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Hatton National Bank

HNB – N:Rs.152.00, X:Rs.122.00 - 11 April 2014 

Hatton National Bank (HNB) reported an EPS of Rs.4.7 for 4Q2013 (down 40% YoY), slightly below our expectations, due to HNB reporting a relatively higher YoY Effective Tax  Rate (ETR) in 4Q2013

-       QoQ Spreads under pressure and efficiency declines on negative QoQ net income growth


Quarterly Highlights:

-        HNB’s loan book grew 5% QoQ and 16% in FY2013 (above the sector average of 9% in FY2013) to Rs.352bn as at 31 Dec 2013 while its deposits base grew 6% QoQ and 13% in FY2013 (below the sector average of 15% in FY2013) to Rs.385bn as at 31 Dec 2013

o    Pawning advances as a % of gross loans stood at 12.7% as at 31 Dec 2013 (vs. 15.8% as at 31 Dec 2012)

        -          Gross Non Performing Advances (NPA) ratio declined to 3.6% (compared to 5.6% of the banking sector) as at 31 Dec 2013 from 4.7% as at 30 Sep 2013 (and 3.7% as at 31 Dec 2012)

o    The management attributed the QoQ improvement in NPAs to aggressive recoveries made during 4Q2013

        -          The Effective Tax Rate (ETR: including Financial Value Added Tax) rose on a YoY basis largely due to HNB incurring a relatively lower ETR for 4Q2012

o    As at 31 Dec 2013, HNB reported contingent tax liabilities amounting to Rs.1.0bn (down from Rs.2.3bn as at end 2012)


Outlook & Valuations:

-         We broadly maintain HNB’s net profit for 2014E at Rs.8,368mn (up 19% YoY) and forecast a net profit of Rs.9,361mn for 2015E (up 12% YoY) on account of unchanged forecast assumptions and due to an expected recovery in demand for credit during 2H2014E  

-         On forecast earnings, HNB voting share trades at a discount to the market and the sector on PE multiples of 7.3X (PBV -1.0X) 2014E and 6.5X (PBV - 0.9X) 2015E and provides dividend yields of 5.5% 2014E and 5.7% 2015E. The less liquid non-voting share however trades at a 20% discount to the voting share on PE multiples of 5.8X (PBV – 0.8X) 2014E and 5.2X (PBV – 0.7X) 2015E and provides dividend yields of 6.9% 2014E and 7.1% 2015E. The company is forecast to offer ROEs of 13.9% 2014E and 14.2% 2015E. The voting and non voting shares underperformed the broader market falling -8.4% YoY and -5.1% YoY vs. market’s 4.8% YoY increase. However, during 2014YTD, HNB voting share slightly outperformed the broader market by increasing 3.4% vs. ASI’s 3.0% increase during the same period  

-         Despite near term economic headwinds expected to impact the banking sector’s short term performance, with the regulator’s market consolidation initiative expected to stabilise the financial sector in the medium term, we believe HNB’s relatively inexpensive valuations to find favour among value oriented investors in the medium term. In the absence of any identifiable catalyst to re rate the share higher in the short term though, we believe the share will broadly perform in line with the sector and the market.  

Last Updated (Thursday, 17 April 2014 10:11)


Hemas Holdings

HHL – Rs.38.00 - 1 April 2014 


Hemas Holding (HHL) 3Q14 EPS of Rs.1.0 (+42% YoY), in line with our expectations; profitability driven by the improved performance of the Healthcare, FMCG and Transportation sectors


Quarterly Highlights:


?        FMCG Sector : Earnings in line with our expectations, with profitability impacted by increased tax expenses

?        Healthcare Sector: Earnings above our expectations, amidst higher than anticipated earnings contribution from the Pharmaceuticals segment

?        Leisure Sector: Earnings in line with our expectations with earnings slightly improving subsequent to reopening of refurbished hotels

?        Transportation Sector : Earnings above our expectations due to higher than anticipated revenue growth driven by its new venture, Hemas Logistics, that offers logistics solutions to major shipping lines calling at the Colombo port

