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LOLC SEC ValuationShare PriceUpside/(Downside)Risk Level(refer page 29 for recommendation)
Warrants ValuationW0022
LOLC SEC Valuation LKR 16.70
Warrant Price LKR 20.00
W0023
LOLC SEC Valuation LKR 22.20
Warrant Price LKR 37.10
Share DetailsBloomberg Ticker JKH SL
CSE Sector Diversified
GICS Sector Industrials
Market Cap (LKR Mn) 194,610
Issued Quantity (Mn) 997
30-day avg T/O (LKR Mn) 82.52
Beta (6 months) 1.25
Investment FundementalsLKR Bn FY 14 FY 15 FY 16 (F) FY 17 (F)
Revenue 89.26 91.58 97.29 105.22
Net Profit 11.72 14.35 15.93 18.26
S/H's Equity 122.89 137.80 162.07 172.98
Total Assets 202.47 218.09 271.22 318.48
ROA(%) 5.79 6.58 5.87 5.73
ROE(%) 9.54 10.41 9.83 10.56
Price MultiplesPE (X) 14.11
PBV (X) 1.41
Price to Sales (X) 2.16
Divdend Yield (%) 1.80
Price Behavior
Per Share Details as at 29.05.2015 (LKR)Earnings per share (trailing 12m) 13.82Net Asset Value per share 138.15Sales per share (trailing 12m) 90.38Dividend Per Share (trailing 12m) 3.50
Business Nature
Top Shareholder Details as at 31.03.2015
Mr. S E Captain 11.10%Broga Hill Investments Limited 10.40%Paints & General Industries Limited 6.70%
Source:CSE, Bloomberg, LOSEC Research
01 June 15
Analyst (s): Gayan Rajakaruna|+94 117 880837|gayanraj@lolcsecurities.com , Hiruni Perera|+94 117 880809|hirunipe@lolcsecurities.com
Recommendation Guidance, Important Disclosures and Analyst Certification: Page 29
Valuation
Strategic Player Leveraging on Sri Lanka's Growth Story
Sri Lanka is poised for robust economic expansion from the revival of the economy after the
end of civil conflict in 2009 and ensued progression made by the country with more stable
macro economic fundamentals. Country's GDP has grown by 7.5% in real terms since 2009
and is expected to continue similar growth momentum. JKH has been able to establish strong
presence in key growth segments of the economy with market leadership in most of its
businesses.
JKH historically has been able to make strategic entries into growth sectors. The latest entry
is into mixed development projects via its flagship investment “Waterfront Integrated Resort
Development Project (IR)” which is expected to drive the next growth phase of the group. We
estimate the project to account for 26% of the valuation of the group and coupled with
existing portfolio of businesses JKH presents a unique opportunity for an investor to get
exposure to Sri Lankan economy.
We assume a cost of equity of 12.34% taking the nature of investor composition in to account.
We believe JKH will continue to be a key player in the Sri Lankan economy. We have valued
the company using the SOTP approach. Our valuation model values the share price at LKR
262.24 and accordingly counter is trading at a discount to our valuation. We give BUY
recommendation for JKH.
Salient Sections of the Report
JKH, a unique proposition (pg.2)|Waterfront, the next big thing (pg.4)|CF&R, a key growth
sector (pg.6)|Leisure the growth star (pg.7)|Transportation, a steady cash cow (pg.9)|Real
Estate at a growth stage (pg.10)|Financial sector, an underpenetrated growth segment
(pg.12)|IT, plantation(pg.14)|Financial snapshot of JKH performance (pg.15)| Valuation
(pg.16)| Sensitivity (pg.18)|Earning risk comment (pg.18)|Appendices (pg.19)
JKH is a diversified business operating in Sri Lanka. Its
businesses include food and beverage, transportation,
leisure, property development, banking, insurance and other
financial services, IT and tea and rubber plantations.
John Keells Holdings PLC
Initiation Coverage
BUY
Equity Research
LKR 262.24
34.41%
Investment Considerations
Well established portfolio of businesses to drive the financials in medium term: JKH
current operation includes well diversified portfolio of businesses with strong foothold on
their respective sectors. It has market leadership in key growth segments, tourism (largest
hotel operator in the country) and consumer food (market leader in beverage and ice cream).
The transportation sector serves as the cash cow for the group with its container handling
and bunkering businesses. JKH's presence in financial services through insurance and
banking further strengthens its business portfolio. Accordingly we forecast JKH to show 13%
CAGR in bottom line for next two years.
