NDB Stock brokers in the special report say amidst gradual revival, two-year bull run on the cards; valuations attractive; corporate profit growth to bounce back in 2013 in a resilient economy

NDB Stockbrokers in a special research report that is likely to move investor sentiments for the better is upbeat of a revival in the currently-bearish stock market as well as a rebound in corporate earnings from next year onwards.

Boldly titled ‘Emerging Bull in the World of Bears,’ the NDBS stated: “In view of the stabilizing economic conditions, we remain positive on the profit growth prospects over the next two years.

While we estimate that currently, the overall Sri Lankan market is trading at a forward P/E of 11x, we expect it to increase to 15x with the improvement in sentiment over the next two years.”

Recalling that in its previous review released in May a forecast was made that the bull run would commence from the latter part of 2012, NDBS said since then the ASI has gained 6% (from 5,048 to 5,331).

In line with the positive factors, “we maintain our ASPI target of 9,000 by the end of 2014. However, the sentiment is likely to improve gradually and pick up steam by 2013H2 in view of the prevailing uncertainty in global economies and high domestic interest rates.”

Its latest report also predicted corporate profit growth to bounce back from 2013.

After two years of exceptional growth (of 75% and 25% respectively) in corporate profits, 2012 is seemingly a year of consolidation with profits remaining flat from the previous year up to September.

NDBS expects the trend to continue until the rest of the year and accordingly revised downwards its previous profit growth expectation of 10% for 2012. However sectors such as banking, hotel, telecommunication and food and beverage have recorded appreciable profit growth, it noted.

“We maintain our expectation that the profits would bounce back in 2013 and 2014, to record a growth of 20% and 15% respectively. This is in view of the improving economic stability resulting from the measures taken in 2012H1,” NDBS said.

Emphasizing on attractive valuations, the broking firm said Sri Lankan equities were attractively priced compared to regional emerging/frontier markets.

“While according to our estimates the Sri Lankan stocks are trading at a forward P/E of 11x, the regional markets are trading at a forward P/E of 12.8x. With the expected improvement in profitability and economic stability over the next two years, we maintain our expectation that the forward P/E would reach 15x with improving investor sentiment,” NDBS pointed out.

It implied that attractive valuations, as well as future upside in relation to regional peers, were key reasons for record net foreign inflow into Sri Lankan equities so far this year.

“The foreign investors have been bullish on Sri Lankan equities since early 2012, with net foreign inflows to the stock market reaching Rs. 33 billion up to October,” NDBS said.

As of last week, as reported by the Daily FT, the net inflow had crossed the Rs. 37 billion marks. This is in comparison to net foreign outflows of Rs. 26 billion and Rs. 19 billion in 2010 and 2011 respectively.

“This indicates that the value investors perceive upside potential in Sri Lankan equities in view of positive policy measures taken in 2012 and the prospects of impressive growth over the next few years,” NDBS said.

Noting that demand for equities was quietly accumulating whilst supply was slowing down, the broking firm said Initial Public Offerings (IPOs) and secondary equity issues (rights issues, etc.) by listed companies had slowed down in 2012 compared to 2010 and 2011.

As a result, NDBS said the investable funds within the economy have been accumulating and have been directed to short-term fixed income instruments to a large extent, in view of the relatively high-interest rates. In addition, with the increase in interest rates and triggering margin calls, the utilization of margin trading (leverage) would have reduced significantly over the last 12 months.

“We feel the equity selling pressure has been reducing substantially over the last 12 months. Simultaneously, the investable funds have been accumulating, which could flow into the equity market if the interest rates come down (including an increase in margin trading activity) or any other event occurs that could boost the sentiment of the equity market,” NDBS added.

Adopted from ft.lk 

The Colombo Stock Exchange (CSE) is currently in the process of amending regulations pertaining to the listing of debt securities, according to CSE’s Assistant General Manager of Regulatory Affairs, Renuke Wijayawardhane.

“We are currently in the process of revising some of the Listing Rules. However, nothing has been finalised at the moment and we are still at the discussion stage,” Wijayawardhane said.

Amendments to the current regulatory framework follows a spate of new listings of corporate debt, mainly debentures, on the CSE by listed and unlisted companies, seeking to capitalise on generous concessions granted in Budget 2013.

Proposals in question include the exemption of the withholding tax on interest income earned by investing in bonds and debentures listed with the CSE.

Speaking to Mirror Business about potential barriers to the establishment of a vibrant corporate debt market in Sri Lanka, Wealth Lanka Management (Pvt.) Ltd Chairman Mangala Boyagoda highlighted lack of information and regulation on unlisted companies as a potential challenge.

“Recent steps taken to promote the creation of a corporate debt market are very positive. However, statistics on unlisted companies are lacking. So, it’s very difficult to get a clear understanding of the depth of the Sri Lankan corporate debt market,” he said.

Boyagoda also called for more stringent regulation of unlisted companies, which expect to list debt securities.

“Unlisted companies issuing listed debentures must be regulated, so there is control over who is allowed to list debentures and at what amount. Investors have had their fingers burned in similar situations before, so proper regulation will be important to establish confidence,” he noted.

