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23rd August 1998

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Mind your Business

By Business Bug


One cellular phone company recently changed its links and is now in the hands of different owners.

The new bosses have revived operations and called for a complete overhaul of the network's day-to-day affairs.

Flight into Storm

The new bosses at the Bird of Paradise have run into stormy weather.

They planned to close flights to certain destinations, claiming the routes were not profitable enough. But senior executives disagree and say some of the routes make good money. And, with the bosses also managing another bird in the desert there were claims of conflict of interest.

CSE gears for a new look

By Mel Gunasekera

The Colombo Stock Exchange (CSE) is in the process of fine tuning their 'Blue Chip' index, CSE officials said.

The Sensitive Index, which carries a basket of 25 blue chip companies, is handpicked on selected criteria, which the CSE is in the process of reviewing and revising, they said.

East Asian models from developed markets like Hong Kong, and Kuala Lumpur, are being used as guidelines to change the criteria to formulate the revised index, CSE sources added.

The index was last revised in 1994, but the CSE feels a revision on a yearly basis would be more appropriate.

The existing criteria include market capitalisation , healthy P/E ratios, liquidity and returns. The selected companies also have to comply with the CSE's listing rules.

The changes have not been finalised yet, CSE Director General, Hiran Mendis said. "We should have it ready by end September/October."

The CSE is also in the process of formulating a set of regulations to list debt. Preliminary studies done by the CSE indicate, a high potential for the development of the debt market, provided that a listing can be granted to companies, independent of a listing for equity.

It is understood that the draft regulations by the CSE, which were sent to the Securities and Exchange Commission (SEC), have been returned to them with some recommendations.

In the absence of a rating agency, the CSE intends to amend its rules to encourage debt market activity.

Under the proposed amendments, unlisted companies could seek a listing provided they obtain a backup credit line or a guarantee from a regulated financial institution for the payment of capital and interest of the securities being listed.

Or else, companies can enter into an agreement with a regulated financial institution to act as a market maker for the securities being listed.

This strategy will also provide an incentive to financial institutions to encourage their clients to list debt instruments, since they will be able to effectively diversify their portfolio risk and raise funds in the market.

The CSE hopes to bring in the changes by year-end, Mr. Mendis said.

The CSE's listing rules are also being reviewed. The SEC has gone through the draft and made suggestions to the changes. Once these necessary changes are made, they would once again be sent to the SEC, before being issued to the public.

The present CSE listing rules have been modelled on the rules of the Kuala Lumpur Stock Exchange.

The amendments to the CSE's listing rules are expected to make it more relevant and user-friendly.

TA buyer scrutinised

A leading apparel manufacturing group has indicated its willingness to buy the troubled broking firm imageTA Securities Lanka (Pvt.) Ltd., which was up for sale recently. The Malaysian and local partners of the broking firm have signed an MOU with the prospective buyer, a top company official said.

imageHowever, the sale has not been finalised yet, as the Colombo Stock Exchange (CSE) is yet to give their approval for the prospective owner, the official added.

Market sources said that the prospective buyer's application for a licence has been rejected by the CSE, because of their lack of experience in stock broking operations. The buyer who is operating imageunder the name Almas Organisation is said to have appealed against the CSE's decision, but there are ave doubts about their eligibility, as they do not have a proven track record, market sources said.

The broking licence itself costs around Rs. 50 mn and with the bourse on a bearish trend, brokers have expressed doubt as to whether anyone else would be willing to invest in an existing broking firm.

The Malaysian partner had indicated his willingness to dispose of his shares following the East Asian crisis and a weakening Malaysian economy. A company official said the Malaysian partner was keen to dispose his non-performing overseas assets.

GDP - think again?

A leading research firm has downgraded their GDP forecasts for 1998 from 5.4 per cent to a range imageof 4.8 per cent - 5.0 per cent, due to slow economic environment prevailing at present.

Forecasts for 1999 have also been downgraded from 5.6 per cent to 5.2 per cent, a recent Jardine Fleming report states.

The first quarter '98 data issued by the Central Bank recently, has shown a higher than expected growth of 5.8 per cent on a year-on-year (YoY) basis.

