‘Elpitiya Plantations Firing up the Palm oil Engine’

FIRST CAPITAL RESEARCH – COMPANY REPORT PUBLISHED ON THE ISLAND NEWSPAPER.

elpitiya

Elpitiya Plantations PLC (ELPL) is a listed regional plantation company engaged in Tea, Rubber and Palm oil cultivation. ELPL is expected to grow its earnings at a CAGR of c.36% FY16-FY19E, to c. LKR 500Mn in FY19E. Earnings will grow on the back of Palm oil having segment margin improving and contribution to revenue portfolio increasing. FC Research expect ELPL to provide an annualized return of 46% with a fair value of LKR 27.0 by FY18E. STRONG BUY

Palm oil to drive bottom line growth: ELPL’s top line is expected to grow at a CAGR of c.10%YoY in FY16-FY19E. FC Research expect that performance will be on the back of earnings from Palm oil improving with a CAGR of c.28%YoY. As of FY16 Palm oil contributed 17% to ELPL’s revenue portfolio which FC Research expect to increase to c.27% by FY18E. This growth is on the back of global Palm oil prices moving upward due to expectations of global shortages in supply matching demand and mature palm oil plantations hectarage of ELPL increasing by CAGR of c.13%.

Multiplexing revenues through investments: ELPL has diversified from its principal activities to manufacturing specialty tea Hydro power generation, hotel and adventure park operations through its investments which will create additional revenue streams to ELPL. FC Research expects ELPL to benefit substantially from Elpitiya Dianhong Jin Ya Tea Company (Pvt) Ltd as it will provide an edge to acquire market share in China, 10th largest customer of Ceylon tea and a high growth market, and AEN Palm Oil processing (Pvt) Ltd will provide synergy to ELPL by boosting margins in the segment.

ELPL to provide a return of 46% by FY18E: FC Research estimates ELPL’s fair value at LKR 27.0 (DCF based LKR 30.5, PER based LKR 24.3) providing an annualized return of 46% in FY18E.

Investment risk: Impact from government policy actions in estate worker wage hike and cap on land held by plantations Company is yet to be seen. ELPL is also exposed to the risks of key currency rates’ fluctuations and volatility of product prices.

-First Capital

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Sri Lankan shares rise nearly 0.5 pct in high turnover

FIRST CAPITAL’S SENIOR RESEARCH ANALYST, ATCHUTHAN SRIRANGAN, SPEAKS TO REUTERS.

Sri Lankan shares closed about half a percent higher on Wednesday, recovering from a more than eight-month closing low hit in the previous session, led by blue chips such as John Keells Holdings and Hatton National Bank.

Turnover was 1.73 billion rupees ($11.59 million), more than twice the daily average of 739.5 million rupees for this year. Commercial Bank of Ceylon and Sunshine Holdings accounted for 48.3 percent and 44 percent of the turnover, respectively.

The Colombo stock index finished 0.41 percent higher at 6,228.51, bouncing back from its lowest close since April 6 hit in the prior session. It shed around 2.1 percent in the 10 sessions through Tuesday.

“Blue chips lifted the market. I think it was mostly due to window dressing ahead of the year-end,” said Atchuthan Srirangan, a senior research analyst with First Capital Equities (Pvt) Ltd.

Foreign investors bought a net 16.2 million rupees worth shares on Wednesday, extending the year-to-date net foreign inflows to 627.5 million rupees in equities.

Top conglomerate John Keells rose 1.1 percent, while Hatton National Bank gained 2.65 percent. Commercial Bank of Ceylon closed 2.1 percent higher, while Sunshine ended flat.

($1 = 149.3000 Sri Lankan rupees)

(Reporting by Shihar Aneez; Editing by Subhranshu Sahu)

 

INSIDE SRI LANKA: First Capital Sees LKR Weakening Through 2017

Wire: Bloomberg First Word (BFW) Date: Dec 28 2016 9:32:12

Bloomberg_logo

By Anusha Ondaatjie
(Bloomberg) — Reduced political, economic uncertainty and an external environment supportive of inflows are factors required to amend expected weakness, Dimantha Mathew, head of research at First Capital, writes in report.

