Business Times

Construction and manufacturing to drive 2011 stock profits

By Duruthu Edirimuni Chandrasekera

Colombo’s stock market is on a roll. The listed company annual results, which are trickling in and more specifically their last quarter’s profits, have been very much above expectations.

With bullish economic growth expected, analysts say that companies related to construction and manufacturing will continue to report strong results in 2011. “Possibly the next drive on the market will come from these two areas. With these two sectors booming I expect that financial services industry will also grow,” Deshan Pushparajah Manager Corporate Finance, Capital Alliance Holdings Limited told the Business Times.

However, he said that with the level of liquidity prevailing in the market competition will strengthen resulting in reduced margins for listed firms. Overall, analysts expect an average growth in the financial sector.

Analysts say that the exponential rise in profits this year came from two main areas, rubber plantations and the manufacturing sector. On the other hand, the financial services and diversified sectors also saw 40-50% rise in profits year on year. It must be noted though, that the profits from the leisure sector did not come in as high as the market expected them to be, while the appreciating dollar badly affected the export related companies.

Going forward, many analysts say that 2011 is slated to be the year for commodities. “Tea and rubber will continue to do well (the latter more than the former with increasing oil prices driving customers away from synthetic rubber in favour of Sri Lanka’s natural rubber),” Mr. Pushparajah noted, adding that rubber is already at record highs.

He said that the only dampener on the earnings of these companies will come from potential wage hikes expected towards the middle of the year. He also added that the rise in commodity prices will hurt companies which rely on them as raw material. He said that as most of the companies are also involved in exports and with the rupee expected to continue appreciating profits of such value added export companies could be really hurt unless they possess the pricing power to pass some of it onto customers.

Chitra Sathkumara, CEO Ceybank Unit Trust said that Colombo traders are bullish on the hotels, manufacturing and telecom sector medium term earnings. “If credit growth gets better, the banking sector will post profits,” he said, adding that some listed firms seem to be trading at high multiples but expected earnings growth and their sustainability can justify the valuations. He said that a few selected hotels such as Cinnamon Grand and Cinnamon Lakeside are now charging $180+ and having over 80% occupancy which indicates that the ‘best is yet to come’.

He noted that the manufacturing, especially the Tile sector has seen increasing domestic demand. “The 12% mortgage rate is helping people to build more houses and new buildings are coming up. In the telco sector the worst is over, especially the price war and now many telcos are expanding and their margins should improve.”

But he also noted that some speculative trading on a few illiquid stocks have pushed the All Share Index too far during the last few weeks and the market correction seen at present is the cause of this.
When asked about foreign selling being prevalent, Mr. Sathkumara said that it’s not a cause to worry. “So many fund managers are visiting Sri Lanka and they will return,” he added.

Milinda Ratnayaka, Analyst SMB Securities said that leading the way forward this year will be companies with business strategies that can be sustained over the long-term. “Therefore, the investment community will continue to see the use of sustainable investment criteria in Sri Lanka to analyze its impact on a company’s long-term fundamentals,” he said.

He also noted that firms will continue to see sustainable practices as important to investors, while these practices will contribute to long-term gains in revenue and profitability of a company.

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