Agriculture output was depressed during this period largely as a result of poor rice production due to the 1996 drought, the report said. The manufacturing sector performed well in first quarter '97, as manufacturing was depressed in first quarter 1996 due to power cuts. Consequently manufacturing output in first quarter 1998 was down (YoY), they said.

The release of the quarterly data has important consequences for our GDP growth forecasts in 1998, JF says. A GDP growth figure of 4.4 per cent YoY in first quarter '97, means that the economy would have grown by a minimum of 7.7 per cent YoY in the subsequent quarters, in order to achieve a full year growth of 6.4 per cent YoY.

This means, that for the economy to reach our annual growth forecasts of 5.4 per cent in 1998, the economy would have to grow a minimum of 5.2 per cent YoY over second to fourth quarter '98, the broking firm argues.

Such a growth rate on a base of 7 per cent is highly improbable, particularly in a slowing economic environment. Existing evidence does not support this either.

Central Finance buys Balangoda in surprise move

Central Finance Company Ltd., has acquired a 19 per cent stake in Balangoda Plantations Ltd for Rs. 153.9 mn, market sources said.

The Public Enterprise Reform Commission (PERC) announced the sale last week, without disclosing the identity of the buyer. The market was merely informed that the buyer looked at the Balangoda acquisition as a 'strategic investment', market sources said.

The stake comprising 3.8 mn shares was sold at Rs. 40.50 on an all-or-nothing basis on the Colombo Stock Exchange (CSE), where the scrip was trading at Rs. 38.25 per share.

Central Finance submitted its bid through their brokers Forbes ABN Amro Securities (Pvt.) Ltd. Eyebrows were raised at Central Finance's choice of the broker, as they did not opt to bid through John Keells Stockbrokers. Central Finance is at present working closely with the John Keells management to set-up its own bank.

Distilleries Corporation of Sri Lanka owns the controlling 51 per cent of Balangoda Plantations.

PERC said it was pleased with the price, given the overall depressed market conditions. "This speaks well for the future of the plantation sector on the CSE, where there has been a downturn more due to the Asian crisis, rather than any local consideration," PERC Director General Mano Tittawella said in a media release.

Though the ASPI has shown a bearish trend, the plantation sector index has declined by about 7.7 per cent a PERC release said.

Led by tea prices that are seen remaining healthy for the rest of the year, the sector is expected to continue to show growth.

In 1995, the government began privatising ownership of the 21 Regional Plantation Companies (RPC's) which have leasehold rights to the country's tea and rubber estates, by selling 51 per cent to a strategic investor, 20 per cent to the public, gifting 10 per cent to employees and retaining 19 per cent.

It began divesting the 19 per cent stakes and retaining the 'golden' share in the privatised plantation companies in 1996. Of the 12 plantation firms listed on the CSE, to date, the government has sold 19 per cent stakes in 8 RPC's and raised revenue of about Rs. 1.2 bn.

Seylan rescues ailing Tri Star

The ailing apparel giant, Tri Star Apparel Exports (Pte.) Ltd., has secured a US$ 20 mn loan from an Australian financial institution to repay amounts due to a consortium of Sri Lankan banks. The loan was negotiated at a 6 per cent interest and would be guaranteed by Seylan Bank, Tri Star Chief, Kumar Dewapura told 'The Sunday Times Business'.

A consortium of banks, comprising Bank of Ceylon, People's' Bank, Sampath Bank and Hatton National Bank came forward to assist Tri Star with a loan of US$ 7.5 mn at 9.3 1/4 interest last year. The balance due on this loan is around US$ 6.2 mn.

While refusing to comment on the speculation that Seylan Bank has bought into the management of Tri Star, to bring some professional management into the group, Mr. Dewapura said: "We are in the process of slimming and consolidating our group, we should see some changes in the future."

Tri Star went into financial difficulty after its British partner S R Gent temporarily suspended orders till the company completed its re-organisation process. Meanwhile, the UK partners of S R Gent sold its stake to an Indonesian firm.

Mr. Dewapura confirmed the management buyout process was nearly completed, and the name of the new Indonesian buyer would be announced soon.

As part of the re-structuring programme, the BOI recommended that Tri Star dispose 12 of its factories. Recommendations were made to the Textile Quota Board (TQB) to restore quotas to these factories under new ownership.

