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National Development Bank

NDB – Rs.212.00 - 1Q2014 Results Summary - 28 July 2014

National Development Bank (NDB) reported a net profit of Rs.1,191mn in 1Q2014 (up 135% YoY and up 167% QoQ on account of to low base effect), above our expectations, due to higher business volumes and a lower effective tax rate


§  NDB’s loan book grew 6% QoQ (sector up ~3% QoQ) to Rs.145bn while its deposit base grew 4% QoQ (sector up ~3% QoQ) to Rs.135bn as at 31 March 2014

§  Total loan loss impairment rose 435% YoY (down 88% QoQ) to Rs.126mn in 1Q2014 (albeit relatively low vs. Rs.1.26bn in 2013). Impairment rose largely due to worsening asset quality and resultant impairment charges made on few individually significant loans. NDB’s Gross Non Performing Advances (NPA) ratio rose to 2.7% (highest since 30 September 2009) as at 31 March 2014 (compared to banking sector NPA of 6.2% as at 31 March 2014) from 2.5% as at 31 December 2013

§  NDB’s Effective Tax Rate (ETR: including Financial Value Added Tax) fell to 31.8% in 1Q2014 from an abnormally high 55.7% in 1Q2013 (however rising from 23.7% in 4Q2013) largely on account of growth in tax efficient money market investments


Outlook & Valuations:


  • NDB’s net profits revised up by 7% and 6% to Rs.3,698mn and Rs.4,144mn for 2014E and 2015E respectively on account of revised Non II and effective tax rate assumptions
  • NDB share has outperformed the broader ASI, appreciating 27% YoY (vs. ASI’s 12% YoY increase). However the share performed in line with the broader market (rising 10%) during past 3 months
  • On account of the recent outperformance in the share, NDB currently trades at sector par valuations on PBV multiples of 1.3X (PER – 9.4X) 2014E and 1.1X (PER – 8.4X) for 2015E. The company is forecast to deliver an ROE of 14.3% for both 2014E and 2015E, in line with the sector average ROE of ~14%. Profitable deployment of NDB’s surplus capital remain critical to improve its ROEs above the sector in the medium to long term
  • NDB’s relatively conservative stance during the recent past has paid off by way of best-in-class portfolio quality (net NPAs of 1.4% vs. a sector net NPA of ~3%) and a strong balance sheet (Tier I + II of 17.4%), with ample scope for growth amid an expected uptick in credit demand in 2H2014E
  • With the group expected to actively participate in near term financial sector consolidation initiatives, we expect the share to find favour amongst value oriented medium term investors. However, we expect the NDB share to perform in line with the broader market in the near term on account of its justified near term valuations.


John Keells Holdings

JKH-N – Rs.238.70 - Results Summary 1Q15 -  25 July 2014


JKH’s 1Q15 EPS of Rs.2.2 (+17% YoY), in line with our expectations. YoY growth led by strong performance in the leisure and consumer, food & retail sectors coupled with above par performance in others sector, comprising a capital gain of Rs.389mn from disposal of shares and high interest income earned from JKH’s significant cash pile, compensating for decline in earnings of transportation sector


Outlook & Valuations:


  • JKH net profit (NP) forecasts maintained at Rs.12,679mn for FY15E (+8% YoY on a recurring basis) and Rs.13,848mn (+9% YoY) for FY16E, driven primarily by the leisure sector (37% and 38% of total PAT in FY15E and FY16E respectively), whilst we also expect relative stabilization in the key transportation sector (18% of total PAT for both years). Further, Others sector to contribute through interest income on the remaining rights issue funds
  • JKH trades at a PER multiple of 18.6X FY15E, at an EPS growth of 3.6% YoY and a PER multiple of 17.1X for FY16E, at an EPS growth of 9.2%
  • Near term valuations are still relatively demanding, subsequent to EPS dilution and earnings being under pressure in key transportation sector, coupled with weakening ROEs. However, IR project earnings not included in near term earnings partially explains the higher multiples
  • Premium multiples however partly justified by JKH’s unrivalled share liquidity, country proxy characteristics and potential for the IR to be a game changer. The highly liquid share may continue to be favoured by longer term investors seeking exposure to the local gaming industry. High regional competition, project execution and regulatory risks though remain, with potential profit upside and downside, both critically linked to the success of the IR and gaming projects
  • Timely achievement of IR and gaming project milestones could be potential catalysts to share price performance in the longer term



