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Hatton National Bank

HNB – N:Rs.235.90, X:Rs.185.00 - Results Summary 4Q2014 - 18 March 2015 

HNB reported a 4Q2014 net profit of Rs.3,653mn (up 93% YoY, 45% QoQ), above our expectations, resulting in its 2014 NP rising 28% YoY to Rs.9,820mn. However, recurring 2014 NP rose only 27% YoY to Rs.8,931mn. NP rose on account of improving QoQ net interest margins, higher Non II growth and higher loan loss impairment (LLI) reversals YoY

Net Interest Spreads continued its QoQ upward momentum, partly due to recognition of interest written back on a bad debt reversal in 4Q2014. CASA continues its increasing trend amid lower rate differential in short term FDs and Savings interest rates. Core fund based growth picks up pace with loans and deposits rising 9% QoQ and 5% QoQ respectively. Non-Interest Income (Non II) rose on account of better fees and commission income growth


Outlook & Valuations


HNB’s NP revised for 2015E by 18% to Rs.10,441mn (up 17% YoY) on account of faster than expected growth in overall spreads and better Non II expectations. We forecast HNB’s 2016E NP at Rs.12,289mn (up 18% YoY) on account of forecast organic growth in top line and NISs

On revised earnings, HNB voting share trades at a discount to the sector on PE multiples of 9.0X (PBV -1.4X) for 2015E and 7.7X (PBV - 1.3X) for 2016E. HNB is forecast to offer  recurring ROEs of ~15% - 16% in the short to medium term

The significantly less liquid Non-voting share however trades at a 22% 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 and are expected to out-perform the broader market in the short to medium term given HNB’s improved risk profile and on better near term earnings expectations amid lower (than sector average) valuations


Nestle Lanka

NEST 4Q2014 Results Summary - Rs.2,300 - 17 March 2015

4Q2014 net profit of Rs.615mn (-13% YoY and -44% QoQ), below our expectations – lowest quarterly net profit since 1Q2012 - amid a further slowdown in revenue growth and marketing, selling and distribution (MSD) expenses rising to a record high. Consequently, 2014 net profit +14% YoY to Rs.3,787mn (2014 EPS of Rs.70.5), amid favourable commodity prices 

Outlook & Valuations


2015E NEST net profit forecast revised down by ~12% to Rs.4,196mn (+11% YoY), amid downward revisions to the gross profit margin forecast, due to the increase in floor price of local fresh milk and rise in global dairy prices. 2016E net profit forecast at Rs.4,604mn (+10% YoY)

The proposals from the National Budget 2015 in Oct 2014 and again in the Interim Budget 2015 in Jan 2015 to raise the guaranteed liquid milk price, +20% and +17% respectively, to impact NEST’s input costs. As per industry sources, latest price revision however not yet implemented

Exact calculation and payment due date of the one-off Super Gain Tax (SGT) proposed in the Interim Budget 2015 have not yet been defined by the authorities. Despite the potential impact of a SGT payment, NEST maintained its usual ~97% dividend payout in 2014, though it would likely lower dividend paid in 2015E

The defensive share has outperformed the market during the past three months, +11% vs. the ASPI’s decline of -2%. Total shareholder return of +19% YoY 

The illiquid share seems fairly valued on near term valuations, trading at premium PERs of 29.4X 2015E and 26.8X 2016E. NEST is however a stock on which most investors would take a much longer term stance, given its relatively steady and solid fundamentals, offering superior ROEs of over 100%, ~97% dividend payout and robust balance sheet. Amid the anticipated revival in local consumption, medium to long term investors favouring the consumer driven story in frontier markets and those seeking retirement stocks may accumulate the NEST share, which is one of the few fundamentally strong “buy and forget” shares on the Colombo Stock Exchange (CSE)


Aitken Spence

SPEN – Rs.102.0 - 3Q15 Results Summary - 16 March 2015


Aitken Spence (SPEN) reported a 3Q15 net profit of Rs.870mn (-20% YoY), below our expectations, due to sharp underperformance in the volatile strategic investments sector amid lower contribution from the thermal power segment and minority interest rising higher than anticipated amid restatement of FY14 values. 1-3Q15 recurring net profit -20% YoY to Rs.1,857mn, excluding ~Rs.338mn non-recurring items in the tourism sector


Outlook & Valuations:


