CORPORATE

Fitch upgrades People’s Leasing Finance to BBB (lka)

Fitch Ratings has upgraded Sri Lanka’s People’s Leasing Finance Plc’s (PLF) National Long-term rating to ‘BBB(lka)’ from ‘BBB-(lka)’. The Outlook is Stable.

The upgrade reflects Fitch’s view that support from its parent, People’s Leasing Company Limited (PLC, ‘A(lka)’/Stable, a 93 percent ownership), is more likely to be available than in the past. This is in turn premised on the agency’s view that PLC’s stand-alone financial strength has improved over the past 12 months. Unlike PLC, PLF is licensed to mobilise public deposits, and therefore helps to diversify PLC group’s funding base and reduce cost of funds.

PLC also channels Islamic lending products via PLF, broadening the group’s lending portfolio. The ratings could be upgraded if there is a greater operational integration between PLC and PLF, or an increase in PLF’s strategic importance to the PLC group measured by the proportion of deposit-funded group-assets — while maintaining healthy asset quality and profitability. Conversely, a weakening of PLC’s stand-alone financial position, or a perceived waning of PLF’s strategic importance to PLC, could result in a downgrade of PLF’s rating.

PLF’s gross advances grew by 68 percent in the six months ended September 2010 (6mFY11), driven by renewed marketing efforts amid improving economic activity. At end-6mFY11, PLF’s advances consisted of lease and hire purchase contracts (76 percent) and sundry loans (24 percent), which are predominantly used for financing motor vehicles. Fitch notes that on 49 percent of its sundry loans, the company would need to resort to legal recourse for the ultimate recovery of the asset, and is therefore more risky. To reduce this risk, PLF maintains that such products are generally disbursed selectively to customers with good repayment records.

PLF’s NPLs, at the regulatory six-month arrears level, have broadly remained stable in absolute terms between December 2008 and September 2010. Gross six-month NPLs reduced to 5.7 percent of gross advances, from 11.3 percent, on the back of strong loan growth during the above period. Fitch expects PLC’s strong operational influence to continue to strengthen PLF’s risk management processes and controls. However, any compromise in lending standards amid the current high loan growth could weaken asset quality over the medium-term, as the portfolio seasons.

PLF’s deposit growth outpaced loans in 6mFY11 (+75 percent). The company’s average interest cost has reduced in line with market interest rates, while the average premium offered on deposit rates has narrowed compared to larger competitors’, and is indicative of its improving deposit franchise. At end-6mFY11, PLF’s deposits funded 6 percent of PLC group’s assets(end-March 2010:5 percent).

TFC share issue oversubscribed

The Finance Company’s share issue launched on January 21 was fully subscribed on January 27 with very good participation from institutional investors and high net-worth individuals.

In an endeavour to re-capitalise the organisation, The Finance Company issued 40,000,000 ordinary voting shares at Rs. 40 per share. Through this share issue the Company plans to raise Rs. 1.6 billion in capital.

The Finance Company has achieved stability and sustainable growth during the past two years under the guidance of the Central Bank of Sri Lanka and the managing agents of the company, the Merchant Bank of Sri Lanka, which is a fully owned subsidiary of Bank of Ceylon.

Director/Chief Executive Officer of The Finance Company Kamal Yatawara said “Our organisation is certainly showing steady growth and stability.

The over subscription of the share issue as well as the new deposit intake of over Rs. 300 million during this month are clear indicators of the people’s confidence in the organisation.

With adequate capital for normal business activities resulting from the share issue as well as the new deposit inflow, the Company would be striving to acquire a large stake of the market in the areas of hire purchase and pawning.

Yatawara also thanked the customers and said that they were a strong force behind the Company’s current success.

Haycarb reports pre-tax profit of Rs. 548 million at 9 months

Haycarb PLC, the Hayleys Group’s value-added activated carbon manufacturer, has reported a pre-tax profit of Rs 548.4 million for the nine months ending December 31, on a consolidated turnover of Rs 4.7 billion.

Group turnover improved by a healthy 27 percent over the corresponding period of last year, due to the strong demand for activated carbon and maximum capacity utilisation in the nine months reviewed.

However, the net profit of Haycarb’s Sri Lankan operations for the third quarter reflected a decline of 17 percent over the corresponding quarter, principally as a result of higher charcoal prices and the appreciation of the local currency against the US Dollar, the company said. Due to the acute shortage of charcoal locally the company was compelled to import 55 percent of its total requirement.