* Says foreign reserves dangerously low
* Rupee down 0.1% to 149.65/dollar; USD/LKR’s MACD above zero and signal line
* Yield on 10.75% govt bonds due March 2021 fell 7bps to 12.08% on Dec. 27, data compiled by Bloomberg show, ahead of Wednesday’s govt sale of 11.5b rupees of treasury bills
* Sri Lankan interest rates to be volatile “within 150bps-200bps strip” over Jan.-July 2017: First Capital
* Recommends investing in shorter tenors of debt to counter risk in the system and prevent capital erosion

To contact the reporter on this story:
Anusha Ondaatjie in Colombo at anushao@bloomberg.net
To contact the editors responsible for this story:
Tan Hwee Ann at hatan@bloomberg.net Shikhar Balwani

Strategy Report 2017

Dec 2016 – “Uncertainty provides volatility; Hope in 2H2017”

strategy-report-2017

 

Content Briefing

 

1.0        Track Record…………………………… 3

2.0        GDP Growth Outlook 2017…………………………… 8

3.0        Factors to Consider for 2017 Outlook……………………  11

4.0        Political Uncertainty clouds 1H2017……………………13

5.0        Economic Outlook for 1H2017 Weak: Uncertain………. 15

6.0        External Environment in Unknown Terrain…………… 23

7.0        FC Research Interest Rate View for 2017……………. 25

8.0        FC Research Exchange Rate View for 2017………….  29

9.0        Recommendations…………………………………….31

10.0       Requirements to improve weaknesses……………….33

 

Sri Lankan shares rise after eight sessions of falls in thin trade

FIRST CAPITAL’S SENIOR RESEARCH ANALYST, ATCHUTHAN SRIRANGAN, SPEAKS TO REUTERS.

Sri Lankan shares edged up on Friday, snapping eight straight sessions of falls and moving away from a more than eight-month closing low hit in the previous session, while turnover was low in holiday-thinned trade as investors stayed away from markets ahead of the Christmas weekend.

The Colombo stock index ended 0.11 percent firmer at 6,216.56 after posting its lowest close since April 6 in the previous session. It shed 2 percent in the eight sessions through Thursday, and declined 0.8 percent this week.

Turnover was near a four-week low at 124.9 million rupees ($835,451.51), around a sixth of this year’s daily average of 738 million rupees.

“We may see some window dressings next week, which might help the index move up,” said Atchuthan Srirangan, a senior research analyst with First Capital Equities (Pvt) Ltd.

Sri Lankan markets will be closed on Monday for a bank holiday in lieu of Christmas on Sunday.   Foreign investors, who have been net buyers of 621.5 million rupees of equities, sold a net 4.2 million rupees of shares on Friday.

Cargills (Ceylon) Plc and top conglomerate John Keells Holdings Plc accounted for 59 percent of the day’s turnover.  Cargills shares gained 2.9 percent, while Hatton National Bank Plc rose 1.1 percent to boost the overall index. John Keells, however, fell 0.14 percent.

($1 = 149.5000 Sri Lankan rupees)

(Reporting by Shihar Aneez; Editing by Subhranshu Sahu)

 

Watawala Plantations – Initiating Coverage – STRONG BUY

FIRST CAPITAL RESEARCH – COMPANY REPORT

Watawala Plantations PLC (WATA) is primarily engaged in tea and palm oil cultivation.   We initiate coverage on WATA at a time where the company has made a strategic move to dairy farming while adapting a “quality driven” strategy for tea having discontinued rubber.

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On the back of rising prices and yields in the palm oil segment which is the major enzyme of its profitability, WATA is expected to grow its earnings at a CAGR of 31% during FY16-19E, despite the headwinds from wage hike.  FC Research estimates a fair value of LKR 30.0 giving a total annualized return of 53% in FY18E. STRONG BUY

 Oil palms shelter the bottom line: With the rising global palm oil prices and increasing yields at WATA’s palm oil nurseries, we expect palm oils to contribute significantly to the bottom-line.  This we believe will completely offset the impact of recent wage hike which is estimated to be ~LKR 230Mn.
Palm oil prices are expected to increase in close correlations to the rising crude oil prices. WATA is the largest palm oil planter in the sector with 3,157 hectares of palm oil of which 76% is mature where the yields are peaking.  As ~756 hectares foster young plants with expectations to add ~200 more, we expect the yields to increase going forward.  Palm oils generated ~55% of gross margins in FY16 which could be seen improving to ~70% in 1HFY17.

 Strategic focus nurtures future profitability: The Company adapted a “quality driven” strategy for tea, where they will produce less quantities for a superior standard.  Moving away from quantities brings down the losses incurred in the tea segment, which is struggling with ever rising wage and utility costs that makes it difficult to sustain margins in a price-sensitive global market. Similarly WATA completely stopped its Rubber processing,
putting a full stop to losses from the segment while converting them to palm oil.  Further, they made an important strategic move to Dairy Farming which is expected to have a sizeable under-tapped demand.

