Energy firms struggle against rising oil and LP gas prices

Among the third quarter results of the financial year ending March of listed companies issued so far, energy companies have shown a negative performance, analysts say.

“Energy sector saw a drop by 105 per cent. This was mainly owing to its two large companies’ - LIOC and LAUGFS Gas PLC - slump in earnings. LIOC saw a 110 per cent drop year on year ( yoy) and LAUGFS Gas saw an 82 per cent drop yoy. These hits are mainly attributable to higher oils prices and LP gas prices which saw escalated costs in these firms while the controlled selling price remained constant,” an analysis by Candor Securities says.

They said that the diversified financial sector also had a significant contribution to the low earnings where profits declined to Rs. 8 billion from Rs. 10 billion a year ago. “This is mainly caused by LOLC which saw a drop of 23 per cent yoy. Finance companies’ sector mainly experienced higher net impairment losses as effects of floods in the second quarter that trickled down to the September quarter as well,” the research report said.

The positive earnings performance in the earnings was seen from food, beverage and tobacco sectors which saw a 9 per cent growth yoy. Bukit Darah and Carsons together with plantation companies reported encouraging growth earnings owing to positive trends in their gross profit margins and higher tea prices.

The banking sector earnings grew by 6.5 per cent yoy, driven by Commercial Bank ( 10 per cent yoy) which saw a healthy growth in net interest income.

Analysts say that going forward, the first half of 2018 is likely to show moderate levels of growth while the second half will post good growth numbers.

They say that construction and consumer goods firms will record an uptick in earnings during the second half of 2018. The banking sector would have been the key sector to be watching for in 2018 as an improvement in economic growth has the largest impact on the banking sector, they added. “However, the proposed debt repayment levy takes out most of the positives for this sector and if implemented in the current form will see slow earnings expectations for the sector,” Kanishka Perera, Senior Vice President - Research, Asia Securities told the Business Times. He said there's a positive slant on the telecommunications industry with the removal of the telecommunications levy on data services back last August but the budget proposal calling for a tower levy which makes analysts take a cautious view on their earnings. “Having said that, we believe that share market earnings will be better in 2018 and estimate earnings growth for the ASPI will be around 12 to 15 per cent yoy," Mr. Perera said.

He added that from a market valuation point of view, the Colombo stock market is still one of the cheapest frontier markets trading at nearly 10.0x2018 earnings but, a lack of transparency in government policy will continue to hold back valuations. “Furthermore, net foreign inflows this year were largely supported by Pakistan being reclassified into the MSCI Emerging Markets Index from the MSCI Frontier Markets Index leading to a few large foreign funds allocating more to Sri Lanka. This effect won’t be there in 2018. So we broadly expect the ASPI to be driven more by earnings in 2018 rather than the Sri Lankan market being viewed more positively which would lead to an expansion of the valuation multiple.”

Analysts stress that a few things need to change for the capital markets to become more dynamic. From a broader point of view what’s needed is predictable government policy making and implementation which will give investors confidence to put their money into the country they say. “State banks should be listed as it allows them to raise capital, especially with Basel III requirements, and continue to be competitive against private banks while giving the public the public the opportunity to invest into these. Plus, these account for a substantial proportion of the banking sector and listing them will make the ASPI more representative of the economy than what it is now,” Mr. Perera said.

It’s also important that investors should follow a bottoms- up approach and pick stocks rather than looking at the broader ASPI, he said.