22nd November 1998
By Mel Gunasekera
The majority stake of the famous Nuwara Eliya landmark, the Grand Hotel may change hands again.
Rumours are afloat that the majority stake holder, Mr. George Ondaatje is may sell 29 per cent of his 32 percent stake in Nuwara Eliya Hotels Company Ltd (NEH), another major shareholder said.
He is said to have indicated a desire to sell part of his shareholding at a recent AGM.
There is speculation in the market that the expected price for the controlling stake is around Rs. 750 per share.
Prior to a rights/bonus issue in 1996, NEH's shares fetched as high as Rs. 3,000, per share, brokers said.
While announcing his decision to sell, Mr. Ondaantje had suggested that Mr. Cornel Perera, another major shareholder should buy the 29 per cent stake.
When contacted Mr. Perera said they were not in a position to buy the stake at present, but he was aware of some Japanese and Hong Kong buyers who have shown an interest.
When asked if Mr. Perera too was interested in selling his 22 per cent stake he said, "if the price is attractive we will certainly consider."
Approximately 89.2 per cent of NEH shares are held by four key shareholders: G L A Ondaatje (Chairman/Managing Director) 32 per cent, DFCC Bank (29 per cent), Cornel Perera (22 per cent), and Sanjeev Gardiner (6.2 per cent).
Mr. Ondaantje also holds the management control of NEH, for which he is paid a management fee of 4 per cent of the gross turnover.
There are speculations that the other shareholders are unhappy with the present management contract. There are also rumours that there seems to be some displeasure between Mr. Ondaatje and DFCC Bank, on various issues.
This is not the first instance that Mr. Ondaatje and DFCC Bank have not seen 'eye to eye', shareholders said. In 1993, DFCC Bank took legal action when Mr. Ondaatje as Managing Director of NEH challenged the legality of a fresh tranche of 20,000 shares issued to the Bank. A spokesman for DFCC said a disgruntled shareholder had misled Mr. Ondaatje and the matter has now been resolved.Mr. Perera said, "If the 29 per cent is sold and irrespective of whether other shares are sold or not, we would be delighted to see the hotel being managed by either Hilton, John Keells, Jetwing Group or Aitken Spence, as they have the capabilities to exploit the hotel's great potential the hotel so transparently possesses."
He added that, "If and when the hotel is operated with the management agreement by an established professional group, the struggle for control will not be important or material." With regards to a new management contract, he said, the board is going to negotiate for highly competitive terms favourable and attractive to the owning company.
The Grand Hotel is one of the oldest hotels in the country and the hotel had originally been a bungalow owned by a former British Governor, Sir Edward Barnes.
NEH reported a net profit before tax of Rs. 22.7 mn for FY'98. This was the first year of operations with the increased number of rooms, subsequent to the commissioning of the new wing in April 1998.
The new 63 room Golf Wing was undertaken by a wholly owned subsidiary Grand Hotel (Pvt.) Ltd., a BOI approved project that enjoys a 5-year tax holiday.
When contacted, Mr. Ondaatje denied he was trying to dispose of his investments in NEH, and said he enjoyed a good relationship with DFCC Bank.
New plan for numbering
The Telecommunication Regulatory Commission (TRC) intends to unveil a new 8-digit numbering system next year, TRC Director General Prof. Rohan Samarajiva said.
The existing numbering system for Sri Lanka Telecom (SLT) contains 6 digits. All mobile operators have 9 digits. The two fixed access wireless local loop (WLL) operators have 9 digits.
However, the entrance of the WLL operators has caused some confusion. Suntel numbers begin with 074, while Lanka Bell numbers begin with 075. This has led to a certain amount of confusion, as people mistook these numbers for cellular numbers.
Furthermore, some people were wary of acquiring a Suntel or Lanka Bell line as they thought they had to pay for their incoming calls as is charged by cellular operators.
This had given an unfair advantage to the dominant carrier SLT. Industry sources say SLT was at times misleading unsuspecting customers to believe that the WLL operators charged for their incoming calls.
Prior to its launch next year, the TRC intends to embark on an islandwide awareness campaign to enlighten the customer on the impending changes.
The new numbering system would also replace the present 9 digit cellular system, where the prefix '0' would be dropped. Customers dialling long distant numbers would also benefit as they will have to dial only 8 digits.
The numbering system would give a wide range of services like toll-free numbers, premium service numbers, number portability (customers can switch operators but keep the same number) etc. Calls to expensive premium numbers could be barred at the customers' request. (MG)
Additional costs kill price gain
The sharp drop in world crude oil prices has not been passed onto local consumers, as the Ceylon Petroleum Corporation (CPC) is using it to meet the heavy operational expenditure, including the maintenance of an expanded workforce of 7,058 in 1998.
Declining prices have also generated additional profits to CPC.
