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LTL Holdings Limited, set to go public with an IPO in September 2024, faces significant downside risks despite its ambitious expansion plans. The company's overreliance on thermal power generation and delayed projects may spell trouble in an increasingly competitive energy market. In contrast, its peer WindForce PLC, a leading player in renewable energy, showcases better growth potential due to its forward-looking investments in renewable resources. LTL's heavy exposure to fuel cost volatility and delays in its key projects, such as the 100 MW solar power project, raise red flags.
The competitive pressure from peers focusing on renewable energy, like WindForce, makes LTL's reliance on older thermal technologies appear outdated. Furthermore, with LTL’s profit margins shrinking over recent years highlighted by its reduced earnings per share (EPS) and return on equity (ROE) the company may struggle to maintain investor confidence. Given these factors, potential investors should be wary of LTL’s ability to compete effectively, as peers with more aggressive renewable energy strategies may capture market share, leaving LTL at risk of falling behind.
1. High Debt Levels:
With a debt-to-equity ratio of 0.64x and total debt at LKR 47.2 billion, LTL is heavily reliant on debt financing for its capital-intensive projects. This exposes the company to high interest costs and refinancing risks, especially if revenue generation from projects is delayed or underperforms.
2. Fuel Price Volatility:
LTL Holdings has significant exposure to thermal power generation, which depends on volatile global fuel prices (such as heavy fuel oil). Any significant increase in fuel prices could erode profitability, as seen in the past few years when margins were impacted by rising costs.
3. Delays in Project Execution:
Delays in large-scale projects like Sahasdhanavi and the Rividhanavi solar project have already been flagged. Further delays could increase costs and reduce expected returns, negatively impacting cash flow and the ability to service debt.
4. Intense Competition in Renewable Energy:
The energy sector is shifting towards renewables, and competitors like WindForce PLC are well-positioned with larger renewable portfolios. LTL’s slower expansion into renewable energy places it at a disadvantage, as investors increasingly favor companies with more sustainable energy projects.
5. Regulatory and Policy Risks:
LTL operates in a heavily regulated industry. Any changes in government policies regarding energy tariffs, fuel imports, or tax regulations could negatively impact the company’s financial performance. Moreover, its significant reliance on contracts with government bodies such as the Ceylon Electricity Board (CEB) adds uncertainty, especially regarding payment delays or renegotiation of terms.
6. Profitability Concerns:
LTL’s earnings per share (EPS) and return on equity (ROE) have declined over recent years. With a P/E ratio of 15.95x, the company is trading at a relatively high valuation for its declining profitability, which may deter investors looking for better returns.
7. Foreign Exchange Risk:
LTL operates in multiple countries, particularly Bangladesh, where it has USD-denominated borrowings. Any depreciation of the Bangladeshi Taka (BDT) or Sri Lankan Rupee (LKR) against the USD could increase the company’s foreign exchange losses, as seen in the recent financial statements.
8. Liquidity Concerns:
The company’s large capital projects tie up significant liquidity. If revenues do not materialize as expected, LTL may face liquidity constraints, making it harder to manage short-term obligations, including interest payments and operational costs.
In summary, LTL Holdings Limited faces significant downside risks related to its high debt levels, exposure to fuel price volatility, delays in project execution, and competitive pressures in the energy sector. These factors could adversely impact the company’s profitability and future growth prospects, making it a riskier investment compared to peers.
Download Full Prospectus: https://cdn.cse.lk/cms-internal/upcoming/M1IX8zjnkRcESGpG_29Aug2024094816GMT_1724924896240.pdf
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Risk of owning share of Government owned Enterprises
Owning government-owned entities, such as Sri Lanka Telecom (SLT) or LTL Holdings, presents several risks that investors should consider. These risks are tied to government involvement, political instability, regulatory changes, and operational inefficiencies. Here are the main risks of owning government-controlled companies, using Sri Lanka Telecom as an example:
1. Political Influence:
Government-owned entities are often subject to political decisions rather than pure business-driven strategies. In the case of Sri Lanka Telecom, political changes can affect the company’s leadership, strategic direction, and priorities. Frequent shifts in management or board members appointed based on political affiliations rather than expertise can lead to instability and inefficiencies.
