Strategy Note /

Sri Lanka Strategy: Market stabilising post terrorist attack

    Kavinda Perera
    Kavinda Perera

    Head of Research

    Asia Securities
    2 May 2019
    Published by

    The terror attack in Sri Lanka was a first such instance of a coordinated, widespread terror attack in the country, after the conclusion of the 26-year civil war, 10-years ago. In the short run, we expect the tourism sector to be the worst hit with cancellations of existing and forward bookings. Tourism accounts for ~5.0% of GDP and is one of the growth sectors in the economy. Overall, a downward revision in the tourist arrivals for FY2019 is inevitable and based on Sri Lanka’s own experience with terrorism in 1983-2007, tourist arrivals post an isolated terror attack could drop between 15%-25% YoY. Based on initial assessment by the Hotels Association of SL, the industry could see earnings drop by USD 1.5bn (2018 tourist earnings: USD 4.4bn).

    Valuations remain depressed – one-off event opens buying opportunities

    Market valuations remain depressed, with the ASPI trading at 8.6x trailing P/E; at a 32.3% discount to 5-year average and 35.6% discount to MSCI EM index. Looking at the historical context in SL, market value depressions driven by isolated terrorist events generally recover between 70-90 days. However, this was during the height of the war, when the general economic situation was strained. In contrast, while this terrorism event comes post-war, it’s also larger in magnitude given the loss of life and foreign casualties.

    While the current events pose an added threat to price recovery which was weighed down by the fragile political and economic climate, we note that the market has hit a new trough. Highly liquid counters such as JKH (FY20 P/E 10.6x), HHL (FY20 P/E 11.7x), DIAL (CY20 P/E 5.7x) and HNB (CY20E P/B 0.6x) trade at attractive valuations which offers investors the opportunity for selective value investing.

    Changes to our focus list

    We temporarily remove SAMP and LION from our top picks list until the impact from tourism is further assessed and maintain HNB, HHL, DIAL, AAIC and ASIR in our focus list.