Combined earnings of listed companies have been declining each quarter for a couple of years heading into 2020. However, since falling 32% in the Dec 2018 quarter, combined earnings decline had bottom-out, recovering to a mere 5% fall in the Dec 2019 quarter. Back then, many analysts predicted 2020 to be equity’s comeback year! The All Share index of the Colombo Stock Exchange ended 2019 with a 1.27% gain, after declining 18% over the previous four years!
COVID-19 was emerging as a global threat, but it was still not Sri Lanka’s problem. The pandemic did make it ashore, and the impact on listed companies have been devastating. The All Share index fell 16% during the first six months of 2020. In the March 2020 quarter, combined earnings fell 52% from a year earlier. In the next quarter, June 2020, it tumbled a further 60%! Since June 2018, listed company earnings have fallen 205% over eight quarters. COVID was responsible for half this decline with combined profits falling 110% in the two quarters to June 2020 (please see Figure 1). This data backs up what economists have been saying: Sri Lanka’s economic problems only got worse with COVID; it’s not like the pandemic started this! We will now have to wait for the September 2020 earnings data to see how the post-lockdown recovery went if there was indeed a recovery. The All Share index did recover losses in the September 2020 quarter, gaining 14% since June. Will the underlying earnings stack up? Time will tell.
A CLOSER LOOK AT JUNE 2020
The June 2020 quarter was perhaps the most anticipated. Market analysts were keen to know how listed companies performed in the June 2020 quarter and try to understand the full impact of the lockdown on the economy through the eyes of listed companies. According to First Capital Research, combined earnings of listed companies fell 58% from a year ago to Rs18 billion in the June 2020 quarter (down from Rs42 billion in June 2019). First the bad news, and there is no surprise here, mostly. Tourism-related companies reported a combined loss of Rs8 billion in the quarter, doubling losses from a year ago. Every one of the nearly 40 companies reported losses. The sector was hit hard by the 2019 Easter bombings, but COVID-19 is beating it senseless. The country’s two largest hotel chain operators, with properties in the Maldives too, John Keells Hotels and Aitken Spence Hotels both saw losses quadrupled to Rs1.7 billion each. Retail reported Rs410 million in combined losses, a slight improvement from a loss of Rs629 million with Odel Plc reporting to Rs676 million loss, tripling from a loss of Rs210 million a year ago. Singer Sri Lanka did exceptionally well reporting a profit of Rs370 million in the quarter, ballooning over 1,200% from Rs27 million a year earlier. John Keells Plc which controls several consumer food brands, supermarket chain SuperK, logistics, property, plantations and an insurance firm, reported a profit of Rs59 million in the quarter, up 300% from a year ago. Supermarket chain Cargills Ceylon profits fell 70% to Rs210 million due to lower consumer footfall due to the lockdown. Capital goods sector losses deepened fivefold to Rs5 billion. First Capital has included diversified holding companies such as John Keells Holdings, Aitken Spence and Softlogic Holdings into this category.
JKH reported Rs1.7 billion loss compared to a profit of Rs1 billion a year ago, mainly due to the closure of its hotels to the pandemic. Softlogic Holdings, with interests in retail, telecommunications, financial services, and leisure, saw its losses slide down to Rs2.5 billion, compared to a Rs753 million loss a year earlier. However, there were a few bright stars: Hemas Holdings reported a profit of Rs270 million, compared to a loss of Rs430 million a year ago while Vallibel One saw earnings grow 50% to Rs860 million. Consumer durables and apparels reported a Rs260 million loss, compared to a Rs343 million profit a year earlier. Dankotuwa Porcelain made a R170 million loss, and Ambean Holdings reported a Rs132 million loss. Losses of energy companies doubled to Rs980 million from Rs510 million a year ago. Lanka IOC losses grew over 200% from a year earlier to Rs795 million while Laugfs Gas cut back losses by 32% to Rs180 million. What’s perhaps surprising is that healthcare lost Rs850 million, compared to a combined profit of Rs200 million a year ago, mostly because people were afraid to go to hospitals fearing they would catch the virus!