  • Amid higher minority interest expectation and reduced expectation for maritime cargo logistics and strategic investments sectors, SPEN’s group recurring net profit forecasts revised down by 20% to Rs.2,978mn for FY15E (-20% YoY) and by 19% to Rs.3,484mn for FY16E (+17% YoY), with earnings primarily driven by key tourism sector (~73% of total PAT)
  • On revised earnings, SPEN trades at PER multiples of 13.9X FY15E and 11.9X FY16E. Whilst the share trades at a discount to most local conglomerate peers, it currently lacks an immediate catalyst to re-rate the share with ROEs weakening to ~10%
  • An approximate sum-of-the-parts (SOTP) valuation for SPEN suggests that the share is trading at a ~7% premium to its estimated break up NAV of Rs.95 per share, with ~75% of the total value arising from the tourism secto
  • Despite SPEN offering superior liquidity levels over leisure subsidiary Aitken Spence Hotel Holdings (AHUN), given the increased volatility in other sectoral earnings and the valuation gap narrowing, AHUN currently seems a better investment option for tourism sector exposure over SPEN, though more compelling value appears to exist in other non-tourism related counters 
  • The potential non-renewal of the Power Purchase Agreement (PPA) of Ace Power Embilipitya (APE) remains a significant overhang for SPEN. In addition, poor sectoral earnings visibility amid lack of detailed information to develop robust sectoral forecasts (excluding tourism) and over-reliance on tourism, which is vulnerable to shocks are potential investment risks to be factored
  • Investors may consider an alternate investment into SPEN via Distilleries Co. of Sri Lanka (DIST), which provides exposure to associate SPEN at relatively more favourable valuations



Peoples Leasing

PLC - Rs.23.5 - 30Q15 Results Summary - 11 March 2015

  • People’s Leasing & Finance (PLC) reported a net profit of Rs.1,102mn for 3Q15 (+32% YoY and +1% QoQ), slightly above our expectations, largely due to greater than expected expansion of Net Interest Spread (NIS). Consequently, 1-3Q15 net profit grew +29% YoY to Rs.2,978mn


Outlook & Valuations:


  • Net profit forecast revised up by 2% for FY15E to Rs.4,258mn (+23% YoY), while FY16E net profit forecast was revised up marginally to Rs. 4,444mn (+4% YoY)
  • NIS forecasts revised down by 19bps for FY15E and  by 36bps for FY16E to 8.8% and 8.3%. Disbursement growth marginally revised up for FY15E, while FY16E disbursement forecast revised down by 4%. Liability forecast revised down by 9% for FY15E and by 20% for FY16E
  • Amid a recovery in earnings growth during the past year and attractive dividend yields, PLC has attracted significant foreign institutional interest 
  • Subsequent to the announcement of the Interim Budget on 29 Jan 2015, wherein taxes on hybrid vehicles were sharply increased, and amid the recent rise in interest rates, the share price witnessed a downward trend
  • On revised earnings, PLC trades broadly inline with most LCBs at PER multiples of 8.4X for FY16E (PBV - 1.4X), but offering above sector average 6-7% gross dividend yields and 18-20% ROEs
  • Further material share price outperformance may be limited in the near term, given the pressure on vehicle imports and the rising interest rate environment, which will likely impact PLC. Downside risk may however also be modest at current levels following the -16% share price correction from its peak and above average dividend yields

Aitken Spence Hotel Holdings

AHUN – Rs.77.90 - 3Q15 Results Summary - 2 March 2015

Quarterly Highlights:

AHUN reported a 3Q15 Net Profit (NP) of Rs.638mn (+17% YoY), above our expectations, mainly due to earnings growth from its key Maldives segment on the back of lower operating expenses despite a 1% YoY decline in revenue

Cumulative recurring earnings adjusted for Rs.300mn insurance income for damaged water villas of Adaaran HudhuRan Fushi and for a gain on loss of control of a subsidiary of Rs.45mn. 1-3Q15 recurring NP of Rs.944mn (-16% YoY)


Outlook & Valuations:


AHUN recurring NP forecasts revised up by +16% for both FY15E and FY16E to Rs.1,986mn (-2% YoY) and Rs.2,309mn (+16% YoY) respectively, on account of lower operating expenses

AHUN underperformed the market, rising +13% YoY, vs. the broader market’s gain of +25%

Whilst AHUN’s forward valuations are at a discount to past premium valuations and broadly on par with peer John Keells Hotels (KHL), AHUN is more heavily reliant on Maldives with 632 rooms (to be increased by a further 160 rooms in ~18 months) vs. KHL’s 340 – a potential challenge to occupancy amidst the negatively changing tourist patterns currently prevailing in Maldives Amidst lackluster investor sentiment and activity, more compelling value appears to exist in other non-tourism related counters.

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