Copal Amba Country Head puts opportunities in Sri Lankan stock market in context

Friday, 31 January 2014 00:00 - - {{hitsCtrl.values.hits}}

Moody’s new subsidiary Copal Amba Sri Lanka Country Head Chanakya Dissanayake at the Invest Sri Lanka Forum in Singapore put the opportunities in the Colombo stock market in context via a brief yet insightful presentation. He said that valuations at the CSE were attractive from a regional perspective since the All Share Index (ASI) was trading at low valuation in comparison to peers such as India, Indonesia, Philippines and Thailand though Vietnam was much lower. “Overall valuations at CSE are still subdued despite the stronger growth outlook,” Dissanayake added. He also said new investors in Singapore and South East Asia via the CSE had diversification opportunity due to low correlation to global events. He said QE3 tapering led sell-off had had minimal impact on the CSE in comparison to BRIC and other emerging markets. The continuing net inflows to the CSE since 2012 were also emphasised.

The relatively stable exchange rate was highlighted as a strong positive to foreign investors of the Colombo Bourse. This is because Sri Lanka Rupee depreciation was the lowest among regional currencies in 2013, according to Dissanayake. He added that Sri Lanka’s gross official reserves were on the rise whilst Foreign Direct Investments had almost tripled over the past three years. Low inflation and its support to lower interest rate regime and anticipated lower Government borrowing with reforms and profits improving in the public sector were some of the other key reasons highlighted by the Copal Amba Sri Lank Country Head to emphasise that Sri Lankan equities were poised for a re-rating. Dissanayake recalled that in 2009 the primary focus of economic commentary on Sri Lanka was whether the country would be able to achieve sustainable economic growth. Concerns included achieving a high investment yet low inflation economy, achieving a sustainable Government debt trend driven by fiscal consolidation and higher FDI to fund the infrastructure spending. “By end 2013, we have seen investment in major infrastructure to reduce capacity bottlenecks. as well as maintenance of a high investment to GDP ratio whilst restricting inflation to single digit rates over the past five years,” Dissanayake said. “Furthermore, Sri Lanka has attracted FDI to embark on large-scale infrastructure projects whilst debt to GDP ratio has been reduced to 78% in 2013 from 86% in 2009,” he added. Having emphasised the far-reaching positives, Dissanayake also highlighted a few risks facing Sri Lanka and equities. Reversal of global economic growth trajectory especially in key export markets and significant energy price shocks that could reverse the Government’s ability to maintain turnaround in CEB and CP through market price adjustments were two of those. He also cited unfavourable weather patterns that could lead to food price inflation and increase the cost of power generation. Banking/Finance and Conglomerates: Growth sectors Focusing on growth sectors for foreign investors, which he described as “sectors in structurally sweet spots for medium term growth,” Dissanayake picked Banking and Finance and Conglomerates as attractive ones. On Banking and Finance, he said short to medium term growth catalysts were falling into place. His optimism stems from the fact that there was upside potential on Net Interest Margins as interest rates decline, pickup in demand for credit and long term bond portfolios mark-to-market valuation upside due to declining rates. Furthermore, Dissanayake said policy-driven consolidation in the Banking and Finance sector was a long term catalyst since the move should help reduce inefficiencies in the sector, improve sector stability and improve cost to income ratios, providing sustainable support to Return on Equity. He said that the Banking and Finance sector saw Non Performing Loans rise in 2013 but the risks were mitigated by high Capital Adequacy Ratios, provisions and the waning impact of the gold price decrease. It was noted that the impact of the 2013 NPL rise was already factored into current valuations in Banking and Finance sector equities and mid-teen ROEs versus below 2 times Price to Book value make the sector attractive for investors. He said banks were trading at low valuations despite stronger growth outlook. His analysis covered Commercial Bank, HNB, DFCC Bank, Sampath Bank, NDB, NTB and Seylan Bank. With regard to conglomerates, Dissanayake said these companies enjoy multiple growth drivers with transport, logistics and port services being high growth trajectory, leisure brimming with exponential growth owing ambitious targets as well as potential for post-conflict growth in tourism. The Copal Amba Country Head highlighted the attractiveness of JKH (as good as buying the index and emerging as a prime property player in Colombo with integrated resort projects), Aitken Spence (a play on tourism and logistics), CT Holdings (provides exposure to spending growth in the middle class consumers via retail, real estate and food processing), Hayleys (Sri Lanka’s top exporter, earnings growth aligned to recovery in export destinations), Hemas Holdings (a play on healthcare, FMCG, hydro and thermal power and leisure) and Expolanka Holdings (provides exposure to the high growth freight and logistics sector) in the diversified sector.