Consumer demand to drive Dec 2015E / Mar 2016E earnings growth

Consumer demand to drive Dec 2015E / Mar 2016E earnings growth
Results update – March 2015 quarter
June 17, 2015, 7:00 pm


Low interest rate regime, higher disposable income and stable exchange rate are likely to drive market earnings for Dec 2015E / Mar 2016E positively affecting Banking and Finance, F & B, Manufacturing and Trading sectors while indirectly affecting Diversified sector as well. We continue to maintain market earnings forecast for Dec 2015E / Mar 2016E at 11%-13% YoY. We believe market returns are likely to stay low amidst the current uncertainty in the political front. We expect Market returns to be strong once the prevailing uncertainty settles down. However, we expect a slowdown in economic conditions beyond June 2016 due to possible rise in interest rates affecting companies across the board. As a result we expect Market earnings to slowdown for the earnings period Dec 2016E / Mar 2017E resulting in an earnings forecast of 4%-5% YoY.

The earnings for the Financial Year Dec 2014 / Mar 2015 recorded a growth of 13%, slightly above our growth target of 10-12%. Market earnings for the March quarter remained strong among most companies especially in the Banking and Finance sector though absolute earnings were flat in the recent quarter compared to the previous year’s corresponding quarter resulting from lower palm oil earnings (CARS & BUKI) and negative earnings in LIOC.

Our previous forecasts on earnings

Our "Results Update December 2014 Report" forecast for future earnings was as follows:

We upgrade our earnings forecast for Dec 2014 / Mar 2015E to 10%-12% from the previous 6% -7% amidst earnings continuing to remain above our expectations predominantly led by heavy trading income in the banking sector and consumer led earnings growth coming in earlier than we anticipated. We continue to remain bullish on consumer led earnings growth which is likely to drive market earnings in Dec 2015E / Mar 2016E to reach our forecast of 11%-13%. Market returns suffered during the current 2 quarters with Dec Quarter recording +0.6% return and Mar Quarter up-to-date recording c.-2.3% amidst the prevailing political uncertainty. Despite healthy earnings growth in most companies, gap between market returns index and market earnings index has been widening; thereby we are bullish on market returns during the 2H2015 when the policy direction becomes clearer and the political uncertainty settles down.

Our "Results Update September 2014 Report" forecast for future earnings was as follows:

With company earnings registering in line with our expectations, we continue to maintain our forecast for Dec 2014E / Mar 2015E earnings growth at 6%-7% YoY while retaining our forecast for earnings growth for Dec 2015E / Mar 2016E at 11%-13%. In line with previous expectations market return slowed down during the last 2 months with the market return registering a growth of 0% while the YTD return remained at 23%. Amidst the growth in Market Earnings being in line with expectations and slow Market Returns in the last few months, we expect Market Return to remain strong during the next few quarters once the political uncertainty eases off.

Our "Results Update June 2014 Report" forecast for future earnings was as follows:

We continue to maintain our forecast for Dec 2014E / Mar 2015E earnings growth at 6%-7% YoY while maintaining our forecast for earnings growth for Dec 2015E / Mar 2016E at 11%-13%. Market Return during the last few months have been strong with the ASPI gaining 18% during last five months and 10% during last two months which has outperformed our target expectation. We believe market returns to adjust in the short term until market earnings recovery catches up with the rise in market returns. We continue to remain positive on market returns towards medium to long term in line with expected growth in earnings.

Our "Results Update March 2014 Report" forecast for future earnings was as follows:

With the improvement in economic conditions we believe market earnings are likely to reach 6%-7% in Dec 2014E / Mar 2015E with the benefits of the pick-up in the economy felt by the companies towards the 4Q2014 and 1Q2015 quarters. A considerably strong growth momentum is likely in Dec 2015E / Mar 2016E with market earnings likely to reach 11%-13%. Thereby we expect market returns to show an uptrend towards medium to long term in line with expected growth in earnings.

Consumption led earnings support March quarter….

March quarter earnings remained almost flat with a slight improvement of 1% YoY to LKR 53bn despite the slowdown depicted in QoQ basis by -4% on the back of underperforming oil palm, diversified and power & energy sectors. Growth reflected in banking finance and insurance sector, telecommunication sector and manufacturing sector positively contributed to maintain earning at a healthy phase.

Banking sector continued its growth momentum by achieving a profit of LKR 18bn (42% YoY) mainly driven by accelerated private sector loan growth and lower impairment provisions in March quarter amidst margin expansion stemming from the lower cost of funding. Continued lower interest rate regime together with increasing disposable income also aided banks to increase their disbursements along with higher demand which came from leases and hire purchases. Cost efficiencies and improved demand along with increased disposable income drove profitability in both manufacturing and telecommunication sectors by 99% and 47% respectively.

However, global oil palm price crisis halved earnings of the oil palm sector leading to a YoY decline of 82% to LKR 554bn. Further, negative margins along with the reduction of oil prices led power and energy sector to incur a loss of LKR 655mn (-188%) mainly arose from LIOC. Diversified sector also saw a decline in earnings by 13% to LKR 11bn owing to stagnant growth in big cap counters together with direct hit which came from oil palm segment.

- First Capital Research