Stock  Taking

Worthless Listing

by Rabindra Bhattarai

Nepse was empowered to enlist and delist the companies even before second amendment of the ‘Securities Listing By-Law 1996’ but the delisting criteria were not clear and this resulted in the speedy rise in the number of the listed companies which reached as high as 115.

However, increased number of companies listed in the stock exchange does not mean that the secondary market is becoming more efficient. Quantitative growth of the listed companies does not necessarily mean the growth of secondary market. What is necessary is a qualitative growth of the stocks listed. The increased number of companies being listed may only mean more listing fee earning for the stock exchange.

More importantly, it does not provide anything to the existing and potential investors. What develops the market qualitatively is the listing of the stocks from these companies which have positive net worth, are continuously earning profit and creating good image among the investors, and which have good future prospects. But companies which are incurring losses for a long period of time, have negative net worth and are in a technically insolvent state can give nothing to the investors except dissatisfaction. There is need for clear provisioning in the laws to delist such companies from the exchange.

Nepse delisted 25 companies after it was empowered by the second amendment in the ‘Securities Listing By-law 1996’on July 2, 2002. However, the delisting criteria followed by Nepse are questionable. While the criteria consider the payment of the fee for the renewal of the listing, holding of annual general meeting (AGM), submission of annual audited financial report and some other factors mentioned in the listing agreement between the company and Nepse, conspicuously ignored is the solvency aspect. Even these stated criteria are not being carefully observed. If Nepse considers holding AGM and submitting audited financial report as major criteria for delisting the companies, why has not it delisted companies like Rastriya Beema Sansthan which have neither audited their performance for long nor have held AGMs as required.

Many companies listed in the exchange are technically insolvent with negative net worth. The common stocks of such companies have no value at all and have become worthless. Even then, Nepse has not been delisting them. Though Nepal Bank Ltd. (NBL), which has a negative net worth, was delisted recently after a lengthy debate over the matter, many other companies, which are shown in the annual report for the fiscal year 2002/03 of the Securities Board (SEBO) of Nepal as having negative net worth, are still listed in the Nepse (see table). Out of the 67 companies, which submitted their annual report for the fiscal year 2001/02 to the SEBO, 6 were with negative net worth. There also are several other companies which have their stocks trading at substantially lower prices than their face value, such as Necon Air Ltd., Gorakhkali Rubber, Taragaon Regency Hotels Ltd., Oriental Hotels Ltd., Harisiddhi Bricks etc. Nepse has not taken any initiative to delist them.

If these stocks are delisted, it will, hopefully, stir the shareholders to pressurize the managements in these companies to improve their performance.

(Bhattarai teaches Finance to the MBS students)

Sex Appeal in Stocks

by Jeevan Basnet

We can find a common thread running through different variable in growth rates. To make it simple, let us substitute an individual company for the whole market and see what five years of growth at various rates do when we start with a base year's profit of Rs. 10 per share. Then, let us apply the kind of average multiples seen in our market to the base year’s earnings and to those five years hence. Interestingly, 8%, 12% and 15% growth stocks would mathematically coincide around 9 PE.

Initial price paid for Rs. 10 earning stock was Rs. 145 for a 8% growth in the base year. That Rs. 145 amounts to a PE 9.8 [145/14.7=9.8] in the fifth year, which was 14.5 [145/10=14.5] in the base year. The same thing goes for the 12% and 15% companies as well. This, when looked five year hence, the different purchase price amount to approximately 9 times earnings no matter what the difference in growth rate had been.

To be more precise take the average of the three earning multiples at the end of five year, it still won't leave the 9 PE bracket.

9.8+9.0+8.7/3=9.1

With this mathematical equation we can nevertheless presume what price a 30% compounding growth stock shall enhance given five year duration. Rs. 10 earning in the base year shall grow to Rs. 37.1 at the end of five year at 30% compounding growth.

Therefore the price: 37.1x9=Rs. 334

This not yet recognized figure translates to a whopping 24% compounding profit to the initial investment of Rs. 115 during IPO. A clear possibility of beating the market.

Such mystery of the stock market and valuable profit making ideas are numerous, however one should not very much bend only on the final outcome which is undoubtedly the by-product of the glamorous growth rate embedded within the stock. Invitation from such stock makes someone fall in love.