Profit attributable to equity holders of the company recorded a nominal growth to Rs 393.9 million for the period. “The continuing increase of charcoal purchase prices could not be passed on to customers, and exerted significant pressure on our bottom line,” Haycarb Managing Director Rajitha Kariyawasan said.

“However, the strong performance of overseas subsidiaries, maximisation of throughput and our focus on value added products enabled the company to mitigate this exposure to some extent.”

He further said that the significant appreciation of local currencies in Indonesia and Thailand against the US Dollar and an increase of furnace oil cost in Sri Lanka also contributed to a reduction in the gross margin of the group.

The pioneer manufacturer of activated carbon in any coconut producing country, Haycarb is also the world’s largest producer of coconut shell-based activated carbon.

The Group, whose manufacturing facilities in Sri Lanka, Thailand and Indonesia are supported by marketing offices in the UK, Australia and USA, produces standard, washed and impregnated carbons in granular, pellet and powder form.

Watawala Plantations records PAT Rs. 332 million

Watawala Plantations PLC has had an excellent nine months ending December with group net profit of Rs. 418 million which is an 85 percent increase over the same period the previous year. The company recorded a profit after tax of Rs. 332 million.

The performance of tea was encouraging which bettered the performance of the previous period by improving on the bottom line by 44 percent. Increased production coupled with better agricultural practices and better prices in comparison with the market elevation averages were the main contributory factors.

Waltrim Estate in the Lindula region, which now has a state-of-the-art factory, has re-established its mark in the region by fetching high prices. This recovery after the old Waltrim factory which was fully gutted by fire in April 2008 is remarkable. Exceptionally high rubber prices have significantly increased the profitability of this segment, with rubber contributing Rs.80 million profit when compared to a loss of Rs. 7.5 million in the same period previous year.

The average prices during the nine months improved by 80 percent. The company will be in a position to capitalise on this situation and report a better performance in the next quarter, subject to good weather conditions.

The oil palm segment has once again delivered excellent results recording a Rs. 168 million profit. This is marginally lower when compared to the previous period as production declined due to unfavourable weather conditions but with improving prices due to global supply shortages, profitability was maintained. However, it is envisaged that this trend would ease towards the end of the financial year.

The Company continues to benefit from its partnership with Tata Global Beverages Ltd (formerly Tata Tea Ltd) with increasing support for exports of bulk and value added tea to them and their clients. Exports of the company to Australia are now handled by Watawala Marketing Ltd. which is a fully owned subsidiary. Therefore these results are reflected in the subsidiary’s accounts.

The former FMCG division of the Company was converted to Watawala Marketing Ltd in April 2010.

The Company has had a remarkable nine months ended December 2010, reporting a net profit of Rs. 157 million which is a 43 percent growth over the net profit of the previous period.

Tokyo Cement assigned long and short-term corporate credit ratings of A/P2

RAM Ratings Lanka has assigned long and short-term corporate credit ratings of A and P2 to Tokyo Cement Company (Lanka) PLC. The long-term rating carries a stable outlook.

The ratings are supported by the Group’s strong market position, healthy balance sheet and debt coverage levels; the ratings are however moderated by Tokyo’s dependency on the cyclical construction sector and inability to fully pass on cost increases to consumers.

Tokyo is one of the leading companies in the domestic cement industry. Tokyo has been able to strengthen its market position, supported by its brand and extensive dealer network.

Despite cement being a commodity, Tokyo has managed to maintain its premium pricing due to its strong branding.

Tokyo and Holcim are the only cement suppliers in Sri Lanka that operate local manufacturing plants; the rest of the market is populated by importers.

In this regard, domestic manufacturers enjoy some tariff protection and logistical advantage compared to importers, which face the risk of cement hardening due to the product’s short shelf life.

On a separate note, capital expenditure (capex) for capacity enhancement and investment in a new bio-mass plant had increased the Group’s debt burden by the end of FYE March 31, 2010. With the completion of these projects, however, Tokyo has now begun repaying its debt facilities, thereby improving its overall financial profile.

The Group’s debt burden was reduced from Rs 4.27 billion as at end-March 2010 to Rs 3.55 billion as at end-September 2010, thus easing its gearing ratio from 0.75 times to 0.64 times.

This, coupled with the environment of receding interest rates, had broadened Tokyo’s interest coverage to a healthy 4.46 times as at end-September 2010 (end-March 2010: 1.94 times). At the same time, its funds from operations (FFO) debt coverage clocked in at an annualised 0.74 times (end-March 2010: 0.49 times). With no major capex planned, we expect the Group’s financial profile to improve as its debt level is reduced further.

