Corporate earnings rebound in December, but lack vitality

• Adjusted earnings for one-off gains up only 8.7% 
• 12-month earnings Rs.274bn, up 8.7%
• Weak consumer spending, higher commodity prices hit manufacturing sector 
• JKH, Hayleys, Hemas drag down diversified sector earnings
• Beverage, food and tobacco sector led by CTC

    
Sri Lanka’s corporate earnings recorded some robust growth during the final quarter of 2017 rebounding from a contraction in earnings in the September quarter. But earnings growth slowed when adjusted for one-off gains in few sectors. 

Sri Lanka’s listed company earnings, which provide a proxy for the wider economy, grew by 17.4 percent during the October-December quarter (4Q17) from a year ago and from 1.4 percent contraction recorded during the July-September quarter.

But the growth moderated to just 8.7 percent when the profits were adjusted for some exceptional gains in insurance, property and plantation sector companies.    
The listed companies reported Rs.86 billion in earnings during 4Q17 compared to Rs.60.5 billion recorded during the previous quarter when adverse weather hit businesses and livelihoods alike and the tighter monetary and fiscal policies started taking toll on businesses and disposable incomes of the people.   

The prolonged drought in key cultivating regions and intermittent floods disrupted the supply chains of most of the listed companies linked to rural economies while the rising interest rates and value added tax (VAT) eroded incomes of people, who otherwise demand more goods and services leading to higher profits in listed firms.  
Meanwhile, the higher rates directly hit the bottom lines of many corporates, which borrowed heavily when the interest rates were low.Higher VAT weighed on costs and financial services, leading to higher effective tax rates for banks and finance companies. 

Due to these reasons, Sri Lanka’s corporate earnings for 2017 have been languishing as the growth came down from 12 percent in the January-March to 5.0 percent in April-June and minus 1.4 percent in July-September.  

Meanwhile, for the year ended in December 2017, all listed corporates reported total earnings of Rs.274 billion, recording an increase of 8.7 percent year-on-year (YoY).

According to CAL Research, the research arm of Capital Alliance Group,4Q17 earnings were primarily driven by one-off surplus gains in the insurance sector as AIA, Ceylinco Insurance and Union Assurance recorded large one-off surpluses due to changes in the insurance liability vacation methodology.

Besides, the land and property sector earnings grew an exceptional 308 percent on year to Rs.6.1 billion due to revaluation gains on Colombo Land and negative goodwill recognized by RIL Property on its acquisition of United Motors.  

“Excluding earnings from the three insurance companies, palm oil companies and one-off gains from property revaluation for RIL Properties and Colombo Land and Development, market earnings were up 8.7 percent”, CAL Research said. 

As usual market earnings were primarily driven by the growth in banks, finance and insurance sector earnings, which grew by 62 percent YoY to Rs.46.8 billion, which increased the sector’s contribution to 55 percent against 40 percent in 4Q16. 

“Lower interest rates and equity issuances aided the margin expansion”, CAL Research said on the higher profits in the banking sector. 

Non-bank finance companies earnings were driven by Lanka Orix Leasing Company PLC but the conglomerate’s profits slipped 8.0 percent YoY to Rs.2.6 billion during December. 

Meanwhile, beverage, food and tobacco sector earnings grew by some robust 38 percent YoY to Rs.9.4 billion contributing 16 percent towards overall market earnings during 4Q17. 

The sector earnings were largely driven by Ceylon Tobacco Company PLC, Nestle Lanka PLC and Lion Brewery Ceylon PLC but Ceylon Cold Stores’ profits were dented by 32 percent YoY due to lower consumer spending.  Lion Brewery saw 50 percent growth in revenues—the highest recorded by the company—as beer volumes recovered on the back on a tax cut in November while the profits grew by 29 percent YoY to Rs.413 million for the quarter. 

Meanwhile, the diversified sector earnings dropped by 21 percent YoY to Rs.11 billion from Rs.14 billion during the same quarter a year earlier. 

The decline were led by the 15 percent YoY drop in John Keells Holdings’ profits, 21 percent YoY fall in Hemas Holdings’ profits and 12 percent drop in Melstacorp PLC’s profits. 

The weak consumer spending and higher commodity prices hit the manufacturing sector earnings as earnings declined by 19 percent YoY to Rs.5.0 billion. 
Despite some modest growth in earnings during the December quarter, the future earnings outlook remains muted as the political uncertainty looms large and uncertainty in the forex and interest rates weighing on business and investor sentiments. 

Inflation, though moderated to mid-single digit levels lately, the prices remains still high and elevated cost of living has been identified as the recent defeat of the ruling coalition at the local government elections.