Which stocks to focus on? The Arrenga Capital's picks

Arrenga Capital has come up with its list of counters for stock market investors to focus on. Here are excerpts from its report released last week. Please note the share prices quoted were prior to the release of the report.

"With the steep dip the market experienced over the past weeks, most of the counters are now under-priced with attractive valuations. As per our previous reports, we have highlighted that ‘the time to buy is now’. This is clearly visible as many high net worth players have identified this juncture as a point of re-entry.

The steep correction the Sri Lankan stocks underwent is an essential element after its peak of 7,811.82 points in 14.02.2011. Hence, now the market has elevated itself to be attractively valued at a 4Q trailing PER of 18.0X (Vs. 22.7X in February 2011). With the forthcoming earnings season and the strong expectations on corporate performance, we expect the market to be more attractively valued. Consequently, several fundamentally sound counters who had recorded price hikes during the bullish run have now calmed down to attractive prices. The counters below have been picked on the basis of their current valuation and their earnings potential in mind. These would be among the counters which the market will favour as it recovers.

Banks & Finance Sector 4Q Trailing: PER – 12.68X PBV – 2.2X

Sampath Bank [SAMP: Rs. 240.9]

Valuations: With the lacklustre effect of the bourse, the counter has shed nearly 12.8% YTD and now has been spotted as a fundamentally driven counter with strong earnings growth potential. Following the dip in price, SAMP currently trades at a 4Q Trailing PER of 9.3X.

Nations Trust Bank [NTB: Rs. 63.4]

Valuations: The negative market sentiments has led the counter to shed nearly 30.8% YTD. Following the dip in price, NTB currently trades at a 4Q Trailing PER of 11.1X. As a young and dynamic financial institution NTB is expected to grow at an accelerated rate in the coming years depicting strong value potential.

LB Finance [LFIN: Rs. 167]

Valuations : Against this backdrop, we expect LFIN to record net earnings of Rs. 1,468.2 m in FY12E (up 43.9% YoY) and earnings of Rs. 2,120.5 m in FY13E ( up 44.4% YoY). In terms of earnings to price multiple; the counter is valued at 7.8X FY12E earnings and 5.1 X FY13E net profits.

Food & Beverage 4Q Trailing: PER – 13.5X PBV – 4.0X

Lion Brewery [LION: Rs. 200]

Valuations: The current demand scenario of the beer market has created enough room to take in LION’s capacity expansion plans. The company having increased its capacity by 30% in FY11 to around 650,000 hectolitres p.a.; it continues in improving its brewing capacity on an incremental basis with its current operational capacity standing at 750,000 hecolitres p.a.Having the increased tax burden of 40% in mind, we expect LION to report a conservative Rs. 1.2 b in FY12E (up 26.1% YoY). With LION’s expansion plans taking an incremental move where most of the capacity enhancement is to be reflected in FY13 books, we expect LION to make Rs. 1.7 b in FY13E (up 37.5% YoY).Despite the lacklustre effect of the bourse the counter managed to maintain its price level shedding only 6.5% after its low of Rs. 187.80 in January 2011.The counter touched an all-time high of Rs. 256.7 on 18 April 2011. LION currently trades at 12.9X projected FY12E earnings and 9.4X FY13E earnings.

Bairaha Farms Limited [BFL: Rs. 281.8]

Valuations: With investment plans of BFL in mind to further improve efficiency ratios through backward integration moves and as the new broiler operations get consolidated into BFL’s books, we believe BFL to report Rs. 538.3 m in FY12E. Despite BFL’s profit margin being highly exposed to raw material price fluctuations; BFL currently trades at a PER of 8.4X FY12E projected net earnings.

Distilleries Company of Sri Lanka [DIST: Rs. 170.9]

Valuations: The Group has registered a five-year CAGR of 23.1% in net earnings. DIST has proven to be one counter which has preserved its price performance amidst the current dreary market sentiments. The counter has dipped a mere 4.1% YTD with an all-time low of Rs. 168.40 on 2 February 2011.With the market re-rating to an attractive valuation platform, DIST has been recently picked up by the bargain hunters. The counter currently trades at a 4Q Trailing PER of 6.2X. We believe this counter to hold great potential in the periods as the telco arm of DIST, which lagged group’s performance in the earlier periods, also contributing positively to DIST’s bottom line.

Nestle Lanka [NEST: Rs. 735]

Valuations: Dairy products, being the key revenue generating unit of NEST, make up nearly 70% of its top line. With the current global milk powder prices ranging from US$ 3,600-US$ 3,700 (compared to US$ 4,958 in its previous quarter in March), we can expect NEST to be a recipient of this. Furthermore, with the Rs. 10 bn expansion plan of its manufacturing facility in Kurunegala (currently produces circa 90% of NEST’s products) starting from 2011, we can expect to see NEST’s diary arm being further strengthened with the new malted drink plant being already commissioned in April 2011. It now currently trades at a 4Q Trailing PER of 19.5X. NEST would be another strong counter for investors focusing on dividend play.

Chemical & Pharmaceuticals 4Q Trailing: PER – 9.2X PBV – 1.9X

CIC Holdings [CIC.N: Rs. 129.0, CIC.X: Rs. 92.3]

Valuations: Against this backdrop, we expect CIC to record Rs. 1.01 b in FY12E (up by 9.4% YoY) and net earnings of Rs. 1.3 b in FY13E (26.9% YoY growth). CIC (voting) currently trades at 12.1X forecasted FY12E net profit, 9.5X estimated FY13E net profit and 1.8X PBV. CIC non-voting currently trades at 8.6X forecasted FY12E net profit and 6.8X forecasted FY13E net profit. Having touched a peak of Rs. 195.8 (CIC voting), Rs. 137.6 (CIC Non-Voting) on 3 February 2011, the counter has shed by 39.9% and 43.3% respectively.