For instance, there have been instances where leadership changes at SLT were driven by political shifts, which led to disruptions in its long-term strategy.
2. Inefficient Management and Bureaucracy:
Government-owned firms tend to have bureaucratic hurdles and inefficiencies compared to private firms. For Sri Lanka Telecom, being partly government-owned can mean slower decision-making, inefficient procurement processes, and resistance to modernizing operations due to red tape.
SLT has historically faced criticism for its slow pace in adopting cutting-edge technology and infrastructure, particularly in a fast-moving telecommunications sector where private competitors are more agile.
3. Dividend Policy Uncertainty:
Governments may prioritize extracting dividends from their owned entities to support fiscal budgets, sometimes at the expense of reinvestment into the business. Sri Lanka Telecom has periodically paid high dividends, but this could come at the cost of future growth, as cash needed for infrastructure upgrades or expansion is diverted to meet government revenue needs.
If the government decides to prioritize dividends over reinvestment, it could undermine long-term growth prospects.
4. Regulatory and Policy Risks:
Government ownership often comes with close regulatory scrutiny, which can create uncertainty. For instance, Sri Lanka Telecom is heavily regulated by the government, which sets tariffs, licensing fees, and infrastructure requirements. Any changes in these regulations, driven by political or economic considerations, could hurt profitability.
In SLT’s case, there have been regulatory delays in approving new services and tariff adjustments, which affected the company’s ability to compete with private-sector rivals.
5. Financial Support and Moral Hazard:
Governments may provide financial support to their entities during tough times, but this can also create a moral hazard, where management might make riskier decisions, assuming that the government will step in to bail them out.
Although Sri Lanka Telecom is relatively self-sufficient, other state-owned entities have had to rely on government bailouts, which can put a strain on public finances and increase investor skepticism about long-term viability.
6. Privatization or Divestment Risk:
Governments may consider privatizing or selling stakes in their entities to raise funds. This can create uncertainty for investors, as seen in discussions about the possible privatization of Sri Lanka Telecom. Such moves can lead to share price volatility, concerns about job cuts, or strategic shifts that may not align with the company’s long-term goals.
In SLT’s case, the government has floated the idea of selling part of its stake, creating concerns about how the new ownership might affect the company's operational independence and strategy.
7. Market Competition:
Government-owned entities are often slower to react to competition due to their bureaucratic nature. In the case of Sri Lanka Telecom, the company has been facing stiff competition from private telecom players who are more agile in introducing new technologies and services. This has led to a gradual loss of market share in key segments like mobile services.
Example: Sri Lanka Telecom and Political Instability
In 2023, there were talks about the divestment of a government stake in Sri Lanka Telecom as part of the country's broader strategy to raise funds during a financial crisis. This announcement led to stock price fluctuations and investor concerns about potential changes in the company's governance and strategic direction. While privatization may improve efficiency, it also brings uncertainty regarding how the new ownership would manage the company.
Summary:
Investing in government-owned entities like Sri Lanka Telecom comes with risks such as political influence, inefficiency, regulatory challenges, dividend uncertainty, and competition from private firms. While such entities may offer a degree of stability due to government backing, these risks can lead to slower growth, unpredictability, and long-term challenges for investors
What Happened to Ceylon Oxygen IPO?
The shares of Ceylon Oxygen were delisted from the Colombo Stock Exchange (CSE) after a takeover by Linde Group in 2010. Linde acquired a 95.4% stake in Ceylon Oxygen, which was previously held by Europium Ltd. Following this acquisition, Ceylon Oxygen became a subsidiary of Linde, leading to the voluntary delisting of its shares from the CSE. The decision to delist was part of a strategic move by Linde to consolidate ownership and streamline operations under its global structure.
The delisting was contested by some minority shareholders, who argued that the valuation offered was unfair and pushed for the Securities and Exchange Commission (SEC) to cancel the delisting to ensure a free market for the shares. Despite these protests, the delisting proceeded, and Ceylon Oxygen was removed from the public market.
This case highlights the risks minority shareholders may face when a company is taken over by a larger entity, particularly regarding the valuation and the potential loss of liquidity when shares are no longer traded publicly.