 WATA to provide a return of 53% by FY18E: FC Research estimates WATA’s fair value at LKR 30.0 (DCF based LKR 30.0, PER based LKR 29.0) providing an annualized return of 53% in FY18E.

 Investment risks: Extreme weather conditions, changing political and social landscape, pressure on costs from continuous wage demands and rising utility costs and difficulty of sourcing land for palm oil cultivations limiting further expansion are some of the risks WATA faces.

Sri Lankan shares fall to over 8-month low; Seylan deal weighs

FIRST CAPITAL’S HEAD OF RESEARCH, DIMANTHA MATHEW, SPEAKS TO REUTERS.

Sri Lankan shares fell for a sixth straight session on Tuesday to hit its lowest in more than eight month led by financials as a Seylan Bank share deal cancellation weighed on sentiment.

Stockbrokers said the Colombo Stock Exchange cancelled the 1.3 billion rupees ($8.7 million) Seylan Bank foreign deal on the request of the broker with the consent of both buyer and seller.

Prime Minister Ranil Wickremesinghe ordered a reversal and a probe into the deal as it failed to follow proper procedure.

The Colombo stock index fell 0.45 percent to hit 6,222.33, its intraday lowest since April 8, but recovered to close 0.25 percent weaker at 6,234.75, its lowest close since Nov. 29. The bourse has fallen near 1.7 percent in six straight sessions through Tuesday.

“The market trading was quiet. We expect the turnover levels to fall further. The next supporting level is at 6,000. We expect the index to fall in thin trade,” said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.

Dealers said the cancellation of Seylan Bank has hurt the sentiment of potential foreign buyers.

Turnover stood at 537.6 million rupees ($3.61 million), less than this year’s daily average of around 744.7 million rupees.

 

Foreign investors bought a net 80.3 million rupees worth of shares on Monday, extending the year-to-date net foreign inflow to 697.5 million rupees worth of equities.

Shares in top private lender Commercial bank of Ceylon lost 1.53 percent, while Hatton National Bank fell 1.87 percent to drag down the overall index.

($1 = 148.7500 Sri Lankan rupees)

(Reporting by Shihar Aneez)

 

TOKYO CEMENT COMPANY – Earnings Update “Defining the Indistinctive Leadership” – STRONG BUY

FIRST CAPITAL RESEARCH – COMPANY REPORT

Earnings Performance –

Earnings up by 118% YoY: TKYO’s earnings for the 2QFY17 was recorded at LKR 1.1Bn oppose to LKR 490Mn recorded in comparative quarter in FY16 registering a 118%YoY. On a QoQ basis the earnings saw a 66% growth compared to LKR 644Mn recorded in 1QFY17. During the 1HFY17, TKYO generated an earnings of LKR 1.7Bn as opposed to LKR 956Mn recorded in 1HFY16 registering an impressive YoY growth of 79%.

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tokyo-cement-company-lanka-plc1

 

Revenue generation grows by 24%YoY: Resultant to the boom in the construction sector coupled with the company’s investment into capacity enhancement to reach total plant capacity to 2.8Mn MT that’s coming into effect towards the latter part of the year 2016, topline was recorded at LKR 9.8Bn during the 2QFY17 with a 24%YoY growth in comparison to LKR 8Bn recorded in 2QFY16 while on a QoQ basis the same was recorded a growth of 30% as opposed to LKR 7.6Bn recorded in 1QFY17. During the 1HFY17 the topline was recorded at LKR 17.4Bn with a YoY growth of LKR 14.9Bn during 1HFY16. LKR 60.0 increase in Maximum Retail Price (MRP) to LKR 930.0 per 50kg of cement bag towards the latter part of the 1H2016 also impacted favourably on the revenue.

Future Outlook

Boom in construction sector led by Government led Infrastructure projects: With the recommencement of the construction of the Government led Infrastructure projects coupled with the Port City project and the initiation of the Western Region Megapolis development project undertaken by the government are likely to lead to a boom in the overall construction sector which is expected to boost the volumes of TKYO which in turn would increase the topline. TKYO revenue is expected to reach c.LKR 34.8Bn in FY17E registering a 15%YoY growth while the same for FY18E expected to reach c.LKR 40.8Bn.

Capital investments to increase volume and improve margins: Investment of USD 50Mn in construction of a new cement manufacturing plant in Trincomalee is expected to add 1.0Mn metric ton enhancing the overall capacity to 2.8Mn metric ton per annum. This would enable TKYO to increase volume thus benefit from the boom created in the industry. Further, newly built 8MW biomass plant would enable to meet the energy requirement of the increase capacity. These investments are expected to increase cost efficiencies and improve the GP margin to c.24% and c.25% in FY17E and FY18E respectively. TKYO invested USD 2Mn investment in a Joint Venture to manufacture 300,000 MT of sand per annum locally which would bring down the cost further.