The CPC recorded a profit of Rs. 2.1 bn as against a loss of Rs. 520 mn in the first half of 1997. Hence CPC was able to reduce its bank liabilities by Rs. 1.9 bn in the first half of 1998, a Central Bank publication on the State of the Economy 1998 states.
The average import of crude oil dropped by 27 per cent to US$ 14.23 per barrel in the first half of 1998 compared to the first half of 1997. The net expenditure on all petroleum products declined from US$ 238 mn to US$ 142 mn saving US$ 96 mn to the economy.
The volume of crude oil imports increased by 45 per cent, as the refinery was fully operational during the entire period under consideration while imports of refined products dropped by 46 per cent.
Domestic consumption of petroleum products declined due to a drop in the use of diesel for power generation.
Auto diesel sales declined by 14 per cent while consumption of other petroleum products increased.
Petrol sales rose by 4.8 per cent when compared to a 3 per cent drop in the same period of last year.
The Colombo Stock Exchange (CSE) will introduce a new index known as the Milanka Price Index (MPI), which will replace the present sensitive price index. The base index for MPI will be at 1000 points, and the CSE intends to introduce it with effect from January 4th 1999, CSE Director General, Hiran Mendis said.
The MPI is conducive to the introduction of index based instruments. It mirrors the changes in the ASPI and the issue of liquidity has also been addressed in its construction. Size and liquidity were the selection criteria for constructing the new index.
Size has been measured by market capitalisation as at June 30th 1998 and liquidity has been determined by the number of trades executed over the period January to June 1998, and the trading value (over January to June 1998) as a percentage of the average market capitalisation as at January 1st, March 31st and June 30th 1998.
A CSE study shows the degree of correlation between the ASPI and the MPI is 99.5 per cent, which is indicative of the fact that the MPI reflects market movement, Mr. Mendis said. Twenty-five companies included in the MPI represent 55 per cent of the total market capitalisation and approximately 10 per cent of all the listed companies.
The CSE expects to revise the MPI annually.
The companies in the MPI are as follows: Sampath Bank, NDB, DFCC Bank, Commercial Bank, Hatton National Bank, Asia Capital, Ceylon Cold Stores, Distilleries Company of Sri Lanka, Lion Brewery, Pure Beverages, Ceylon Tobacco, Nestle Lanka, Ceylon Brewery, Colombo Dockyard, John Keells Holdings, Aitken Spence, Hayleys Ltd., Asian Hotels Corporation, Trans Asia, Ceylon Grain Elevators, Richard Peiris & Company, Lanka Lubricants, Watawala Plantations, Maskeliya Plantations and Kelani Valley Plantations.
Tea for Iraq
The tea trade is in a buoyant mood these days, the reason being that Iraq, a major buyer, has responded to our overtures. All these days, Colombo was fighting shy of trading with Baghdad because of UN Sanctions, but now the deadlock has been broken, diplomats say.
Now, the name of the game is for Colombo to "officially" subscribe to the sanctions but to "unofficially" continue with exporting the brew to Iraq, without raising a storm in a tea cup.
Uncle Sam is not pleased, the foreign office says, but it has decided to wait and see without making a noise about it.
Everybody said that the budget touched nobody's lives in any significant way.
Well, that's not true, at least for the motor car trade which is now competing at break-neck speed to lower prices, following tax concessions from the budget. The coming weeks will see many leading automobile dealers slashing prices on the more popular vehicles, we hear....
Then, there is the other 'vital' sector feeling the pinch from the budget - the liquor industry. The market leaders in the 'soft' liquor industry have already announced a price hike.
But the chances are that their rivals will stick to old prices and reduce their profit margins in a bid to grab a bigger share of the market, trade insiders say....
There are signs of an upturn in the glo bal economy. The developed coun tries have accepted the economic crisis in Asia, Latin America and Russia as a global problem and have taken steps to assist these countries.
The United States has responded with a reduction in interest rates and the investor community is gradually moving funds into emerging markets again. The Japanese government has at last taken steps to rehabilitate its financial institutions.
There are signs in East Asian countries of an economic stabilisation and early signs of growth. All these are good signs for the recovery of the global economy. The recovery may come faster than expected.
Despite the Sri Lankan economy having weathered the external shock reasonably well owing to the structure of our exports and a measured response, there appears to be a growing pessimism in business circles that might, in fact, hinder the country taking advantage of the global recovery.
Despite all the turbulences in the international market place, in the first nine months of this year, Sri Lanka's exports grew by 5.6 per cent with agricultural exports growing by 9 per cent and industrial exports rising by 6 per cent.
The latter figure in particular indicates that our exports have been able, by and large, to cope with the external difficulties.
The stock market is considered to be a good indicator of business confidence. The collapse of the market with the All Share Price Index dipping to below 500 and blue chip company shares falling to record low levels, was one of the main factors responsible for generating such pessimism.
The share market too has responded moderately to the global changes. The All Share Price Index has now risen to over 500 and there is evidence of foreign funds once again coming into the market. Therefore what is vitally needed is a new wave of optimism about the likely turn of events in the global economy.
