Lankem Ceylon PLC, an asset rich but troubled business with shareholders funds topping Rs.1.2 billion, has posted a profit of Rs.169.8 million in the year ended March 31, 2009, up from Rs.105.7 million the previous year though at group level, the profit was down to Rs.62.4 million from Rs.738.1 million a year earlier.

The Lankem group carries several contingent liabilities and the auditors, KPMG Ford, Rhodes, Thornton & Company, offered a qualified opinion on the accounts over non-provision of impairment carrying amounts of investments in four subsidiaries – Sigiriya Village Hotels PLC, Marawila Resorts PLC, Beruwala Resorts Limited and Colombo Fort Hotels Limited.

Similarly impairment has not been provided for amounts receivable from several subsidiaries including the three hotel companies and Lankem Consumer Products Limited, the auditors said.

Despite these problems Lankem has declared its highest dividend in seven years of Rs.2 per share.

The company’s Chairman, Mr. A. Rajaratnam, said that despite a difficult operating environment, their four core operating divisions – crop protection, construction chemicals, bituminous products and consumer products "have shown remarkable resilience."

He was however less upbeat about their plantation operations with Kotagala seeing pre-tax profit plunge to Rs.205 million during the year under review from the previous year’s Rs.547 million and Agarapatana posting a loss of Rs.266 million from the previous year’s pre-tax profit of Rs.77 million.

"In addition, the recently concluded wage negotiations have led to a massive increase in the cost of labour. If this increase is not matched by a substantial increase in the productivity per worker, the industry’s long-term viability is likely to be called into question," Rajaratnam said.

"It is unfathomable that productivity in Sri Lanka lags behind every single tea producing nation in the world whilst the cost of labour is the highest."

He said that they have attempted to diversify their plantation operations to different crops, power generation and tourism. However, "unless the issue of wages is addressed fairly, the future of the tea industry in general is bleak."

Lankem’s crop protection division was an industry leader and Rajaratnam was hopeful that previously abandoned cultivable land will be tilled in the next agricultural season following the end of the conflict.

Their distribution network in these areas was in place and they would be able to market their products as and when cultivation resumes, he said. He also reported that they have entered the seed market and was seeing steady growth in this area where they are targeting a 20% market share over the next few years.

"The company hopes, with the assistance of its foreign partners, to introduce new seed varieties currently unavailable to the local farmers," Rajaratnam said.

They were also into export agriculture although the project was yet in its infancy. They had achieved their first harvest and exports during the year under review and hoped this business would be a key profit driver in coming years.

Despite the slow down in building, with adverse economic conditions forcing consumers to delay scheduled construction and renovation of homes, their construction products division had shown steady growth in the course of the year.

"However, the company was able to provide some respite to consumers because the raw materials used for manufacture of these products fell in line with the global fall in the price of crude oil," he said.

He saw good prospects for their paint business in the short-term with reconstruction and rehabilitation in the North and the East but warned that in the long run, "(this) market is rapidly reaching saturation."

"Further growth over the long term will only be possible by the company entering into new overseas markets. These plans are in their infancy but the company places a great deal of importance to this strategic initiative in order to maintain the growth in profitability it has seen over the last few years," he said.

Rajaratnam also made the point that Lankem must equip itself with the tools to effectively compete in the foreign market with the coming years likely to see vital investments in technology.

He reported that they have retained their investments in the leisure sector during the three-decade long civil war. The year under review had seen this segment recording one of its worst ever performances with occupancy rates declining in all three of their hotels. There was also a marked decline in the room rates.

The loss at Sigiriya Village had risen to Rs.40.9 million, at Marawila Resorts to Rs.46 million and Beruwala Resorts to Rs.42 million during the year.

"With the country entering a new era of peace, the prospects for the tourism industry have never been better. Many countries that issued travel warnings have now relaxed or removed them," he said.

But he pointed out that ``the image of Sri Lanka as a budget destination did not help the industry’’ during this period.

"With the condition ripe for growth, the industry and the government should strive to change this image to attract higher paying tourists," Rajaratnam stressed.

Lankem has a stated capital of Rs.281.2 million, capital reserves of Rs.272.8 million, general reserves of Rs.318.3 million and retained earnings of Rs.332.4 million in its books.

Interest bearing borrowings and finance leases were running at Rs.1.4 billion with trade and other payables listed under current liabilities stated at Rs.2.2 billion. Total liabilities were Rs.6.9 billion against total equity of Rs.2.3 billion.

E.B. Creasy & Company PLC with 45.41% followed by The Colombo Fort Land & Building Company PLC (30.77%), M.T.T. Al-Nakib (5.75%) and Darley Butler & Company Ltd (2.22%) are the major shareholders of the company.