Diversified Holdings 4Q Trailing: PER – 17.9X PBV – 2.7X

Vallibel One [VONE: Rs. 29]

Valuations: We expect to VONE record net earnings of Rs. 1,938.1 m in FY12E and earnings of Rs. 3,057.9 m in FY13E (up 57.8% YoY). In terms of earnings to price multiple; the share is valued at 14.0X FY12E earnings and 8.9 X FY13E net profits.

Hayleys [HAYL: Rs. 360]

Valuations: Having dipped by 15.3% after its peak of Rs. 424.80 on 18 April 2011, the share currently trades at a 4Q Trailing PER of 37.3X. Despite the share trading over the market PER, we believe this counter to hold great potential in the long term due to its strong diversified exposure coupled with the recent entry of a leading business icon in Hayleys management team.

Hotels & Travels 4Q Trailing: PER – 30.0X PBV – 2.2X

Citrus Leisure [REEF: Rs. 73.40]

Valuations: Having REEF’s plan to add 600 rooms to Sri Lanka’s room inventory in three years time; we have identified it as a long term pick. Following the dull sentiments that prevailed in the bourse, REEF shed nearly 28.3% since its peak of Rs. 102.4 on 1 February 2011. The counter currently trades at a 4Q trailing PER of 178.4X.

Amaya Leisure [CONN: Rs. 109.90]

Valuations: Having CONN’s aggressive investment plan in mind, coupled with the heavy concentration the leisure industry has attracted recently with most of the FDIs focusing on the Lankan tourist sector, we can rate CONN as a strong counter. The counter dipped 15.9% since its peak of Rs. 130.7 in January 2011. The share is currently trading at a 4Q trailing PER of 11.4X.

Manufacturing 4Q Trailing: PER – 16.0X PBV – 2.6X

Royal Ceramics [RCL: Rs. 147.1]

Valuations: We expect RCL to record net earnings of Rs. 2,060.1 m in FY12E (up 41.2% YoY). Having RCL’s expansion plans in improving its capacity, we expect RCL to report Rs. 2,853.2 m in FY13E (up 38.5% YoY).In terms of earnings to price multiple; the share is valued at 7.9X FY12E earnings and 5.7X FY13E net profits. RCL trades at a substantial discount to the manufacturing sector holds strong growth potential. Despite the drastic dip in overall market sentiments, the counter has shed only 7.4% YTD.

Lanka Walltiles [LWL: Rs. 110.5]

Valuations: In terms of earnings to price multiple; the share is valued at 12.6X FY11 earnings. With the drastic dip in overall market sentiments, the counter has shed nearly 30.6% YTD. As the leader in country’s tile manufacturing, LWL holds strong value potential in the medium to long term. Following the dip in price YTD, LWL currently trades at a 4Q Trailing PER of 17.1X.

Motors 4Q Trailing: PER – 11.8X PBV – 4.0X

Diesel & Motor Engineering [DIMO: Rs. 1,306.4]

Valuations: With the lacklustre effect of the bourse, the counter has shed nearly 28.3% since its peak of Rs. 1,822 on 18 February 2011 and now has been spotted as one fundamentally strong counter which has had a rich history to record a three-year CAGR 117.8% in net earnings. Following the dip in price, DIMO currently trades at a 4Q Trailing PER of 5.4X.

United Motors [UML: Rs. 136.5]

Valuations: With the fall in share price by 33.8% since February 2011, the share currently trades at a 4Q Trailing PER of 9.7X. We expect UML’s earnings to take a positive trend in the coming quarters.

Colonial Motors [COLO: Rs. 284.6]

Valuations: With COLO having regained the franchisee agreement for the sale of ‘Land Rover’ vehicles in December 2010; it is expected to contribute to COLO’s profits. Demand for ‘KIA’ also has seen an upward trend with their order books continuing to be heavy. Thus, we believe COLO would post healthy earnings in the coming quarters. Following the fall in share price by 40.0% since its peak of Rs. 474.5 in May 2011, the share currently trades at a 4Q Trailing PER of 10.2X.

Plantations 4Q Trailing: PER – 6.9X PBV – 1.9X

Kotagala Plantations [KOTA: Rs. 123.7]

Valuations: We expect KOTA to record Rs. 570.8 m in FY12E (down 14.6% YoY), net earnings of Rs. 607.8 m in FY13E (6.5% YoY growth). KOTA currently trades at 7.3X forecasted FY12E net profit and 6.8X estimated FY13E net profit.

Kegalle Plantations [KGAL: Rs. 170.5]

Valuations: We expect KGAL to record Rs. 925.0 m in FY12E (up by 10% YoY) and net earnings of Rs. 972.7 m in FY13E (up 5% YoY). KGAL currently trades at 4.6X forecasted FY12E net profit, 4.4X estimated FY13E net profit and 3.0X PBV.

Namunukula Plantations [NAMU: Rs. 104.1]

Valuations: We expect NAMU to record Rs. 484.3 m in FY12E (up by 18.3% YoY) and net earnings of Rs. 568.7 m in FY13E (up 17.4% YoY). NAMU currently trades at 4.9 X forecasted FY2012E net profit, 4.1X estimated FY2013E net profit and 1.7X PBV. With the dip in overall market sentiments, the counter has shed nearly 15.4% YTD.