Sri Lankan listed firms have posted an impressive 170 percent rise in profits in March quarter with gains across almost all major listed firms led by diversified companies, hotels, banks, oil palm companies and telcos’, according to an earnings analysis by stockbrokerage Asia Securities.
The earnings rise comes on the back of 180 percent profit growth in the December quarter 09 compared to the same three month period in 2008, according to Asia Securities a unit of investment bank Asia Capital.
“Going forward we won’t see earnings grow at these high rates but around 35 percent annually in the next couple of years,” says Sanjitha Rajasekaran the Research Manager at Asia Securities. The analysis is based on the reported profits of 220 companies out of the 235 that are listed, some of which hadn’t published their quarterly accounts yet.
“We’re forecasting an earnings multiple of 15.5 times by the end of this year.”
Earnings multiple also called the price-to-earnings ratio (PER), denotes the number of years it would take to recover an investment at the current share price. Based on reported earnings in the last four quarters Asia Securities says the PER is 21 times.
Profits rose across 16 of the 18 sectors in to which listed companies are categorized at the Colombo Stock Exchanges (CSE). Profit declines happened in the Construction and Footwear & textiles sectors where only six out of the 220 firms tracked are listed.
The six firms making up the diversified sector made an impressive 6.3 billion profit, which was 80 percent higher than the 3.5 billion rupees they collectively made in the March quarter of 2009, when the war with the Tamil Tigers was at its peak and economic activity was muted.
The 35 listed banks and other financial firms’ earnings grew 65 percent to 5.6 billion rupees in the March quarter.
Bank shares rose sharply over the last couple of months after stock analysts, including ones at Asia Securities, highlighted they were trading at low multiples compared to their forecast profits.
“There is also this rumor that the 20 percent financial services VAT will be removed by the budget,” adds Rajasekaran. The delayed budget for this year will be presented to parliament on 29 June.
The market is up 8 percent since the government slashed import duties on 1 June. Prices of vehicles, electronic goods and food are expected to decline.
Too hot?
“We were forecasting the market will hit 4600- 5000 levels by year end. Its now at 4,600, if it gets to 5000 in the next couple of months I would advise investors to prune around five percent of their holdings,” according to a equity analyst at a stockbrokerage who requested anonymity due to company policy on speaking to journalists.
However the analyst is optimistic about the longer term.
“We expect 25 percent year-on-year earnings growth over the next 3 years,” says the analyst. Twenty five percent annual profit growths will double the overall earnings of listed companies in three years.
Asia Securities says listed company earnings grew 45 percent to 67 billion rupees in the financial years ending in December 2009 and March 2010. For firms ending their financial year in December 2009, like all the banks and telcos’, the gain was largely due to the turnaround in the last quarter.
Firms with a March 2010 financial year end have benefited form two quarters of high earnings growth.
State controlled firms, pension funds and insurance companies have stepped up investing in stocks this year. Foreign investors are also holing their stakes. JKH, SLT and most banks have significant foreign ownership. Dialog and Chevron are controlled by their foreign parents.
Foreign outflows this year totaled 14 billion rupees by Wednesday which is less than one percent of the 1,500 billion rupee market capitalization of the Colombo stock exchange.
However analysts urge caution.
“Twenty one times is a high trailing PE; historically,” says Rajasekaran, “however the market has moved to a higher plain.”
“Its not the time to take trading positions for the short term,” she adds.