?        Power Sector : Earnings below expectations due to lower than anticipated contribution from the thermal power segment, despite the 117% YoY increase in hydropower segment PAT

?        Others Sector : Earnings below expectations due to increased corporate overheads


Outlook & Valuations:


?        Overall HHL NP forecast maintained at Rs.1,819mn for FY14E (+10% YoY) whilst FY15E NP forecast revised up by 4% to Rs.2,268mn (+25% YoY), on account of improved sectoral expectations, mainly on FMCG, Pharmaceuticals and Transportation sectors. The leisure sector contribution is expected to remain modest amidst continued investment in new properties and developing scale 

?        An approximate sum-of-the-parts (SOTP) valuation for HHL suggests that the share is trading at a 12% discount to its break up NAV of Rs.43, with the bulk of this valuation arising from the FMCG and healthcare sectors

?        Despite outperforming the broader market over the past year and three months, +41% and +12% (vs. the ASPI’s gain of 4% and 2% respectively), we believe the share still offers a superior value proposition to most of its main rival conglomerates trading at PER multiples of 10.8X FY14E and 8.6X FY15E

?        Although share liquidity remains relatively low, and management needs to focus on boosting ROEs back up to the high-teens at least (which at 14 -16%  for both years is still broadly on par though with the sector), we believe that the discounted valuations are unwarranted, especially in view of HHL’s dominant presence in the relatively stable FMCG sector and pharmaceutical segments.





Last Updated (Thursday, 17 April 2014 10:10)


Nations Trust Bank

NTB - Rs.63.00 - 14th March 2014


4Q2013 EPS of Rs.2.3 (+27% YoY), in line with our expectations, amidst sharp rise in net interest income


Quarterly Highlights


  • Spreads remain under pressure, but likely to get compensated by higher credit growth


  • With the CBSL’s recent encouragement in consolidation within the banking sector, we expect NTB's key shareholders to actively explore M&A opportunities in the medium term


  • Recovery in demand for credit and net gains in trading portfolio due to falling interest rates are expected to support the bottom line in the near term


  • Warrants a discount to larger peers, and appears fairly valued on PERs of 5.8X in 2014E (PBV - 1.2X) and 5.1 X in 2015E (PBV – 0.9X) providing ROEs of ~19% with EPS growth expectations of above 16% for 2014E



Outlook & Valuations


  • We broadly maintain our 2014E NTB net profit forecast at Rs.2,496mn (up 17% YoY) and forecast a net profit of Rs.2,827mn for 2015E (up 13% YoY)
    • We expect NTB's NIS to deteriorate to 5.8% in 2014E (vs. 5.9% in 2013; AEIR earned 13.6% less AEIR paid 7.8%) due to declining interest rates, which may add pressure on spreads and subsequently improve to 6.0% in 2015E (AEIR earned 14.1% less AEIR paid 8.1%), led by greater demand for credit amidst soft monetary policy stance adopted by the CBSL


  • Despite the NTB share underperforming the market during the past year by rising only 2.1% (vs. ASPI’s gain of 3.6%), the share recently outperformed the market by rising 4.1% during the past three months (vs. ASPI’s gain of 1.7%)


  • The NTB share appears to be fairly valued on PER multiples of 5.8X in 2014E (PBV - 1.2X) and 5.1X in 2015E (PBV – 0.9X), providing ROEs of ~19% with EPS growth expectations of above 16% for 2014E


  • Amidst an expected recovery in the banking sector with softer interest rate environment and net gains expected in the trading portfolio, we believe that the share may find favor among value oriented investors in the medium term. With the CBSL’s recent encouragement in consolidation within the banking sector, we however do not reject a strategic investment by a banking sector peer or by the Government of Sri Lanka (GoSL), given NTB’s relatively clean portfolio, strong growth prospects and absence of a controlling shareholder. We also expect NTB's key shareholders to actively explore M&A opportunities in the medium term.