Strong Corporate Governance gives flexibility in strategy as well as funding: JKH does
not have single entity or group entity controlling shareholder and the Board of directors
consist of majority independent directors. Thereby the Board has the flexibility to drive the
company's strategy to optimize stakeholder expectations including minority shareholders.
JKH has 100% free float which consists of majority foreign shareholders gives the group
flexibility to raise equity capital with fair degree of ease.
Strong Balance Sheet provides aggressive funding options: The group is fairly low geared
and hence can conveniently leverage up to take up the investment opportunities without
putting significant burden to the balance sheet.
Water Front Project to drive the next growth phase of the Group: USD 820 million
project will drive the next growth phase of JKH. We has estimated a value of LKR 68.5 billion
(USD 515 million) for the project on our future projections and hence the group's overall
value will be significantly depend on the project's feasibility in the future.
Medium
LKR 195.10
175195215235255275295
06/05/14 09/05/14 12/05/14 03/05/15
LK
R
JKH Share Price ASI movement (adjusted to JKH base price)
Initiation Coverage: John Keells Holdings PLC | 01 June 15
JKH, a unique proposition among diversified conglomerates in the country
Sound Corporate governance to drive the strategic thinking
Graph 2: Transformation of JKH through strategic acquisitions/developments
Source: Annual reports & LOSEC Research
Strong asset base and flexibility of raising funds
Graph 3: Total Asset value comparison (LKR Mn)
Source: Annual reports
Graph 4: Composition of PPE Graph 5: Total Lands and Buildings (LKR Bn)
Source:CSE, Bloomberg, LOSEC Research
Source: JKH annual report Source: JKH annual report
2 | LOLC Securities Limited
Graph 1: Composition
of EDs and NEDs
This sound corporate governance structure has historically helped the group to aggressively make strategic decisions
to maximize group value without being held back on conflicted interests. We believe it has been a key strategic
advantage JKH is enjoying compared to country's other large corporates which are mainly controlled by single
parties. Thereby JKH has become the largest blue chip it is now, and is placed well to continue to look into strategic
opportunities, with latest being the waterfront mixed development project.
JKH has a track record of strong asset base relative to peer conglomerates in Sri Lanka. JKH also owns the largest
private land bank in Colombo which is of 287.94 acres of freehold land and 144.48 acres of leasehold land which
includes real estate within and out of Colombo. Real Estate contribution to our valuation is 19%.
Strong assets base
relative to peers
Significant proportion
of PPE consist of lands
and Buildings owned
by JKH
Except for Chairman, Deputy Chairman and Finance Director, the board of JKH is consisting of Non-Executive
Independent directors. Accordingly there is no shareholder nominee within the board giving the group flexibility to
drive the strategy to optimize the shareholder wealth as a whole with minimal single party influence. The company
has 98% public free float in its shareholding structure with 2% of the issued shares owned by executive directors.
The company also has ESOP plans which helps to further align employee interest with shareholder wealth generation.
202,474
159,388
81,35561,145 49,126
34,379
JKH CARS HAYL SPEN CTHR HHL
55%21%
24%land and buildings
Buildings onleasehold lands
Other
23.5620.85
24.04
38.8236.15
1015202530354045
2010 2011 2012 2013 2014
30%
70%
Executive directors
Non Executive Directors
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Balanced Shareholding Structure to generate equity raising opportunities
Source: Annual reports & LOSEC Research
Source: Annual reports 2014, Bloomberg
Source: Annual reports, Bloomberg Source: Annual reports, Bloomberg
Source: Annual reports
Source: JKH annual report
2 | LOLC Securities Limited 3 | LOLC Securities Limited
Graph 6: Cash and Cash equivalents of JKH and peers (LKR Mn)
Strong cash position
combined with less
gearing will open up
further avenues for
raising debt to venture
into new projects
Strong cash position and low gearing to allow for investments
Graph 7: Comparison of gearing ratio of JKH and peers Graph 8: Cash position and gearing of JKH
The shareholding structure has well distributed shareholder ownership with non of the single party ownership
exceeding 20% stake of the company. It has significant foreign and institutional ownership with foreign holding
accounting to 54% of the company. The company has strong potential to raise equity capital with the strategic
shareholder, which is reflected by successful right issue carried out to fund the water front project.