All listed Hospitals reported losses from Asiri Hospitals’s Rs390 million to Nawaloka’s Rs270 million. Little known Muller and Phipps Plc, an importer and distributor of pharmaceuticals, reported an Rs8 million profit compared to an Rs23 million loss the previous year. E-channelling was the only other profit maker, with Rs3 million, but this was 35% lower from June 2019. Several sectors remained profitable, although margins had eroded. Food and plantation company earnings fell 70% from a year earlier to Rs7 billion. Ceylon Tobacco saw profits dip 34% to Rs3 billion while Distilleries’ earnings fell 40% to Rs980 million. Ceylon Grain Elevators profits fell 67% to Rs62 million while Nestle Lanka’s earnings declined 37% to Rs370 million. Watawala Plantations earnings grew 60% to Rs400 million. According to First Capital Research data, the property sector earnings plunged 84% to Rs560 million. Earnings at Overseas Realty fell 75% to Rs230 million and while East-West Property Plc profits fell 95% to Rs136 million, down from Rs2.6 billion a year ago. Non-bank finance companies saw combined earnings grow 55% to Rs17 billion. However, this was due to LOLC reporting profit of Rs14 billion, up 130%. The profit included a one-off capital gain from the sale of a subsidiary. Excluding LOLC, sector profits fell 97%, First Capital Research points out. Central Finance saw profits decline 80% to Rs67 million and LOLC Finance earnings fell 91% to Rs70 million on rising bad loan provisioning and falling net interest incomes. Investment houses had better luck. First Capital Holdings reported a profit growth of 151% to Rs1.4 billion, and Ceylon Guardian Investment Trust saw earnings grow 400% to Rs900 million. Combined earnings of listed insurance companies grew 13% to Rs3.2 billion with Ceylinco Insurance reporting a profit of Rs1.9 billion, up 5% from a year ago. People’s Insurance made a profit of Rs500 million, up 150% from a year earlier while Softlogic Insurance reported a profit of Rs53 million, down 88%. Banks had an indifferent quarter with profits growing 3% to Rs11.5 billion.
Tightening interest margins, pressure on loan quality and credit moratoriums stressed the country’s banks (please see Figure 2) Commercial Bank profits increased 5% to Rs3.6 billion, and Hatton Nation Bank’s earnings fell 30% to Rs2.1 billion. Sampath Bank reported a profit of Rs1.3 billion, a 36% decline. DFCC Bank saw profits surge 183% to Rs770 million while Sanasa Development Bank more than doubled its profits to Rs275 million. Despite the challenging period, some companies reported stellar results for the COVID-impacted quarter. Expolanka is a standout company. Its profits exploded by over 1,000% from Rs150 million a year ago to Rs1.7 billion in the June 2020 quarter. “Its freight forwarding business thrived with logistics solutions for personal protective equipment amidst the COVID19 pandemic,” First Capital said.
Listed companies in manufacturing and materials saw combined profits increase 60% from a year ago to Rs2.9 billion. Surgical gloves maker Dipped Products reported a five-fold increase in earnings to Rs610 million while activated carbon manufacturer Haycarb profits increased by 150% to Rs690 million. Tokyo Cement reported a 26% earnings growth to Rs690 million after construction activity picked up post-lockdown. The company also benefited from higher import tariffs slapped on competitor brands. Construction firm Access Engineering’s profits fell 74% to Rs76 million.
A RECOVERY IN SHAMBLES?
Market analysts expect companies to report better earnings results in the September 2020 quarter. Equity investors seem to share that sentiment with the AllShare index gaining around 14% from July to end September. However, that recovery is unlikely to be sustained with a second COVID wave hitting the island. Which means the next quarter to watch will be December 2020.