Financial Times

Short-term loss to shareholders from MBSL capital reduction
Merchant Bank of Sri Lanka (MBSL), which has sought regulatory approval to reduce its capital in a move to rid itself of debt, is a stock which should be held by the investors expecting medium to long term returns, SC Securities said.

"However, the risk-pro investors could take the chance of selling their holding and buy back after the Capital Reduction Programme is complete," the stock brokers said in a research report.

MBSL's main shareholder, Bank of Ceylon, has given its consent to the company's proposal to reduce its total share capital from Rs 1.3 billion to Rs 600 million. The bank is awaiting approval from Securities & Exchange Commission, courts of law and the remaining shareholders. MBSL's share price is around Rs 13. SC Securities said the result of the Capital Reduction Programme would be that an investor holding 1,300 shares at a total value of Rs.16,900 would be left with only 600 shares and the price of the share should go up to Rs. 28.17 for the total investment to be unaffected.

Presently, MBSL shares are trading at a historic PE multiple of 7.98 while Price to Book Value is at 10.92 times, based on negative Net Assets Per Share of 1.31 at June 30, 2004.

"At a price of Rs.28 per share the forward PE would be at 16x and the price to book value would be at 2.29," SC Securities said. "Therefore, considering these high ratios, the ability of MBSL stocks reaching Rs.28 immediately after the capital reduction would be remote."

Therefore, it said, investors holding onto MBSL shares are likely to suffer a loss in value in the short term. However, medium to long-term prospects of the share appreciating in value would be very high.

Institutional interest in the share is expected to increase in anticipation of consistent growth and the ability of paying dividends after the capital reduction, the stock brokers said.

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