CSE at forward P/E ratio of 15.1

Antonym · 1 CSE at forward P/E ratio of 15.1 Thu Mar 31, 2011 12:34 am

Antonym

Vice President - Equity Analytics

Posts : 1090
Equity Stars : 7460
Reputation : 275
Join date : 2011-02-09

"The CSE is trading at a forward price-to-earnings (P/E) ratio of 15.1, one of the highest among emerging markets, compared with 11.3 in Asian markets and 11.8 for global emerging markets."

The above statement from Reuters implies that the CSE is over-priced. However, that is not the case.

Taken in their entirety, Asian / global emerging markets (there are a couple of big exceptions) are not growing as fast as Sri Lanka is. For emerging markets, a forward P/E of 2 times the country's rate of growth is believed to be acceptable. So, if our economy is expected to grow at 7.5% per annum for the foreseeable future, the CSE is priced just about right - on an overall basis.

Any views on this...?

UKboy · 2 Re: CSE at forward P/E ratio of 15.1 Thu Mar 31, 2011 3:46 am

UKboy

Senior Vice President - Equity Analytics

Posts : 1943
Equity Stars : 7347
Reputation : 391
Join date : 2011-02-08
Location : Earth

Antonym wrote:"The CSE is trading at a forward price-to-earnings (P/E) ratio of 15.1, one of the highest among emerging markets, compared with 11.3 in Asian markets and 11.8 for global emerging markets."

The above statement from Reuters implies that the CSE is over-priced. However, that is not the case.

Taken in their entirety, Asian / global emerging markets (there are a couple of big exceptions) are not growing as fast as Sri Lanka is. For emerging markets, a forward P/E of 2 times the country's rate of growth is believed to be acceptable. So, if our economy is expected to grow at 7.5% per annum for the foreseeable future, the CSE is priced just about right - on an overall basis.

Any views on this...?

That is a good improvement & few months ago it was around 20.
Mainly- if the companies in diversified holdings can produce impressive profits in new couple of quarters we can see this P/E value goes further down. But a significant improvement in profits will be very challenging.
Especially for JKH & SPEN. Both are investing heavily on new projects. But I think HHL,CFLB & CTHR will be getting better (CTHR & HAYL has to go long way before justify its share value).
Sorry I have lack of knowledge about CARS group. Somehow I always try to avoid looking into this group.

Hotel sector still overly valued and will take few more months before settle down. Some hotels badly need refurbishments. But compare to diversified sector contribution to the overall P/E value, hotel sector high P/E value does not make significant impact on overall PE value of the market.

investment trust sector also have high P/E.
In general we cannt really judge an investment trust by its PE. But sadly few of the most notorious companies are listed in this sector.

All other major sectors have quite ok PE value.

I think coming quarters overall PE value will go further down & settle around 15-13. Government cooperative tax reduction will be vital for this.

But if I tell the truth still this is not an attractive market for foreign hedge funds.

Academic · 3 Re: CSE at forward P/E ratio of 15.1 Thu Mar 31, 2011 10:19 am

Academic

Senior Manager - Equity Analytics

Posts : 454
Equity Stars : 5450
Reputation : 103
Join date : 2011-01-23

Theoretically forward P/E ratio can be derived as follows.

P/E= (1-b)/(r-g) (derived from Gordon model)

Since g=ROE*b, b and ROE are retention ratio and return on equity respectively. r is the required rate of return.

P/E=(1-b)/(r-b*ROE)

As ROE in SL businesses are high as they are recovering from a contraction (with positive future) and dividend payout is substantially low (so high b). And also with economic stability, r is also decreasing. Thus, IMHO, 15.1 seems not a big concern. All depend on future performance of companies.