CT Smith tips stock market’s upward momentum to continue

CT Smith Stockbrokers is expecting the recent upward momentum to broadly continue in the near term in 2013E, and foreign investor participation to be maintained.

“In addition to greater promotion of the Sri Lankan market, renewed interest and infusion of foreign capital into neighbouring markets, especially India, subsequent to sweeping market and economic reforms, is also expected to filter through to the Sri Lankan equity market,” CT Smith said.

The broking firm also expects increased local investor participation to be heavily dependent on the movement of interest rates, with investors largely preferring fixed income in the current high interest rate environment.

In that regard CT Smith said: “We expect the Central Bank of Sri Lanka (CBSL) to however prioritise growth over inflation, and thereby continue to gradually ease its monetary policy. We anticipate further staggered rate cuts in the range of 50-100bps in 2013E, which would likely rekindle local retail investor interest.”

Consequently, also boosted by strategic market transactions as part of corporate restructurings, CT Smith said market may witness a rise in average daily turnover levels from 2012 (Rs. 884 m), though likely would still be below the Rs. 2.2 billion levels seen in the post-conflict boom (2010-2011).

Consequent to tax incentives and proposals introduced in the National Budget 2013, CT Smith also expects a minor revival in Initial Public Offerings (IPOs) in 2H2013E (there were only five IPOs in 2012, raising Rs. 1.4 billion), though corporates will continue to be mindful of liquidity constraints and investor appetite and sentiment.

“Whilst we expect local corporates to face a less challenging operating environment in 2013E vs. 2012, corporates with greater efficiency, productivity, strong and proven management teams would provide superior returns and value to shareholders. Companies with exposure to key growth sectors such as infrastructure, tourism and ports would stand to be at a greater advantage, while selected consumer plays are also expected to do well. Furthermore, in an anticipated lower interest rate environment, the banking and finance sector would be a key beneficiary, while also trading at relatively undemanding valuations,” CT Smith said.

Amidst a forecast earnings growth of 7% YoY, CT estimates the Colombo Bourse to trade at a P/E multiple of 11.1X for 2013E, which is at a discount to the historically rich multiples on which the market has traded.

“Whilst the broader market will continue its path of consolidation, we believe that judicious stock selection will continue to reward investors in 2013, with share prices of key stocks under our coverage such as Ceylon Tobacco Company (CTC, up 76%), Nestle Lanka (NEST, up 69%), and John Keells Holdings (JKH, up 29%) also delivering strong returns in 2012,” CT Smith added.

Broking firm also said the Budget also implemented several measures to promote the underdeveloped financial instruments such as corporate bonds and debentures, which would witness growth in the medium term. Overall, the Government has laid greater emphasis on developing the capital market, and has set an ambitious target to enhance market capitalisation to US$ 70 b in 2016E from the current US$ 17 b (30% of GDP). In light of this development, the Deputy Finance Minister recently stated that the Government is also aiming for the listing of several State-owned enterprises in the future, though no firm details have yet been provided.

A key challenge for the sustainable economic development for Sri Lanka would be stimulating a recovery in GDP growth (it estimates at 7.2% for 2013E, up from 6.3% in 2012E, but down from over 8.0% during 2010-2011), whilst also containing high inflationary pressure (it estimates at 9.7% for 2013E, above the CBSL estimates of 6-7%). Subsequent to corrective measures imposed in 2012 and the Government taking a more cautionary stance, it anticipates the exchange rate to be relatively more stable in 2013E (depreciating at a moderate pace of 2-3%), amidst improved money market liquidity and strengthening of the balance of payments, which would also prove to be reassuring, particularly to foreign investors.

Commenting on the market’s 2012 performance CT Smith said consequent to two spectacular years of gains in 2009-2010 of over 90% annual returns, immediately post conflict-end, the Sri Lankan stock market faced another challenging year in 2012, with the benchmark All Share Index (ASI) of the Colombo Stock Exchange (CSE) closing down -7.1%, after having fallen -8.5% in 2011. The index experienced significant volatility during the year, due to the tightening economic environment and regulatory changes.

However, the market seemed to have regained momentum and stabilized towards year-end, largely driven by high foreign investor participation. Net foreign inflow to the market rose to a record high of Rs. 38.7 b (US$ 304 m), amidst increased foreign holding in fundamentally strong counters, which were attractively priced.

The two strategic foreign deals which stand out were the 8.8% stake purchase of John Keells Holdings (JKH) by Khazanah Nasional Berhad from Sri Lanka’s Employees’ Provident Fund (EPF) in March 2012 for US$ 114 m, and the 19% stake purchase of Asiri Hospital Holdings (ASIR) by Actis for US$ 32 m.

Meanwhile, local investor participation declined, mainly amongst the retail investor base amid sharp declines in more speculative shares, whilst local institutions were largely on the selling side, CT Smith added.