Such an attitude itself would increase our investments, expand economic opportunities and enhance our capacity to grow.
The prevailing view among most businessmen appears to be that 1999 would be a bad year. On that assumption they are cautious and unwilling to take risks.
If their response to the global recovery is delayed, then the Sri Lankan economy may miss opportunities.
Given the intensely competitive nature of international markets and Sri Lanka's high dependence on exports, it is vitally necessary that we gear ourselves to increasing our export capacities and improve our efficiencies to compete in the international market place.
The business community has not been disappointed by the budget. In fact they have generally reacted favourably to the budget. The budget for 1999 has assured a continuity in policy rather than taken a pro-active role.This was to be expected in the economic and financial environment in which the budget was presented. In the same spirit the business community must take steps to be more aggressive in their approach to investment and propel economic growth.
The improving global conditions, the fact that the Sri Lankan economy was not too adversely affected and the fact that the country's institutional, political and social systems are functioning, leads us to expect an economic recovery in Sri Lanka.In the light of this experience the earlier view that the brunt of the global recession would impact in 1999 and that the Sri Lankan economy would face severe problems may not be justified. The unfolding events of the next few months would make it clear as to whether the global recovery would be early and whether we would stand to gain by the emerging global conditions.
The Sri Lankan economy must find the means by which even at a time of global recession, it could survive and grow. Now that a global recovery may be in sight, there is reason to believe that next year could turn out to be a better one than expected. That however depends on our own response to the global recovery.
The Asian currency crisis, the nuclear blasts in the subcontinent and the sanc tions that followed and more recently the Russian crisis had all taken a toll of the Colombo bourse in the last 15 months. In this context, if there is an improvement in the external environment or issues, should not the Colombo bourse be re-rated? says John Keells weekly review on this Colombo bourse. The stockbrokers have done a study on a fair value for the All Share Price Index. We initially looked at the performance of international equity markets, with focus on the region (see table at right) The performance of most Asian markets for the period 30th September 18th November was astounding. The reasons attributed to investor interest in these markets are:
(a) Interest rate reductions by the US Federal Reserve to prop up activity levels in global capital markets with particular focus on Asia. In fact, the last three Federal Reserve monthly releases have seen successive 25 basis point reduction in interest rates in the US. Most analysts expect further rate cuts in the next three months.
(b) US moves to support the Japanese Yen. The Yen, which slipped to 140/US$, strengthened to 116/US$ and currently is valued at approximately 121/US$.
These moves created a substantial fall in Asian interest rates for both short and long term maturities. In fact, an aggregation of Asian interest rates collectively, points them to have reached pre-Asian crisis levels and hence the optimism for sold down equity markets in the region, the report says.
However these measures alone are not adequate to sort out the Asian crisis the report added. On a scale of 1 to 10, if we were at 1 two months ago, we probably are at 3 now, which in turn should be reflected in the Colombo bourse. The current rallies in most Asian markets could only be punctured in the short-term by the US Federal Reserve, being more cautious on interest rate cuts and Yen support, than what the markets have priced them, John Keells brokers say.
More important to the markets in the subcontinent was the partial lifting of sanctions on both India and Pakistan by the United States and the total lifting of sanctions by Japan. The IMF team was in Pakistan last week analysing the monetary requirements of that country and Prime Minister Nawaz Shariff is expected to visit the US by the first week of December to request for a complete lifting of sanctions. All these developments have resulted in the subcontinent markets recovering for the period 1st November - todate (see table below). The US support policies had no effect on the subcontinent markets due to non-convertible capital accounts and the cloud over sanctions.
Based on these facts and figures, the stockbrokers have come up with this fair value analysis. Beginning with by selecting a base index level, which is A1 at which point the index was at 660. Our selection criteria for A1 was based on the following factors:
(a) At level A1, the pessimism due to the Asian crisis was already discounted in the market. It should be noted that the market had fallen 24% (210 points) since it peaked in August 1997.
(b) At this level, the optimism due to high tea prices and excellent corporate results was also not factored in. Since we do not expect corporate earnings growth for FY99 to be as attractive as FY98, we have discounted any market movement due to this optimism.
The large decline from point C due to the nuclear blasts in the subcontinent and the sanctions that followed has also been negated and as such would not be considered in our analysis.
The drop of the index from D to F was due to the Russian crisis. However, the decline from E to F was an oversold scenario. As such, we feel the actual fall due to this crisis was from D to E, which is approximately 80 points.
Though experts in the tea industry view the Russian crisis as not being as serious as one anticipated initially, being conservative we have considered the entirety of this 80-point drop as an inherent issue for the market.We now arrive at our fair value for the All Share Index, which is the base index level of 660 minus the fall due to the Russian crisis of 80 points - 580.
Note - The following could have a material impact on our fair value estimate:
(i) A change in US policy towards Asian markets.
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