|Monday, 22 November 2004|
HNB Stock brokers weekly market review
Budget 2005 removes tax on share trading profit:
Capital market gains basket of fortunes - HNB Stock brokers
The Capital Market reacted positively to the maiden budget of the UPFA as the markets were offered a mixed basket of fortunes including the removal of the tax on share trading profits in its proposals for 2005, said HNB stock brokers to the Daily News yesterday.
All negative impressions created by parties with vested interests were changed after the budget proposals on Thursday and investor-buying interest was renewed rising the indices significantly, All Share Price Index (ASPI) from 7.2 points on Thursday to 22.4 points and Milanka Price Index (MPI) from 5.0 points to 38.6 points on Friday.
In their weekly market report to the Daily News they said:
The market reacted positively towards the maiden budget of the UPFA government, as the ASPI rose by 22.4 points, on Friday followed by the MPI (Milanka Price Index), which rose by 38.6 points compared to Thursday's closing levels.
The capital markets were offered a mixed basket of fortunes, with the removal of the tax on share trading profits, which was replaced with a 0.2% fee on transaction value.
The ASPI closed the week at 1485.2 points, up by 10 points or 0.68% compared to last weeks closing. Meanwhile, the MPI rose by 0.59% or 12.3 points, to close at 2091.9 points.
Both indices suffered an early setback before recovering towards the latter part of the week with renewed buying interest created by the budget proposals.
The week's total turnover was relatively low, standing at Rs. 664.4 million, resulting in an average daily turnover of Rs. 132.9 million.
On Friday renewed buying interest was observed towards hotel sector counters; where approximately 834,000 Marawila Resort, 680,000 Galadari and 223,000 Reefcomber, counters exchanged hands.
Foreign purchases for the week, totalled to Rs. 42.8 million, while foreign sales for the week, totalled to Rs. 107.9 million, resulting in a net outflow of Rs. 65.1 million. Meanwhile, foreign participation for the week stood at 22.7% of total activity.
Blue Diamond (Rights), Royal Ceramics, CF Venture Funds, Marawila Resorts and Vanik Incorporated were among the most traded stock for the week.
Beyond the Budget
Last week the market sentiment was centered on the Budget proposals of the UPFA government, and the investor's were expecting a range of negative proposals.
However, the budget offered a mixed bag of goods, where the overall outcome was better than our expectation. This we believe managed to lift the investor enthusiasm during Fridays trading.
Removal of the tax on share trading profits and introduction of a 0.2% levy on transaction value, results in mixed fortunes to the investor community.
The share trading tax was connected with series of complications, and was not to the benefit of investors. Furthermore, the administration and the collection of this seemed a difficult task.
While the proposal removes this ambiguity and difficulties, it is payable by all investors irrespective of making capital gains or losses.
However, the tax on share trading profits allowed the set off of capital losses, thus it would have been paid only by the profit making investors.
Nevertheless we believe that the overall impact of this levy would affect positively toward the overall market activity and behaviour in the coming months
Corporate tax rates unchanged
While the direct impact on the market remained positive, the indirect impact through tax on corporate earnings seemed mixed.
The corporate tax rates were unchanged but the effective corporate tax liability is expected to be on the rise, as the government restricted the deduction of some of the previously allowable expenses such as advertising, entertainment, management fees, fuel allowances, foreign travel and VAT on financial services.
Furthermore relief was offered to sectors such as apparel, agriculture and hotels, while other sectors such as banking, imports, motor and food & beverages were affected negatively.
Therefore, we are of the opinion that selected sectors would benefit from the budget, but the overall pressure on their bottom line will be on the rise due to higher tax liability.
While the recent investor focus being directed towards the budget proposals, there has been little reaction towards the developments in the other macro factors.
As highlighted in our latest Strategy report, "Peace, the urgent need of the hour", we believe that the time has come for the government and the LTTE to take the peace process to the next level.
Meanwhile, the global oil prices have taken a breather, as the price per barrel dropped to US$45 last week. However we expect the global oil prices to fluctuate in a wide range of US$ 43 - 60 in the near term.
We expect the indices to remain volatile in the coming weeks with the investors initially reacting positively towards the budget proposals.
However, with the other growing uncertainties in peace and oil markets expected to continue in the short run, we foresee stiff upward resistance in the indices.
Therefore, we envisage profit-taking coupling with positive momentum, creating volatility at the market place.
We would be releasing a detailed Research report on the budget proposals and its impact, early next week titled "Budget 2005: The Impact".
LIOC to enter the market
LIOC will be offering a sum of 100 million shares (with an option to increase by 33.3 million shares in case of an over subscription) to the market by means of an IPO issue.
The issue will open on November 29 and will be at a price range of Rs. 23-Rs. 27. The prospectus and application forms for the issue have already been released on the November 16.
Lanka IOC Ltd. (LIOC), a fully owned subsidiary of Indian Oil Corporation Limited (IOC) started operations in December 2003, after taking over 100 retail fuel outlets from Ceylon Petroleum Corporation (CPC) at an investment of US$30 million.
This assigned LIOC the free hold rights to these outlets, of which most are situated at prime locations throughout the country. Presently, the company's business portfolio includes petrol and diesel products, kerosene, lubricants and furnace oil, for which they claim a market share of 23%.
LIOC plans to venture into new business segments such as fuel bunkering, aviation fuel, LPG and power generation, as part of their diversification strategy. We believe that the company is in a strong position to enter these segments and achieve fast penetration, backed by the parent's strength and its own expertise.
LIOC has already increased the number of outlets to 170, by way of acquiring a further 70 dealer outlets and has gained possession of the 99 storage tanks in China Bay Tank Farm at Trincomalee, on a 35-year lease agreement.
Furthermore, approximately Rs. 500 million of the upcoming IPO proceeds are allocated to set up a lubricant blending plant, at Trincomalee, which is expected to offer cost savings.
While we foresee strong growth in existing operations and LIOC's expansion opportunities, we observe risk factors, such as susceptibility to fluctuations in global oil prices, delays in receiving subsidies from the government, limited control over point-of-sale activity, exposure to the progress in the peace process and policy reforms.
However, considering the parent company's strength, diversification and expertise, we believe that LIOC is well poised to manage these factors and post strong earnings growth.
An upside of 44% in the medium term
Based on a net profit of Rs. 578 million, the fully diluted EPS for FY2004 is at Rs. 1.08, resulting in a PER of 25x, based on the maximum issue price of Rs. 27.00 per share. However, as per the projected earnings growth, the fully diluted EPS for FY2005 is Rs. 3.83, with the forward multiples declining to 7.0x.
We further expect PERs to decline to an attractive 3.3x over the next 3 years. The share is issued at a premium to the book value, but we expect the net assets per share (NAPS) to increase to Rs. 27.07 over the next 3 years, making the issue price more in line with its book value.
Based on a FY2005 PER of 10.1x and EPS growth of 254%, our price target is Rs. 38.79, yielding a potential upside of 44%. Following our outlook for the company to be able to deliver a further 49.6% growth in FY2006, our 2-year target price stands at Rs. 57.96.
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