Listed company earnings dip amid challenging business environment

„Cumulative recurrent earnings for 1Q17 down 15% to Rs.56.4bn „With one off gains earnings up 12% to Rs.74.3bn „For year ended March 31, 2017, recurrent earnings up 3.1% to Rs.222.7bn

Sri Lanka’s listed entities have put up a poor show for the first quarter of 2017 (1Q17) as their cumulative recurring profits saw a significant decline from the corresponding quarter of the previous year reflecting the tougher economic conditions and weaker business and consumer sentiment engulfing the country’s business landscape.

According to a quarterly earnings update by CAL Research, the research arm of Capital Alliance Group, the listed companies have together reported total earnings of Rs.56.4 billion on a recurring basis, which is a 15.1 percent decline year-on-year (YOY).

The total earnings however increased to Rs.74.3 billion for the same quarter, recording a 11.7 percent increase YOY over some hefty one off gains made— which are not part of business as usual activities— by Lanka Orix Leasing Company PLC group to the tune of Rs.17.8 billion.

“1Q17 total market earnings were mainly driven up by Lanka Orix Leasing Company which recorded a profit of Rs.9.6 billion, up 320 percent YOY due to a one-off fair value gain of Rs.10.4 billion.

Other subsidiaries of the LOLC group, namely FLCH, BIL and BRWN also recorded one-off gains on disposals of subsidiaries amounting to Rs. 2.4 billion, Rs. 2.5 billion, and Rs.2.5 billion, respectively.

Excluding these gains, 1Q17 total market earnings stood at Rs. 56.4 billion, down 15.1 percent YOY”, Capital Alliance said.

The 1Q17 earnings season, which concluded a fortnight ago, saw corporates exposed to multiple sectors reporting average or poor performance due to dull operating conditions that stemmed from poor investments and consumer sentiments.

Many consumer goods retailers cited weak consumer demand as the main reason for the poor financial performance as higher interest rates, taxes and inflation managed to end the consumption frenzy, which fuelled the corporate earnings and economic growth, during 2015 and 2016.

Also, many corporates saw their tax bill going up or experienced higher overheads due to 4.0 percent increase in value added tax (VAT), of which the full effect was seen during the January-march quarter, for the first time

What was most hurting for the businesses was to see soaring finance costs eating into their bottom lines due to higher borrowings. Lankan corporate borrowed heavily for expansions when the interest rates were kept artificially low by the new government that came into power in 2015.

Meanwhile, for the 12 months ended March 31, 2017, the listed entity earnings barring one-off gains were little up by 3.1 percent to Rs.222.7 billion. But this inflates to Rs.241 billion, an increase of 11.3 percent YOY when the aforementioned one-off gains were added up.

The CSE currently trades at a trailing 12-months price earnings ratio of 11.3 times and a price-to-book value of 1.3 times.