That said, the Group is exposed to the inherent cyclicality of the construction sector, which is the biggest consumer of cement. Nonetheless, the long-term outlook for the construction industry is positive. The industry expanded 8.5 percent year-on-year in 1Q 2010 (1Q 2009: 3.0 percent), followed by another 9.3 percent in 2Q 2010 (2Q 2009: 5.4 percent).

Further growth is expected to emanate from government-led infrastructure projects, particularly in the recently liberated northern and eastern regions of the country.

Given that Tokyo’s production facility is located in the eastern part of the country, we believe that it is well poised to benefit from such an upturn. Moreover, the improving macroeconomic environment is also expected to propel demand for housing over the medium to long term.

Cement is classified as an essential commodity by the Consumer Affairs Authority of Sri Lanka (CAASL); approval is required from the CAASL prior to any revision in the retail price. Cement suppliers are therefore unable to pass on increasing costs to customers, and are thus exposed to potential margin compression. As such, cement manufacturers are vulnerable to adverse price movements in its primary raw material, i.e. clinker, which accounts for around 74 percent of its total production cost.

CTC contributes Rs. 56.1 billion to government coffers

Ceylon Tobacco Company (CTC) concluded yet another strong financial year, contributing Rs. 56.1b to the Government.

The increase in Government Revenue (taxes and levies) is mainly attributed to the vigilance and continued efforts of the law enforcement authorities to minimise the presence of illegal and smuggled cigarettes in the local market.

A total of 74 million confiscated illegal cigarettes with a market value of Rs. 1.2 billion were netted in ensuring a higher revenue base for the Government from CTC.

With improved economic conditions and vigilant law enforcement, Government Revenue by CTC grew by Rs. 3.70 billion over 2009. With a persistent drive by the authorities 2,016 seizures were made in 2010, resulting in the confiscation of 74 million sticks of counterfeit and smuggled cigarettes valued at over Rs. 1.2 billion.

The positive economy and expansion into North and East helped stabilise sales volumes over the previous year. This positive trend along with two excises led price increases, helped grow Gross Revenue to Rs 64 billion and Profit After Tax to Rs 5,097mn.

On the responsibility front, Ceylon Tobacco Company made considerable progress in its flagship initiative, the Sustainable Agricultural Development Program (SADP). The total number of families in the program grew to 9,090 out of which 2,700 families are from the Eastern Province.

Sunshine Holdings records Rs. 599 m net profit

Sunshine Holdings PLC reported excellent results for the nine months ended December 2010 with group Net Profit after Tax of Rs. 599 million, an increase of 38 percent over the corresponding period last year.

Sunshine Holdings PLC is a diversified conglomerate with interests in Healthcare, Plantations, FMCG, Packaging, Tourism, Telecom and Power.

Group companies include Swiss Biogenics Ltd, Watawala Plantations PLC, Sunshine Packaging, Sunshine Travels and Tours, Sunshine Energy and Healthguard Pharmacy.

The company is also the local investor for Tata Communications Lanka.

Group revenue for the period was Rs. 7.8 billion, an increase of 12.6 percent over last year, with the two major sectors, plantations and healthcare achieving a growth of 7.7 percent and 19.6 percent. Gross profit for the period was Rs. 1.7 billion, an increase of 35 percent over the corresponding period last year.

This significant increase has been achieved by contributions from the major sectors, with plantations benefitting from the record rubber prices and FMCG segment margins and the healthcare sector improved sales of higher margin diagnostics and surgical products.

In new ventures, the Company has moved into the leisure sector with the setting up of two boutique bungalows under the brand “Mandira” in the upcountry with more to follow in the months ahead. “Mandira” is the Sanskrit word for mansion, and the brand positioning is to invite guests to experience a colonial home atmosphere.

The increased number of tourist arrivals and effective marketing have led to higher than anticipated occupancy during the period.

Financial services expert joins Brandix

Brandix Lanka Limited has recently appointed Priyan Fernando as executive vice president of Global Business Services at American Express and as an independent non-executive director.

Priyan Fernando

Fernando, based at the American Express World Headquarters in New York City, heads the organisation that provides key business operations functions including finance, procurement, real estate services, human resources and business transformation for American Express worldwide. He was instrumental in establishing financial shared servicing at American Express, which provided global financial services to the entire company from just three locations around the world.

Priyan Fernando, an MBA from Indiana University in the United States, has also served as President of the Global Customer Group and Chief Operating Officer of American Express Business Travel.

In this capacity, he led the globalisation and transformation of service delivery at American Express Business Travel to create a common customer experience, reflective of its brand around the world. Prior to this, he was the Chief Financial Officer of the Global Corporate Card and Travel Businesses.