JKH has maintained a strong cash balance position (including cash in hand and short-term investments) over the past
few years, with cash and cash equivalents making up approximately 30% of total assets in FY14 (20% in FY15 as per
interim results). The company also has been able to generate strong free cash flow balances and gearing has
continued be in a declining trend over last 4 years whilst retaining below 30% in FY14. However due to the debt
financing of approximately USD 456Mnfor JKH’s flagship project “Waterfront Development”, gearing is likely to
increase at the latter part of the project period .However the company has remained largely a self-financed business
during previous years, in relation to its local peers. JKH’s cash position also places it at a considerable advantage
relative to other domestic conglomerates.
0
10
20
30
40
50
60
70
80
90
100
JKH SPEN CARS EXPO HAYL HEMS
2012 2013 2014
%
60,508
13,316
18,067
2,674 2,691 3,133
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
JKH SPEN CARS EXPO HAYL HEMS
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2012 2013 2014 2015 2016F 2017F
Total debt Total equity
Net Cash and Cash Equivalent Gearing
LKR Mn Increasedgearing due to waterfront
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Waterfront Integrated Resort Development Project (IR): The next big thing
Source: JKH web site Source: LOSEC Estimates
Source: Annual reports 2014, Bloomberg
Table 1: Valuation breakdown
FacilityUSD (Mn) LKR (Mn)
Luxury Hotel 173 22,966
Conferencing Facility 54 7,194
Shopping Mall 56 7,424 Source: Annual reports, Bloomberg
Integrated Entertainment Facility 143 19,048
Residential Tower - 1 &2 48 6,402
Office Complex 32 4,243
Car Park 9 1,217 Total 515 68,495
Source: LOSEC Estimates
3 | LOLC Securities Limited 4 | LOLC Securities Limited
Value derived from
Waterfront is LKR 68
per share
Value
We have carried out a comprehensive analysis of IR Project based on publicly available information and management
discussions and valued separately from the JKH Group to capture multiple revenue and cost estimates applicable to
different facilities of the Project.(please refer table: valuation breakdown below) .
We have used DCF method in driving the value of the Project. Accordingly we computed the NPV of each facility
separately and estimated the total valuation of the project at LKR 68.5 billion (USD 515 million). We have taken Cost
of Equity at 12.34% which is 5% premium to 3 year Sri Lankan Govt Treasury Bond Yield. The Cost of Debt was
estimated as 6.2% (including currency cost).
Diagram 1: Artist impression of resort Graph 9: Estimated NPV distribution
Valuation
Casino issue: Since the current government disapproved the casino facility to be in place under this integrated
development which had already been approved under the previous regime, we are of the view that JKH will proceed
with the Project excluding the casino facility in this integrated development program.
IR project to increase
JKH value by 35%
IR Project is the largest private sector investment to date in Sri Lanka with an estimated cost of USD 820 Mn. Given
the magnitude and the importance of this strategic investment to the Group, the estimated project cost accounts for
over 50% of the total asset value of JKH’s balance sheet FY15.
The project will generate diverse revenue streams from luxury hotel, two residential towers, office complex and high
end retail mall along with an Integrated Entertainment Facility enabling the landscape of Colombo to be transformed
to a fast-phased modern metropolitan in the South Asian Region. The project is now in progress with required
government approvals with a plan to complete it by the end of 2018. (Please refer appendix: pg.23 for more about
IR)
34%
10%11%
28%
9%6%
2%
Luxury hotel
Conferencing facility
Shopping mall
IntegratedEntertainmentFacilityTower 1 and 2
Office complex
Car park
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Waterfront Integrated Resort Development Project (IR): The next big thing (cont.…)
Table 2: Assumptions of Waterfront project valuation
Source: LOSEC Estimates
4 | LOLC Securities Limited 5 | LOLC Securities Limited
Car park Built up area - 310,000 sq.ft
(2450 slot) 56 -Daily revenue=USD 20/day
No. of parking slots to be rented=1000
*Remaining 1450 to be allocated for hotel
-Estimated size of standard car
park slot = 7.9ft * 16ft
Estimated Built up area -
1.56Mn sq.ft
(source: LOSEC estimates)
Integrated
Entertainme
nt facility
Built up area - 400,000 sq.ft
Rentable area - 307,000
sq.ft (207,000 sq.ft
+100,000 sq.ft)
*100,000 sq.ft rentable area
to be added from vacant
Casino facility (source:
LOSEC estimates)
Shopping
mall
150285 3%
*low growth
due to
absence of
casino
Average visitors per year - 100,000
Average revenue per visit - USD 30
Estimated operating margin - 30%
Year 1 - 50% occupancy
Year 2 - 80% occupancy
Year 3 - 95% occupancy
Estimated
Investment -
USD Mn
5%
* in par with
estimated
YoY rent
price
increase
This is a large office complex
with Grade A office space. The
JKH is on the view that JKH will
be able to sell at least 95% of
the rentable space by FY 21.