Commercial Bank of Ceylon

Commercial Bank of Ceylon acquires Indra Finance Ltd

Commercial Bank of Ceylon (COMB) announced on 16 July 2014, its decision to invest Rs.870mn in Indra Finance Limited (IFL: a Licensed Finance Company [LFC]) and to acquire the entirety of the issued and fully paid share capital of IFL, subject to relevant statutory and regulatory approvals followed by a due diligence.


Whilst this will be the first LFC acquired by a Licensed Commercial Bank (LCB), post Central Bank of Sri Lanka’s (CBSL’s) announcement on financial sector mergers early this year, we expect COMB to benefit from the aforementioned deal on account of IFL’s relatively lower financial leverage and COMB’s ability to increase IFL’s leverage via access to cheaper funds.


COMB enters into an MOU with IFL


According to management of IFL, COMB has entered into a Memorandum of Understanding (MoU) with IFL to provide all leasing facilities related to vehicle sales of Indra Traders Ltd (ITL: one of the largest Japanese and Chinese vehicle importers in Sri Lanka owned by Mr. Y.S.H.I.K. Silva who is also the controlling shareholder of IFL and owns an investment of 5.5% of COMB–N as at 31 March 2014), which is in turn expected to benefit COMB to grow its leasing book whilst providing competitive lease rates to customers of ITL and COMB. Further, the management (of IFL) stated that it had no exposure to the volatile pawning segment, which compares well with the risk appetite of COMB (COMB’s pawning portfolio accounted for only 1.5% of its total advances as at 31 March 2014).


Deal Valuations


IFL was acquired at a book multiple of 1.7X and a TTMPER of 11.9X, a slight premium to the trailing multiples of the BFI sector.


Impact to COMB positive but immaterial


Whilst COMB is expected to use operations of IFL to develop its leasing portfolio (which stood at 6.4% of total advances of COMB as at 31 March 2014), the relatively small size of the acquired franchise is not likely to provide a material impact to COMB’s EPS, ROE and NPAs .


COMB recent share performance and valuations


COMB voting share rose 12.2% during the past 3 months (COMB–X up 10.3%) outperforming the market which rose 10.2% during the same period. On current valuations, COMB–N trades on PBV multiples of 1.8x (PER 11.2X) 2014E and PBV multiples of 1.6x (PER 10.3X) 2015E whilst COMB–X trades on PBV multiples of 1.3x (PER 8.4X) 2014E and PBV multiples of 1.2x (PER 1.7X) 2015E whist offering ROEs of ~17% in the near term



Aitken Spence

SPEN – Rs.109.00 - 4Q14 Results Summary - 21 July 2014

Aitken Spence (SPEN) recurring 4Q14 net profit of Rs.1,428mn (+18% YoY), below our expectations amid below par performance in key sectors, tourism and strategic investments. Earnings adjusted for an impairment provision of ~Rs.400mn in the strategic investments sector for the remaining assets of the non-operational power plants, and excluding ~Rs.391mn insurance income under the tourism sector for property partly damaged by a fire in July 2013 in the Maldives and adjusting for the estimated foregone profit from the damaged villas of Rs.54mn. Consequently, FY14 recurring net profit of Rs.3,735mn (+14% YoY).


