|
Hayleys
and shareholder value
Our columnist analyses the performance of the Hayleys conglomerate
and suggests that while it is a good stock, it can perform better.
With investment in sectors such as plantations, coir, rubber products,
and agriculture it is no doubt that Hayleys is one of the highly
diversified conglomerates in the Colombo bourse which has the potential
to create significant quantum of shareholder value for its investors.
It had posted an EPS of Rs 10.37 for the year 2005 over a turnover
of Rs 19.44 billion and as I write this article a share trades at
Rs 135.
Performance criteria
The objective of this article is to consider the performance
and the potential of the group in terms of the following factors
which I believe are essential to shareholder value.
*Financial performance
* Business strategy and risk
* Gearing and risk
* Leadership and corporate governance
* Valuation factors
Financial
performance
From an earnings perspective the company has achieved a growth of
16.6% in the EPS front over 2004/2005. The Return on Capital Employed
(ROCE) of the group had increased from 12.3% to 14.6%. JKH had achieved
an ROCE of 12.9% for the similar period.
Business
strategy and risk
The core business strategy of the group has been diversification.
Sectors had achieved mixed returns for the financial year with those
such as hand protection, agriculture, transportation and inland
marketing generating returns in excess of 15%. Sectors such as fibre,
environment, resorts, knitted fabric and plantations have in fact
posted returns less than 15%.
The story is similar to many conglomerates in terms of results being
mixed across sectors. The diversification of the group across sectors
as well as many of the sectors being focused on export markets tends
to lower the business risk experienced by the shareholders.
Gearing
and financial risk
Gearing, which is the measure of the debt capital of a company when
compared to the total equity capital employed, is about 102%. This
has increased from the previous year’s level of 77%. The gearing
indicates the financial risk faced by a group and as it increases
the risks faced by the shareholder would also increase. The current
rate is not too bad provided the debt funds are invested towards
lucrative business segments.
Leadership
and corporate governance
I am a passionate advocate of the principle that the realisation
of shareholder value depends on leadership and corporate governance.
The group is lead by R.Yatawara who is both the chairman and CEO.
He has significant experience with the group with many years as
deputy chairman. In common with many Sri Lankan conglomerates the
roles of chairman and CEO have not been segregated. The corporate
governance best practice is for the effective sharing of duties
where the chairman heads the board while the CEO heads the company.
The company does possess other practices such as audit committee
and remuneration committee.
Valuation
factors
If we look at the EPS of 10.37 and compare it with the market price
today which is Rs 135 the PE multiple (confidence) is 13. JKH on
the other hand trades at Rs 174 with an EPS of 6.52 indicating a
PE of 26. If Hayleys can achieve a PE of 20 the share price should
reach Rs 207 (20 ×10.37). The path to this would be strengthening
the business portfolio, minimising risks, adopting positive strategies
and implementing the best practices in terms of corporate governance
and other aspects of business management.
Message
to the investor
It is a good stock but it can definitely perform better with the
right focus and strategy. It is up to shareholders to extract value
by exerting the right pressure on management.
(The writer could be reached at -
ravim@icbsgroup.com) |