Office
Complex
Rent price - USD 5 per sq.ft per month
(inflation adjusted peer avarage rent rate)
Year 1 - 30% sales of rentable space
Year 2 - 85% "
Year 3 - 98% "
5%
* in par with
increase in
local office
space rates
As per management discussions,
both towers will fall in to
premium residential category
which will be equivalent to
existing JKH residencies
"Monarch" and "Emperor".
Target market will be rich and
upper middle class segment.
The management is very
optimistic on apartment unit
sales with plans to sell off all
431 units by end of FY20.
Tower 1: built up area -
366,000 sq.ft (231 units)
Tower 2: built up area -
258,000 sq.ft (200 units)
Residential
Tower 1
Residential
Tower 2
150 1%
*in par with
increase in
YoY
management
fee
Tower 1 -
Average price per sq.ft - USD 375
FY 15 - 30%, FY16 - 30% and FY 17 - 40%
pre sales of total number of units
Tower 2 -
Average Price per sq.ft - USD 386
(estimated based on 3% premium added
tp Tower 1 rate)
FY17 - 30%, FY18 - 30% and FY 19 - 40%
pre sales of total number of units
*Both towers be fully occupied and
operational by FY20(source: LOSEC
estimates)
Tower 1 - 67
Tower 2 - 47
10073Built up area - 400,000 sq.ft
Rentable area - 254,000sq.ft
Rent price - USD 5 per sq.ft per month
(inflatation adjusted rate of Crescat
Boulevard)
Year 1 - 30% occupancy
Year 2 & 3 - 95% 95% occupancy
*Crescat Boulevard currently operates at
95% occupancy
We assume that Integrated
Entertainment Facility
(excluding Casino) will have a
significant contribution to the
overall project valuation. We
believe that this will be in par
with entertainment facilities of
mixed development projects in
the region.
This will be established across
the project premises capitalizing
part of area which was already
allocated for Casino and
remaining space after allocating
for other facilities.
Estimated Built up area
Average Room Rate - USD 180,
(inflatation adjusted rate of Cinnamon
Grand Executive room)
F&B and Banquet revenue = Cinnamon
Grand revenue composition
Occupancy rate - 75% and 5% YoY
growth
Luxury hotel 800,000 sq.ft
(800 guest hotel rooms)
146 150
10%
* LOSEC
estimates
Conferencing
facility
73 100
Construction
Cost Estimates
-USD/sq.ft
Revenue Estimates Other assumptions/ explanationsExpected
terminal
400,000 sq.ft (2500 pax)
*size equivivalant to
proposed shopping mall
(source: LOSEC estimates)
73 125 2 events/day * 2500 pax
1 pax - USD 100 revenue
Year 1 - 60% capacity
Year 2 & 3 - 95% capacity utilisation
The estimated built up area will
include 400,000 sq.ft of common
area and 800 luxury suits of the
size of 500 sq.ft average each.
This is a high end shopping mall
which will largely attract
tourists for their shopping
needs.
This will be the largest
conferencing facility in Colombo
which will include ball room
facilities, conferencing
halls/rooms in different
capacity, meeting rooms and car
park facility. The management
expects very high yield on this
conferencing facility.
7%
*in par with
tourist
arrival
growth
Facility
Initiation Coverage: John Keells Holdings PLC | 01 June 15
CF & R, a key growth sector of the Group
Graph 10: CF& R revenue vs group revenue Graph 11: GDP per capita and CF&R seg. revenue
Source: Bloomberg, LOSEC estimates
Higher consumer demand for consumer food volumes
Graph 12: Per capita consumption of ice cream (Lr) Graph 13: Per capita consumption of soft drinks(Lr)
Source: Web articles Source: Web articles
Emerging growth in the retail sector
Graph 14: Modern retail penetration Graph 15: Retail sector revenue of Keells
Source: Web Articles Source: Company Annual reports,LOSEC Research estimates
5 | LOLC Securities Limited 6 | LOLC Securities Limited
Sector Valuation
CF & R growth was
forecasted backed by
high expectations on
per capita GDP
Largest contributor to
the top line of the
group
Source: Central Bank forecasts, Bloomberg data, LOSEC Research
estimates
Consumer segment remains as the largest contributor to the total group revenue while this percentage was hovering
around 28% for the last three years .As the consumer spending behavior through per capita GDP growth has clear
implications for the CF & R industry, ( we see a strong correlation of 0.97 between two variables) we expect with the
projected increase in the GDP per capita, CF& R segment revenue to increase by CAGR of 13.01% during FY15-17F.