Recommendation

Total return of 32% for both TKYO.N and TKYO.X: FC recommends a STRONG BUY on TKYO.N with a fair value of LKR 86.0 [LKR 87.3 on DCF based and LKR 85.0 on PER based] providing a total return of 32% and STRONG BUY on TKYO.X with a fair value of LKR 69.0 providing a total return of 32% for FY18E. For FY17E we expect a fair value of LKR 78.0 on TKYO.N while LKR 62.0 for TKYO.X.

Sri Lankan shares hit more than 2-wk closing low led by banks

FIRST CAPITAL’S HEAD OF RESEARCH, DIMANTHA MATHEW, SPEAKS TO REUTERS.

Sri Lankan shares fell for a third straight session on Friday to close at their lowest in more than two weeks, as a dollar rally to a 14-year peak after an interest rate increase by the U.S. Federal Reserve earlier this week kept investors subdued.

The 25-basis-point rate increase could hike borrowing costs of foreign capital for Sri Lanka and force the coalition government to borrow locally at higher interest rates, which could also result in movement of money from equities, analysts said.

The Fed also signalled a faster pace of increases in 2017, partly as a result of changes anticipated under a Donald Trump presidency, with the U.S. central bank hinting at three rate hikes next year instead of the two foreseen as of September.

The Colombo stock index ended 0.27 percent weaker at 6,268.61, its lowest close since Nov. 30. The bourse fell 0.88 percent for the week, its second weekly fall.

A block deal in Seylan Bank Plc boosted turnover, with dealers saying state-owned Bank of Ceylon sold 13 million shares to a foreign investor.

“A sizeable crossing of Seylan Bank boosted the turnover. Other than the Seylan trade, there was nothing. The market is getting slower by the day with the holiday mood,” said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.

Shares of Seylan Bank Plc ended steady, while Lanka ORIX Leasing Company Plc fell 4.49 percent and conglomerate John Keells Holdings Plc lost 1.14 percent.

Sri Lanka Telecom Plc dropped 2.61 percent, while Commercial Leasing and Finance Plc fell 5.88 percent.

Turnover stood at 1.86 billion rupees ($12.51 million), well above this year’s daily average of 753.4 million rupees.

 

Foreign investors bought a net 1.35 billion rupees worth of shares on Friday, extending the year-to-date net foreign inflow to 1.87 billion rupees worth of equities.

($1 = 148.6500 Sri Lankan rupees)

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

 

Sri Lankan shares hit more than 2-wk closing low; Fed rate hike weighs

FIRST CAPITAL’S HEAD OF RESEARCH, DIMANTHA MATHEW, SPEAKS TO REUTERS.

Sri Lankan shares fell in line with regional bourses to close at their lowest in more than two weeks on Thursday, as a 25-basis-point interest rate increase by the U.S. Federal Reserve and hints of more to come next year kept investors on tenterhooks.

The Fed signalled a faster pace of increases in 2017 as central bankers adapted to incoming President Donald Trump’s promises of tax cuts, spending and deregulation. Partly as a result of the changes anticipated under Trump, the Fed sees three rate hikes next year instead of the two foreseen as of September.

The Colombo stock index ended 0.21 percent weaker at 6,285.53, its lowest close since Nov. 30.

“Market was on a very slow downtrend,” said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.

“Bond and equity markets have adjusted for the Fed rate hike. We have seen outflows in the last three months. But going forward, we may go into a period of economic and political uncertainty because of a large number of bonds maturing in the first half on 2017 and local elections, plus a referendum coming up next year.”

The rate hike could increase borrowing costs of foreign capital for Sri Lanka and force the coalition government to borrow locally at higher interest rates, which could also see some outward movement of money from equities, analysts said.

The government is considering a change in the country’s constitution next year which requires a referendum.

The two main parties in the coalition government are expected to contest separately in the upcoming local government election, which the administration of President Maithripala Sirisena has postponed since mid-2015 citing delays in a new electoral process.

Foreign investors bought a net 44.7 million rupees ($301,213) worth of shares on Thursday, with the year-to-date net foreign inflow in shares declining to 514.7 million rupees.

 

Turnover was 361.8 million rupees, less than half this year’s daily average of 749 million rupees.

Shares of John Keells Holdings Plc fell 2 percent, while top mobile phone operator Dialog Axiata lost 1.9 percent.

($1 = 148.4000 Sri Lankan rupees)

(Reporting by Shihar Aneez; Editing by Biju Dwarakanath)