Policy consistency with regards to tax concessions was highlighted as a further area of concern. “Removal of the withholding tax and other tax concessions will help grow the corporate debt market. However, there are concerns about their impact on government revenue.”

“Now that they’ve implemented it, there has to be some consistency to allow the market to adjust but with current revenue levels, I have concerns about the sustainability of tax concessions,” Boyagoda said. Meanwhile, Heraymila Securities Limited CEO Ravi Abeysuriya called for streamlining of listing procedure and a greater focus on educating investors about the corporate debt market.

“There is a lot of change that will be required if the corporate debt market is to grow. Even now people are only buying debentures and then holding on to them so they’re not really being traded.” “More will have to be done to educate investors the approvals process, which is geared only towards equity, needs to be simplified,” Abeysuriya stated.

The Colombo Stock Brokers Association (CSBA) on Tuesday highlighted to the Colombo Stock Exchange what was an exhaustive list of woes following the introduction of Automated Trading Version 7, with the CSE passing the buck to solutions provider MillenniumIT.

The meeting, first since the introduction of the new version a fortnight ago, was convened by CSE to iron out various concerns from both investor and broker sides. Whilst CSE officials had assured some issues could be rectified by late March, it had informed brokers to take up grievances with MIT, which is now owned by world famous London Stock Exchange.

Sources claimed that a more responsible move would have been for the CSE to accept the CSBA’s written submissions and take it up directly with MIT than passing the buck.

Though trialled many times via mock sessions and improved with stakeholder inputs, the ATS Version 7 since introduction had been blamed for causing confusion among brokers and investors, especially those doing online trading. This had led to low turnover on some days, in addition to causing frictions between brokers and investors.

Others said the new version is far superior and since introduction needs extra time for all to become familiar with.

Customisation of the ticker is limited. In the existing version, individual users can customize their screens: ticker rows, history rows, ticker mode, etc.

The ticker does not indicate the intra-day change in price but the change between the current and the last traded price.

The ticker does not indicate the intra-day change.

The instruments have to be added to the ticker on a daily basis.

There is a huge delay in the ticker.

Order book

Order book depth displays only 10 price points. This is not adequate. Order book (market depth) cannot be viewed by double clicking as in the previous version.

When you have many company codes opened in the order book where you are looking for prices, the prices do not pop up quickly. There is a delay of about two to three seconds.

There is no quick order book watch.

Whenever stock is changed in the order entry window, default buy window appears.

The order books don’t indicate the buying or selling volumes during the pre-open.

Cannot add VWAP (Volume Weighted Average price) on order book.

Order placement

Drop down list gets removed if the computer restarts or a user gets disconnected and logs in again.

The buy/sell windows take a long time to generate.

The orders should appear in a sequential order according to the type of order (normal order or custodian order).

The order entry panel should have a clear screen command button.

Orders placed for the same client cannot be viewed in the order placement tab unless a share is indicated (this facility was available in the previous version).

Once done amending an order, you cannot place a new order using the same Buy / Sell window (as was done in the previous version) but need to close that window and open a fresh window even though it is for the same client and retype all details including CDS account number which is very time consuming.

Order entry panel should be more user-friendly (space for the client ID field can be reduced and included for the display of the client name which the current given length is not sufficient).

When balance inquiry page is opened from the order placing screen, the client ID in order placing screen (buy or sell window) should automatically moved to client ID field in balance inquiry screen.

When amending an order (qty) the disclosed quantity does not get adjusted automatically.

When a GTC order is entered number of days by default is set for one day, whereas in the older system it was for five days.

Order blotter

The blotter should be able to generate the client’s name (this was there in previous version).

Order count not available in order blotter/my trader.

Orders cannot be filtered by customers. More enhancements are required.

Market watch

Statistics: The previous version was far more effective and should be migrated to this system.

Stock code search option is not functioning.

Blink updates: These are not available in this system although it is a very useful feature.

Instruments list is not available in the market watch when the market is in pre-open status.

Block Trades and Normal trades should be incorporated together. This can cause misjudgement as the volumes will be separate for one stock under the block and normal trade. E.g. calculating the average price for a stock.

The turnover of a share on the market watch does not include the value of block trades.

No column for average price.

Details and summery of executed transactions for the day cannot be viewed in the manager terminal or other terminals.

Announcements window

This window should popup only when there is a new announcement to be displayed.

General

Market status is not displayed on the screen. The user cannot therefore see if the market is open, closed, halted, etc.

If odd lots are allowed to trade on the same system, the minimum charges should be waived off.

Profiles do not open the way it has been saved.

When you add fields to the “recent transactions” on the order entry panel, it doesn’t appear when you re-log to the system though you have saved the profile.

When you re-size the fields in the market watch and save, it doesn’t open in the manner saved.

ATS crashes several times a day

The individual turnover and executed order amount must be indicated in the main screen of each trader login.

Odd lot minimum charge of Rs. 5 for CDS fees should be removed.

Transaction text file (ats2_ttr.txt) sent by CSE at end of the day does not include contract numbers of cancelled contracts for the day.

Value in “order_id” column of transaction text file (ats2_ttr.txt) is invalid; all the recodes carry the value “0000”.

from DailyFT