With backing of low interest rate regime: CSE Earnings to Grow 39% in 2021

By Ishara Gamage | Published: 2:00 AM Jan 14 2021

The Colombo Stock Exchange (CSE) earnings are expected to grow 39% in 2021 compared to a -8% earnings contraction in 2020, Colombo based equity research arm of CT CLSA Securities (Pvt) Ltd stated in its “CT CLSA – Sri Lanka Outlook-2021” report.

“Consequently, CSE is expected to re-rate based on its 1-year forward earnings (PER) multiple of 8.7X. With the global trade also likely to recover in the near term, Central Bank of Sri Lanka (CBSL)’s intention to keep interest rates in single digits whilst keeping money markets liquid for economic recovery is a positive move for the CSE in 2021,” it stated.

Despite the worrying news of faster spreading mutations of the virus in recent days, they remain cautiously optimistic about the outlook of the CSE for 2021. 

“Thus, we expect the 2021 recovery story to be driven by consumption, healthcare, construction and manufacturing sectors that will be funded by a well-capitalised domestic banking system in the short-term,” CT CLSA Securities stated.

The government has already stated that they expect the vaccinations to commence in Sri Lanka by March - April 2021.

CT CLSA Securities believe the island wide vaccination process will start to roll out by the second half of this year which would likely drive the post-pandemic economic revival in the country.

The Central Bank of Sri Lanka (CBSL) may continue to adopt a loose monetary policy to maintain lower

Interest rates amidst CBSL’s shift into modern monetary theory (Rs 650 billion worth of money printed in FY2020)

Twelve-month Treasury yields are forecast at 6.5% as at 31 Dec 2021 (vs. 5.0% as at 31 Dec 2020) and are

expected to increase +100bps YoY to 7.5% as at 31 Dec 2022. The expected rise in interest rates in 2021E is owing to anticipated higher demand for credit by the private sector.

Sri Lankan rupee /US dollar spot mid forecast at Rs 197.6/US$ as at 31 Dec 2021E and at Rs 205.5/US$ as at 31 Dec 2022E.

GDP growth is forecast at an average of +4.7% p.a. for 2021E - 2022E (vs. estimated contraction of -3.9% in 2020 based on provisional figures), on the back of improved consumer spending and growth in key sectors such as construction, manufacturing etc.

Short-term external debt commitments are likely to be fulfilled easily given already negotiated debt rollovers and swaps. “We believe Sri Lanka may again tap the international debt markets only by late 2022 or in 2023,” report stated.

Initial public offering (IPO) activity has remained limited, with only 1 equity listing during 2020. Given the recent boost to local interest in the market along with the proposed tax concessions for IPOs during 2021E, IPO activity may gain traction during the year.

MSCI Frontier Markets and Emerging Market Indexes have witnessed a decline of -2% and an increase of +16% respectively in 2020 (vs. a +14% and +15% increase in 2019), likely supported by the relaxation of restrictions in most countries after the first wave of COVID-19 infections during March – June 2020.

Global markets reacted negatively across the board with the COVID-19 virus spreading initially from the epicenter in Wuhan, China to most parts of the world. However, markets have subsequently picked up amidst an easing of restrictions imposed by most governments and vaccines being approved for emergency use towards the end of 2020.

“Though Sri Lanka ranks low in scale and liquidity amongst other frontier markets, it may be viewed

favourably by certain investors, given the relatively lower market PER in comparison to regional peers.

Forward market valuation of 8.7X for 2021E is at a discount to a majority of regional peers, on the back of an expected earnings growth of 39% Year-over-year (YOY) – off a low base. Select key stocks, particularly in banking and consumer sectors, offer relatively attractive valuations,” it said.

The CT CLSA Securities also stated that a relative improvement in political stability following the general elections in 2020 is expected to result in a clearer economic outlook over the medium term. The political stability this brings may act as a catalyst for attracting investments, and thereby help re-rate market valuations. 


CSE Records highest market cap ever and number of trades

By Ishara Gamage

The Colombo Stock Exchange (CSE) recorded two significant milestones yesterday (13th)  with the market capitalization reaching an all-time high value of Rs. 3.25 trillion and recording 52,559 trades which is the highest number of trades recorded within a market day. 

The number of trades carried out today surpassed the previous record of 49,921 carried out on 18 August 2011. Yesterday’s trading mostly on the back of retailers while also recording the highest intraday gain for 14 weeks. 

According to First Capital research, CSE main all share price index (ASPI) witnessed a continuous upward trend from the beginning of the session, reaching its intraday high of 7,481 at mid-day. 

Later the market moved downwards and closed at 7,443 with a massive advance of 161 points. The materials sector led the turnover for the session closely followed by Food and Beverage and Capital Goods sectors making a combined contribution of 58%. 

The market experienced low foreign participation dominated by the selling side resulting in a net outflow. Year to date total foreign outflow was Rs 1.4 billion and the turnover for the day over Rs 9.1 billion.

“The day’s transactions were led mainly by companies of the LOLC group.

With LOLC Group’s Browns Investments agreeing to make a new investment in the Colombo Port City, investors are flocking to the company these days with rumours that more deals will follow,” other brokers said.

Due to the prevailing low interest rates in the country, a large number of retail investors are now flocking to the Colombo Stock Exchange with the aim of earning capital gains on a short to mid term basis. 

Market Roundup 

Index movement: ASI: up 160.99 index points (+2.2%), S&P SL20: up 39.76 index points (+1.5%) 

Top contributors to the index movement: Expolanka (LKR 47.00; +13.8%),Commercial Leasing & Finance (LKR 7.00; +25.0%), LOLC Holdings (LKR 181.50; +9.5%)

Top contributors to the turnover: Expolanka (LKR 1.6bn), Browns Investments (LKR 1.2bn), LOLC Holdings (LKR 675mn)

Crossings: Expolanka (2.7mn shares at LKR 44.00 – 46.00 per share), Hemas Holdings (0.6mn shares at LKR 95.00 per share), Distilleries (2.0mn shares at LKR 23.00 per share), Watawala Plantations (0.5mn shares at LKR 58.00 per share)

Most actively traded shares: Expolanka, Browns Investments and Piramal Glass

Net foreign outflow: LKR 195mn and Foreign participation: 4%

Top net foreign inflows:CIC Holdings (LKR 14mn), Distilleries (LKR 7mn)

Top net foreign outflows: C T Holdings (LKR 97mn and Kelani Tyres (LKR 23mn)

By Ishara Gamage | Published: 2:00 AM Jan 14 2021

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