The TQB then restored 25 per cent of the quota allocation in May, on condition that the 12 factories would be disposed by the end of August. However, 'Business Times' learns that Tri Star is yet to find a suitable buyer. The asking price is said to be around US$ 1 mn.

If the factories fail to attract a buyer, the TQB would withdraw quotas as scheduled. Mr. Dewapura said the company was negotiating with 6 or 7 parties, but they are yet to receive a good price. "We can't sell our investment for a song."

Industrial exports grow in poor global conditions

The latest statistics released by the Central Bank indicate an improve- ment in Sri Lanka's export performance. There was considerable anxiety that the devaluation of currencies in other Asian countries would affect our exports, especially our industrial exports.

There was some evidence of this in the export statistics for the first five months of this year. The situation appears to have changed in June this year when industrial exports grew more rapidly.

There are also unconfirmed reports that this trend has continued into July as well. At the end of May, industrial export growth was restricted to only 5.2 per cent compared to the corresponding period in the previous year. The six monthly export figures however indicate an upsurge, with industrial export growth rising to 7 per cent.

In the single month of June this year, industrial exports amounted to US$ 273mn. Garment exports continued its increase to register an increase of 12 per cent over the first half of 1997.

The category of 'other' industrial exports, which caused some anxiety with a decline of as much as 25 per cent in the first 5 months, had improved its performance with an export value of US$ 46mn. thereby reducing the decline in export of this category to around 23 per cent

It is also heartening to note that leather and rubber goods exports registered a rise of 9.8 per cent. This was a category which caused considerable concern owing to competitive devaluation of South-East Asian currencies which are some of the largest producers and exporters of rubber and rubber goods.

We certainly hope that the improvement in industrial exports in June would be a trend and an indication of better export performance of our industrial goods. It is worthwhile understanding the reasons why our industrial export sector, or more precisely which industries were resilient and able to cope with the unfavourable global conditions and which was unable to cope with them.

It is true that Sri Lanka's rupee also depreciated during this period but its depreciation was much less than many of our competitors. This implies that in several areas of industrial activity, Sri Lanka retains her competitiveness not entirely on prices but other factors such as quality of products, reliability of delivery and catering to specialised markets.

While this improved performance should make us investigate in some depth the strengths of our industrial export sector, it is equally important that we look at the weaknesses and vulnerability of some of our industrial exports.

External conditions are likely to fluctuate between being favourable and unfavourable and the country's industrial structure and its productivity must be able to cope with the kind of turbulence we have faced recently.

Meanwhile our agricultural export growth has been healthy. This has been mainly due to increased production of tea and improved prices coupled with a favourable international market.

In the first six months of this year tea production grew by 4 per cent and international prices at the end of June this year was about 2 per cent higher than in last June. Consequently tea export incomes rose and contributed almost entirely to the 17 per cent increase in agricultural export value.

These developments in agricultural and industrial exports point to an important lesson for Sri Lanka's future export strategy. There was a time when Sri Lanka rested on the three exports of tea, rubber and coconut for over 90 per cent of its export income. When production and prices of these commodities were high the country prospered.

When prices fell or production dropped or both declined, the economy had to take a very serious beating. Today's diversified export structure is healthier.

Such diversification in exports should not be confined to a balance between agriculture and industry, but should also include a diversification among these categories, particularly industrial exports.

We still continue to have a high reliance on garment exports. While we must continue to expand this sector in those lines of garment production where we can compete with other producers, other industrial exports, particularly higher value added exports, must be encouraged in order to develop a much needed diversification in our industrial exports.

The latest export statistics are indeed encouraging and the business community must look at them and gain a degree of confidence in the country coping with the adverse global developments beyond our control.

Perhaps the worst is over and we could expect the Sri Lankan economy to continue its upward march without being unduly affected by the adverse developments in other Asian countries.

May be that 1998 will not turn out to be as unfavourable as predicted owing to the gloomy global conditions. If that is so, Sri Lanka's economy would have attained a remarkable stability, resilience and capacity for growth under difficult circumstances.

More Business * Snap devaluation - now or never? * UN wants to see Lanka competitive * Management buy outs and role of the venture capitalist * AIS takes over from TIPS * Two extensions from Eagle *

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