(Basnet is one of the prominent active participants in Nepali stock market as an investor as well as stock analyst)

Corporate Scorecard

#  Premier Finance Co. Ltd. held its 7th annual general meeting (AGM) reporting a net profit of Rs. 469,345 for the fiscal year 2002-03. The AGM for this year has approved to distribute 12 percent dividend to the shareholders. The company in the last fiscal year had collected 158 million as deposits and disbursed loan Rs. 153 million.

#  Bhajuratna Finance and Saving Co. Ltd. held its 9th AGM reporting a net profit of Rs. 4.5 million for the fiscal year 2002-03. The company in the same period in previous fiscal year had earned a net profit of Rs. 352,469. The extensive increase in the profit during the year by 11.92 percentage over the previous year is the result of the control of staff and office expenses and increased interest as well as other income.

#  Goodwill Finance Co. Ltd. held its 9th AGM recently and the meeting approved to capitalize the dividend to increase the paid up value of the shares to Rs. 100 from present Rs. 95 per share. The company during the fiscal year 2002-03 earned a net profit of Rs. 2.3 million whereas the net profit in the previous fiscal year was only 92,000. The company pushed up its profit by 2499 percent this year with increasing interest income and decreasing office expenses.

#   People’s Finance Ltd. held its 7th AGM recently reporting a net profit of Rs. 773,000 for the fiscal year 2002-03. The net profit of the company in this year has slumped by 54.18 percent over the net profit in the previous fiscal year when it had earned a net profit of Rs. 1.69 million. Though the company has increased its interest income and non operating income as compared to the previous fiscal year, the increase in bad loan write off, and loan loss provision dragged the profit down.

#   Lalitpur Finance Co. Ltd. has brought out the annual performance report for the fiscal year 2002-03. During the year the company has earned a net profit of Rs. 11.6 million whereas the profit in the previous fiscal year was Rs. 9.6 million. The company for this year has not proposed any dividend.

#  Nepal Bank Ltd., the oldest bank of Nepal, has brought out its annual audited financial report for the fiscal year 2002-03. The bank in the year has incurred a net loss of s. 251.73 million whereas the loss in the previous year was Rs. 3,071.30 million. In this fiscal year total loss of the bank has reduced by 91 percent over the losses in the previous year.

#  Himalayan Bank Ltd., a joint venture with Pakistan based Habib bank Ltd. held its 11th AGM reporting a net profit of Rs. 212 million for the fiscal year 2002-03. The bank in this year earned an operating profit of Rs. 662.9 million and the profit in the previous year was Rs. 554.3 million. The bank has increased its operating profit almost by 20% over the previous fiscal year.

     The AGM has also approved to distribute 1.32 percent cash dividend of paid up capital and 25 percent stock dividend to the shareholders. The bank collected Rs. 21,007 million deposit in the fiscal year 2002-03 increasing by 12.83% over the total deposits of Rs. 18,619 million in the previous fiscal year.

#   Nepal Life Insurance Co. Ltd. held its 4th AGM on 10th March 2004. The company, in the fiscal year 2002-03 collected Rs. 188.4 million gross premium writing 13,842 policies. Moreover, the company during two and half years of its existence has invested Rs. 562.4 million in the portfolio and 35,000 policies are written.

#   Narayani Finance Ltd. has increased paid up capital to Rs. 30 million. The company has been distributing 20 percent dividend each year so far it has distributed a total of Rs.3.5 million  as cash dividend and Rs. 7.3 million as stock dividend. During the first seven months of the current fiscal year 2003-04, the company collected Rs. 220 million as deposits and disbursed Rs. 197.5 million as loans.

#   Samjhana Finance Company Ltd. has disclosed its semi annual unaudited financial report for the first six months of the current fiscal year 2003-04. During the period the company earned an operating profit of Rs. 15.7 million.

#   Pokhara Finance Co. Ltd. has reported an unaudited operating profit of Rs. 15.5 million for the first nine months of the current fiscal year 2003-04. The company in the first six months had reported an unaudited operating profit of Rs. 13.5 million. During the three months it has increased its operating profit by 14.8 percent over the first six months operating profit. The company collected Rs. 464.5 million deposits and made a loan investment of Rs. 478.5 million by the March 14, 2004.

#   Nepal Housing and Development Finance Co. Ltd. is expected to pay 15 percent dividend in the current fiscal year as in the previous year, say reports quoting company officials. During the first 8 months of the current fiscal year, the company earned an unaudited operating profit of Rs. 7.6 million. This declaration of the company is expected to boost the share price in the secondary market.

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