Sri Lanka’s economic and political crisis has wiped out US$18.4bn ytd in value from the Colombo Stock Exchange. The decline has been so swift that investors may be missing opportunities and the latest 700bps hike in the policy rate could arrest the collapse of the Sri Lankan rupee.
We have identified three consumer stocks – Ceylon Tobacco, Melstacorp and Royal Ceramics – that could represent value, if the crisis can be brought to a halt. The three stocks are united by the following features:
All are consumer players that make most of their sales in Sri Lankan rupees;
They can pass on input increases to their end-users; and
Two have dividend yields in excess of 4% (for Ceylon Tobacco and Melstacorp), and all three have PE multiples in single digits.
There are, of course, significant risks in the Sri Lankan equity market, as my colleagues Hasnain Malik and Patrick Curran have identified, including capital repatriation and the fallout from a managed default. However, investors may want to consider opportunities in beaten-down consumer stocks that have local costs.