The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation. It shows whether a company's stock price is overvalued or undervalued
S&P Sri Lanka 20
The S&P SL20 index includes the 20 largest companies, by total market capitalization, listed on the CSE that meet minimum size, liquidity and financial viability thresholds. The constituents are weighted by float-adjusted market capitalization, subject to a single stock cap of 15%, which is employed to reduce single stock concentration.
To be eligible for inclusion, a stock must have a minimum float-adjusted market capitalization of Rs. 500 million, a six-month median daily value traded of Rs. 0.25 million, have been traded at least 10 days of each month for the three months
Price/Earnings Ratios for CSE S&P SL20 - As at 03 December 2020
Aitken Spence has a negative P/E ratio this quarter as it made a loss for the quarter ending 30th September 2020. A loss leads to a negative EPS resulting in a negative calculation for the P/E. Possible reason is that SPEN is heavily exposed to tourism and hospitality which had to endure the double whammy of Easter Attacks in 2019 and COVID 19 crash from February 2020.
SPEN is a professionally run group with a long history of solid performance. They will bounce back as soon as conditions are right.
P/E Ratio less than 10 times - That is currently undervalued stocks
Low P/E ratio means that investors are valuing the stock price lower even when the stock has a good EPS. This is because the market is expecting future earnings of these companies to fall.
If you check the graphic, you can see that in S&P SL20, less than 10 times P/E ratio group is entirely banks and finance companies. This is probably attributable to the fact that COVID 19 has hammered banks in many ways.
1] Many businesses and private borrowers are experiencing earnings drops which has resulted in them being unable to service their loans
2] The Central Bank mandated debt moratorium which is now extended.
3] Many banks have large exposure to hotel and tourism sector which will take at least 2-3 years to recover from COVID disruption.
The result would be that by the end of this financial year these banks are expected to report that a significant portion of their loan portfolio has become non performing loans.
P/E Ratio between 11-20 block is also populated by largely populated by banks and financial services.
The best P/E performer in this lot is the LOLC Group which has a diversified portfolio including agriculture, manufacturing, trading and construction. These sectors are expected to pick-up faster and recover quickly. Therefore, investors are having a higher confidence in the company. This confidence is reflected in Rs.132/- stock price and 18 times P/E ratio.
Above 20 times P/E Ratio
Looking at this block, we can see that these firms are either highly diversified with a distributed risk (JKH, Melstra, Richard Peiris, Access) or providers of essentials such as telecom or tobacco (Dialog, CTC). Big apparel, textile and related exporters are doing well with some managing to jump into the PPE train at just the right time. E.g. Brandix, MAS and Teejay.
While JKH is heavily exposed travel, leisure and hotels, JKH does have good cash cows like their FMCG operation CCS (Elephant House), Keells Super organized retail operation and Export orientated plantations. They also have a strong IT, shipping and logistics businesses. These would help mitigate the risks.
LOLC Finance is the only aberration
The firm has a paltry stock price of 3.50 and a very low EPS of Rs. 0.03 (three cents per share). What we could be seeing is a pump and dump strategy by some interested parties with large holdings. I would not comment any further as I really don't know what is going on with this stock.
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