurring NP of Rs.306mn (-47% YoY)


Outlook & Valuations:


§  AHUN recurring NP forecasts revised down by 20% for FY15E and FY16E to Rs.1,709mn (-16% YoY) and Rs.1,990mn (+16% YoY – off a low base) respectively, on account of lower revenue expectations, higher operating expenses and lower share of profits from associate (Browns Beach Hotel – BBH), amid completion of new property falling behind schedule 

§  Having outperformed the market during the first 11 months of 2014, the AHUN share has underperformed the market during the past month, falling -6% vs. the broader market’s decline of -2%. On revised earnings, AHUN is trading at 15.6x and 13.4x on FY15E and FY16E earnings respectively

§  AHUN’s valuations are at a discount to past premium valuations and the sector TTM PER of 23x, it is at a premium to peer John Keells Hotels (KHL). Further, more compelling value also appears to exist in other non-tourism related counters



Distilleries Co. of Sri Lanka

DIST - Rs.202.3 - 2Q15 Results Summary - 28 November 2014

  DIST reported a 2Q15 net profit of Rs.1,858mn (+25% YoY and up marginally QoQ), broadly in line with our expectations. Strong YoY earnings growth is largely on account of the group enjoying net finance income during the quarter (vs. an expense in 2Q14), supported by higher contribution from the diversified sector, and from increased associate contribution. Consequently, 1H15 net profit +18% YoY to Rs.3,705mn


Outlook & Valuations


§  Group net profit forecasts broadly maintained at Rs.7,513mn for FY15E (+13% YoY) and at Rs.8,588mn for FY16E (+14% YoY), with earnings driven by the core beverage sector and supported by higher contribution from the diversified sector and 41% owned associate, Aitken Spence (SPEN)

§  DIST trades at relatively undemanding PER multiples of 8.1X FY15E and 7.1X FY16E, at a discount to both the beverage, food & tobacco sector and most conglomerates. A valuation discount is however warranted, given relatively poor earnings visibility in its diversified sector (though volatility has decreased due to the transfer of a large portion of investments into a long term portfolio) and high regulatory risk attached to the alcohol industry

§  An approximate sum-of-the-parts (SOTP) valuation for DIST suggests that the share is trading at a ~38% discount to its break up NAV. The potential listing of investment holding subsidiary Melstacorp was to be the key catalyst in unlocking this value in the medium term; however, with this seeming to be delayed, DIST currently lacks an immediate catalyst to close the gap with its break up NAV, though the extent of the discount may be too steep

§  Currently it appears the value of DIST’s core business, which commands market dominance, strong brand equity and high FCF generation, is not clearly seen by investors, being clouded by potentially over diversification attempts, poor disclosures and earnings visibility and the group’s long term strategy still seeming opaque

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