Corporate

RAM Ratings Lanka reaffirms AFC PLC's ratings at BBB/P2

RAM Ratings Lanka has reaffirmed Alliance Finance Company PLC's (AFC or the Company) respective long and short-term financial institution ratings at BBB and P2; the long-term rating has a stable outlook. The reaffirmation is premised on AFC's moderate financial performance, capitalisation and reputable franchise, but is weighed down by our concerns with regards to the Company's asset quality.

With a track record of nearly 54 years, AFC ranks among the oldest registered finance companies ('RFCs') in Sri Lanka. Despite its long operating history, the Company has remained a medium-sized entity, accounting for only 3.58% of the industry's assets as at end-March 2009. This has been underscored by AFC's conservative growth strategy and prudent management.

On the back of its cautious lending strategy, the Company has traditionally maintained above-industry-average asset quality. In tandem with the less conducive economic climate during the reviewed period, however, AFC had experienced an influx of non-performing loans (NPLs). As such, its gross NPL ratio (on a 6-month classification basis) had deteriorated to 5.84% by the end of FYE 31 March 2009 (FY Mar 2009), from 3.58% a year earlier; the ratio climbed up further to 7.97% as at end-September 2009. While this had been exacerbated by a contraction in its loan portfolio, we note that absolute NPLs had also increased by LKR 64.92 million (or 28.76%) over the same period.

However, the management has taken steps to curb its rising NPLs; lending to sectors that experienced higher delinquencies have been either frozen or curtailed. That said, we remain concerned about the influx of NPLs and will continue monitoring the developments in this regard; downward rating pressure may be exerted in the event that asset quality deteriorates further.

Meanwhile, AFC's financial performance remained moderate, albeit easing marginally in line with higher funding costs and hefty overheads. The Company's pre tax profit ebbed slightly to LKR 70.65 million in FY Mar 2009 (FY Mar 2008: LKR 73.92 million). Consequently, its return on assets ('ROA') dipped from 1.63% to 1.30% as at end-FY Mar 2009, although still better than the industry average of 0.83% as at the same date.

On a separate note, the Company had strengthened its liquidity position during the reviewed period; its statutory liquid-asset ratio advanced to 16.29% as at end-September 2009, from 14.84% as at end-FY Mar 2009. Meanwhile, AFC had maintained the healthy growth of its deposit base, which expanded 34.97% year-on-year ('yoy') to LKR 3.36 billion as at end-FY Mar 2009, before augmenting further to LKR 3.56 billion by end-September 2009.

AFC's tier-1 and overall risk weighted capital-adequacy ratios ('RWCAR') clocked in at 10.56% and 12.94% as at end-September 2009, comfortably above the regulated minimums of 5% and 10%, respectively.

ETI overcomes challenging financial year

In spite of the crisis that affected the Sri Lankan financial services sector, Edirisinghe Trust Investments (ETI) posted tremendous results at the end of the 2009 financial year. The crisis, caused by mismanagement at a number of finance companies and worsened by deteriorating global conditions, was negotiated successfully by ETI because of its commitment to the highest standards of professionalism and quality service.

Beginning in the third quarter of 2008, a liquidity crunch rocked finance companies, including banks, and led to a loss of a public confidence. This, in turn, caused a large scale withdrawal of timed deposits, further compounding finance companies' troubles. The Central Bank intervened in order to control the situation and ETI employees worked round-the-clock to ensure that depositors' funds were secured. Prevailing despite the odds, ETI has emerged from the crisis with a renewed belief in the values that have guided it since its inception.

Other finance companies can trace their difficulties to unethical policies and poor management decisions, including weak organisational structures, lack of oversight, unsustainable expansion, unsuitable employees, improper pricing of products, and imprudent investments. ETI, on the other hand, weathered the financial storm by adhering to core management principles; indeed, the company's impressive financial results are a direct result of its insistence on management oversight, long-term planning, and experienced, ethical employees.

For example, in the financial year that ended on March 31, 2009, the company's net interest income grew 90.4% from Rs. 271 million to Rs. 516 million. As a finance company, ETI is ultimately involved in the buying and selling of cash; net interest income, therefore, is an especially useful indicator of the company's performance. The interest income of its credit business was Rs. 117 million, which was roughly the same as in the previous year, admirable given the tough economic times and the deteriorating leasing and hire purchase market. Pawning, the company's core business, accounts for 60% of its product range; interest income from pawning rose dramatically from Rs. 496 million to Rs. 1.1 billion, a phenomenal increase of 114%.

As the private sector leading in pawning, ETI is hailed for continuing to raise the bar in quality service, expertise, and professionalism. Over a period of 40 years, the company has wisely adopted a slow but steady plan of expansion, a strategy that has been vindicated by the events of the recent past. Indeed, its 41 branches and pawning centres have been modernized with a number of innovations, including the implementation of a high-tech data network that allows for transactions to be processed in three minutes.