Outlook & Valuations:


  • SPEN’s group recurring net profit forecast for FY15E revised down by 5% to Rs.4,010mn (+7% YoY), amidst the downward revision in key tourism sector (~74% of total PAT in FY15E, unchanged YoY). Meanwhile, we forecast a net profit of Rs.4,592mn for FY16E (+15% YoY),  in anticipation of improved contribution from the tourism sector (~76% of total PAT) and growth in the maritime cargo logistics sector (~13% of total PAT)
  • Despite the downward revision in earnings, SPEN trades at a slight discount to most local conglomerate peers at PER multiples of 11.0X FY15E and 9.6X FY16E, offering ROEs of ~12%. Given poor sectoral earnings visibility (excluding tourism) and high volatility attached to the strategic investments sector, SPEN previously required a conglomerate discount, though currently seems primarily a tourism stock
  • SPEN trades at a relative discount to its historic levels and at discount to the hotel sector (sector TTM PER of 19.1X), but broadly on par with leisure subsidiary, Aitken Spence Hotel Holdings (AHUN), though it warrants a premium to AHUN, justified by its superior liquidity levels
  • SPEN’s management with strong expertise in the leisure space is expected to continue exploring opportunities and modifying strategies to drive its key tourism sector, with several big ticker projects also in the pipeline. In addition, SPEN will look at further investments into maritime-related opportunities in the Asia Pacific and African regions going forward leveraging on its experience, with upside from CINEC also boosting the maritime, cargo logistics contribution
  • Medium to longer term investors may seek to accumulate the SPEN share, in anticipation of earnings driven share price appreciation

Aitken Spence Hotel Holdings

AHUN – Rs.79.00 - 7 July 2014 - 4Q14 Results Summary

Quarterly Highlights:


§  4Q14 reported EPS of Rs.3.6 (+29% YoY), supported by higher than anticipated other income which includes insurance proceeds of Rs.370mn received during the quarter for water villas of Adaaran Hudhurunfushi which were partly damaged by a fire in 2Q14. Adjusting for same and AHUN’s foregone profit from damaged villas, 4Q14 recurring NP was Rs.907mn (-5% YoY) and Rs.2,026mn for FY14 (+13% YoY), below our expectations for a NP of Rs.2,121mn (+19% YoY)

  • Sri Lanka segment: Revenue of Rs.1,321mn in 4Q14 (+16% YoY, 30% of total revenue vs. 28% in 4Q13)
    • Resorts & Hotels : Comprising six resorts, revenue of Rs.1,124mn (+16% YoY)
    • Others : (management fees from hotels in Sri Lanka-137 rooms, India-68 and Oman-536; total managed rooms-741); Rs.197mn in 4Q14 (+14% YoY), largely driven by the continued strong performance of managed properties in Oman
  • South Asia segment: Comprising four resorts in the Maldives, revenue of Rs.3,012mn (+2% YoY, 70% of total revenue, vs. 72% in 4Q13)
  • Other operating income of Rs.312mn for 4Q14 (vs. other operating expense of -Rs.12mn for 4Q13). Other operating income in 4Q14 largely comprised of insurance claim proceeds received for loss of operations at Adaaran Hudurunfushi following a fire in 2Q14


Outlook & Valuations:


  • AHUN recurring Net Profit (NP) forecasts revised down by 14% to Rs.2,214mn for FY15E (+9% YoY) largely on account of lower revenue expectations in Sri Lanka segment, with a NP of Rs.2,637mn forecast for FY16E (+19% YoY)
  • Net revenue forecast revised down by 4% to Rs.14,430mn for FY15E (+15% YoY), primariliy due to lower revenue expectations in Sri Lanka segment. Net revenue is forecast at Rs.16,392mn for FY16E (+14% YoY)
  • Medium to longer term investors seeking exposure to a pure tourism play, at relatively inexpensive valuations, may find favour in the share, especially given its superior business model with owned and managed resorts in Sri Lanka and South Asia, offering strong upside growth potential
  • AHUN’s relatively illiquid nature may however be a deterrence to certain investors, who may instead prefer to accumulate conglomerate parent, SPEN, which trades broadly on par with AHUN whilst also offering higher liquidity levels, AHUN’s 2014YTD daily turnover was US$35,423 whilst SPEN was US$147,133. SPEN also now seems primarily a tourism stock, with >75% of group PAT contribution from the tourism sector, to which AHUN contributes >90%
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