Alumex Limited – Initial Public Offer Rs.274.00 - 5th March 2014

§  Objective of listing :

o    Add a new powder coating plant which is currently running at full capacity and invest in new die manufacturing  equipment

o    Be entitled for the three year half tax holiday directed by the National Budget 2014 for companies getting listed on the Colombo Stock Exchange (CSE)  


§  Alumex, 51% owned (post IPO) subsidiary of conglomerate Hayleys (HAYL), is the local market leader of aluminium extrusion manufacturing, with market share exceeding 50%


§  Significant local demand is expected for aluminium extrusions in near term, amidst construction boom in the country


§  Alumex is the only local extrusion manufacturer, which carries technology to measure specific attributes of recycled aluminium such as spectrometer to ensure quality and the only company which designs and manufactures extrusion dies (molds)


§  Given the market segment specialization in high end architectural extrusions, diverging from hardware segment has given a competitive advantage for Alumex in capitalizing the specific market share


§  Alumex’s net profit has grown at a four year CAGR of 16% during FY09 to FY13 while revenue grew at a four year CAGR of 7%.

o    Given the company’s ability to make use of currently unutilized capacity, with the expected improvement in demand for high margin products, further enhancement of profit is likely


§  Alumex share is priced at a premium to construction sector peers. However, a slight premium is justified by high ROE and industry dominance

Last Updated (Tuesday, 18 March 2014 09:03)


Chevron Lubricants

LLUB Rs.274.00 - 5th March 2014

4Q2013 EPS of Rs.4.9 (+7.4% YoY, but -3.2% QoQ), broadly in line with our expectations, amidst higher GP margin compensating for lower sales volumes


Quarterly Highlights


  • 4Q2013 revenue fell marginally YoY – sixth consecutive quarter of YoY decline; though up QoQ
    • Contributed by reduced demand from the industrial segment (35-40% of sales mix) whilst retail consumption (60-65% of LLUB's sales) continued to remain weak
  • Declining base oil prices facilitates YoY GP margin expansion by 370bps
    • The relative stability of the Sri Lankan Rupee (SLR) (depreciating marginally both QoQ and YoY) and Chevron’s global procurement synergies also believed to have cushioned GP margins


Outlook & Valuations


  • LLUB’s net profit forecast for 2014E maintained at Rs.2,762mn (+9% YoY), whilst 2015E net profit forecast at Rs.3,079mn (+12% YoY)
    • Net revenue expected to grow 9% YoY to Rs.12,190mn in 2014E and 8% YoY to Rs.13,161mn in 2015E
      • Management stated that product prices were increased by ~12% w.e.f 27 January 2014 and we do not expect any further price increases during 2014E
      • Early price hike to pressure sales volume growth, -2% YoY in 2014E (vs. -7% YoY in 2013). However we expect a pickup of +2.0% YoY in 2015E with recovery in macro conditions leading to improved consumer demand


  • LLUB is comfortably in a position to meet its future capex (~Rs.0.7bn) through its current cash balance (~Rs.1.9bn), thereby likely leading to an increase in its dividend payout going forward


  • The share continues to have outperformed the market rising 26% YoY (vs. the broader market's gain of 5% YoY); total shareholder return of 33% over the past 12 months. LLUB trades at PE multiples of 11.9X 2014E and 10.7X 2015E, at a premium to other listed companies under the manufacturing sector, though it is partly justified by it strong ROEs of ~55%-58% and attractive gross dividend yields of 8.0% 2014E (at an expected dividend payout of 95% subsequent to completion of the capex cycle vs. 71% in 2013) and 8.9% 2015E


  • Whilst LLUB’s long term growth potential seems modest in comparison to its other listed MNCs, particularly NEST, warranting a relatively lower valuation, the defensive share may be favoured by medium to longer term investors seeking exposure to a relatively liquid MNC with a strong brand equity and to a potentially attractive dividend play, especially in the current context of declining interest rates.
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