The company has opened four new pawning centres in Moneragala, Tissamaharama, Kegalle and Eheliyagoda, giving its customers industry-best service standards and interest rates at a more convenient location.

As ETI looks ahead, its future appears brighter than ever. Economists expect a significant recovery in the leasing and hire purchase market. In addition, the company's property development arm stands to prosper due to recent interest rate cuts that will allow its customers to obtain cheaper housing loans. In spite of the difficulties that affected the financial services sector, ETI continued to upgrade its facilities and quality levels. For example, the company's dedication to superior standards is evident in the renewal of its ISO certifications for its leasing and property development units. Commenting on the way forward, ETI CEO Mr. Mahendra de Silva noted that "'ETI doesn't believe in making a quick buck at the customer's expense. Instead, all our management decisions are taken with the long-term view of improving the lives of our customers. After all, we thrive because of our customers."

Hayleys MGT reports profit

Hayleys MGT Knitting Mills, the Hayleys Group's cotton and synthetic fabric manufacturing business reported a net profit of US$ 1.96 million for the nine months ending 31st December 2009, on a turnover of US$ 37 million.

According to figures released to the Colombo Stock Exchange this week, both turnover and profit declined in the third quarter of the year, when compared to the corresponding period of last year.

Hayleys MGT Jt. Managing Director Bandula Weerasinghe said prices had fallen in the third quarter and volumes had also declined as the company had lost some orders to lower-priced overseas competitors. However, the company has regained the lost orders in the current quarter and expects a better year-end result, he said.

The company achieved a 23 percent drop in its cost of sales though a combination of lower energy costs and lean production practices, Weerasinghe said. However, the drop in prices and volumes and volumes in the third quarter had resulted in a decline of 7 percent in profits to shareholders.

The outlook for the final quarter and the year as a whole would be enhanced by the savings generated by the company's new bio mass steam generator and earnings from the recently acquired state-of-the-art rotary and digital printing facility, Weerasinghe disclosed. A major supplier to top international brands such as Marks & Spencer, Next, Nike, Tesco and Decathlon, Hayleys MGT is the first fabric manufacturer in Sri Lanka to be certified as compliant with the world's most stringent Social Accountability Standard, SA8000. The standard represents a comprehensive and flexible system for the management of ethical workplace conditions throughout global supply chains and assures a humane workplace through respect for workers rights.

Hayleys MGT has a production capacity of 4 million metres of fabric per month as its state-of-the-art plant at Narthupana Estate in the kalutara district. The company is a key supplier of high quality knitted fabric to the Sri Lankan apparel industry and to export markets.

Aitken Spence Q3 Profits up by 14%

Aitken Spence PLC showed a 10 per cent rise in pre-tax profits to Rs 914 million and a 14.3 per cent rise in profit attributable to shareholders to Rs 541 million over the same quarter last year.

Aitken Spence is among Sri Lanka's leading corporate entities with interests in Hotels, Services, Logistic Solutions and Strategic Investments in South Asia, the Middle East and Africa.

The diversified conglomerate reported Rs 2.14 billion as pre-tax profit and Rs 1.3 billion as profit attributable to shareholders for the nine months ended 31st December; an increase of 3.3 per cent and 3.1 per cent respectively over the previous year.

Performance from the Group's resorts in the Maldives which operate as Adaaran Resorts, showed signs of recovery despite being lower than last year. With seven resorts under its portfolio, Aitken Spence is the largest international resort operator in islands, which was sharply affected by a slump in tourist arrivals due to the global recession.

During the quarter under review, Adaaran Prestige Resorts was acclaimed as "The Indian Ocean's Leading Water Villa Group" and Adaaran Prestige Water Villas at Meedhupparu won the award for "The Maldives Leading Water Villas" for the second consecutive year at the World Travel Awards ceremony held in London during the 2009 World Travel Market.

"Increased tourist arrivals due to the end of the armed conflict in the country has improved income from our resorts in Sri Lanka during the quarter. An outstanding rebound in tourism is imminent for the next season. With a focused and robust destination marketing strategy that builds a strong country brand internationally, we believe that the private sector is capable of making tourism a key engine of sustainable economic growth for Sri Lanka", said J M S Brito, Deputy Chairman and Managing Director of Aitken Spence PLC.

Aitken Spence is the largest resort operator in Sri Lanka with nine award-winning properties across the island. The company has announced plans to expand its hospitality portfolio in the island with proposed resorts in the South, North and the East.

Aitken Spence opened the newly-rebranded Heritance Tea Factory in December, which joins Heritance Kandalama, Heritance Ahungalla and Heritance Madurai under the up-market Heritance Hotels and Resorts umbrella.

The company also announced that it will be managing the 130-roomed Ramada Hotel and Convention Centre in New Delhi, which is due to open in March this year.

Aitken Spence currently operates five hotels and resorts in India, including the eco-friendly Barefoot at Havelock in the Andaman Islands.