Better consumer sentiment and spending patterns witnessed during the fourth quarter of the 14/15 financial year
will continue while SL is expected to post an increase in the consumer demand driven by the low interest rate
environment, single digit inflation and increased disposable income. On the other hand currently JKH is the market
leader in the ice cream, beverages and processed meat markets accounting for approximately 56%, 40%, and 80% of
local market share respectively. With per Capita Consumption of soft drinks, ice cream and meat in SL being much
lower compared to regional peer countries we see a growth potential in this segment.
We expect revenue of
consumer foods (ice
cream, carbonated soft
drinks and frozen
foods) to grow at a
CAGR of 10% during
FY15-17F
In the super market business, CCS will continuously expand the network of outlets in a similar size and format as
recently opened stores of 7000 sq.ft while currently average store size is sq,ft 3500-4000. In SL retail (modern) trade
penetration is only 16% where as our regional peer countries' penetration level is above 40% indicating the growth
potential in the Keells Super segment along with the growth in the disposable income which would likely to generate
higher footfall for supermarkets.
We estimate a value of LKR 26.26 for the consumer sector. Medium term growth rate of 10.0% has been used FY18F-
FY20F considering the GDP growth rates of Sri Lanka and considering the possibility of increasing the disposable
income of SL consumers. Terminal growth rate of 7% has been used for the period beyond FY20.
Retail revenue to grow
at CAGR of 15% ,FY15-
17F due to expansion of
outlets and increase in
disposable income
Higher purchasing
power and
consumption gaps in SL
will boost the volumes
in the consumer foods
segment
20.8
10.6
2.4
1.9
1.7
1.5
1
0.8
0.4
0.1
0.1
The United States
Canada
Singapore
Malaysia
Sri Lanka
Thailand
china
Philippines
Pakistan
Indonesia
India
16%
84%
Modern vs Traditional trade in Sri Lanka
Modern Traditional
52
39
31.4
19
8.2
Philippines
Thailand
Singapore
Malaysia
Sri Lanka
70%
49% 48%43% 40%
16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Singapore Malaysia Hong Kong Taiwan Thailand Sri Lanka
16.27%
24.12%
12.13%
15.87%19.67%
10.46%
4.73%
17.09%
12.63%13.39%
0%
5%
10%
15%
20%
25%
30%
0
1000
2000
3000
4000
5000
6000
2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F
GDP per capita( USD) CF & R revenue growth of JKH
USD
0%
10%
20%
30%
40%
0
10,000
20,000
30,000
2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F
Retail segment revenue of keells
Retail segment revenue growth of Keells
LKR Mn
28.28% 28.41% 28.47% 32.49% 34.45% 36.12%
77,69085,408 89,256 91,582
97,289 105,225
0
20,000
40,000
60,000
80,000
100,000
120,000
2011/12 2012/13 2013/14 2014/15 2015/16F2016/17F
CF& R revenue Other revenue
Mn
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Leisure the growth star
Graph 16: EBIT contribution by leisure segment
Source: JKH annual reports, LOSEC Research estimates
Graph 17: Current market share of Cinnamon City Hotels Graph 18: Occupancy rates of JKH City Hotels
Source: AHPL annual report Source: AHPL annual report, LOSEC Research Estimates
Table 3: Upcoming city hotel projects in Colombo
Grand Hyatt Sino Lanka Hotels 2015Sheraton Lanka Hotels 2015Marino Sands Damro 2017Movenpick Softlogic 2015NEXT Hotel by SilverNeedleColombo City Centre 2017Cinnamon Life JKH 2018Shangri-La Shangri-la Hotels 2017Jetwings Jetwings 2016Welcome Hotel Lanka WelcomHotel 2018Indo Lanka Hotels Crown Plaza 2019Total rooms
Source: JLL Reseach 2014
Graph 19: Room Inventory in Colombo
Source: Web Articles
6 | LOLC Securities Limited 7 | LOLC Securities Limited
Proposed positioning
Cinnamon City hotels performing well with the dominating market share
Developments
Highest contributor for
the EBIT of the group
3376
475Upper scale 306
225
No of rooms Opening year
Luxury 300Upper scale
Upper scale
Leisure segment has able to maintain its position as the highest EBIT generator for the group over the past and we
expect this to continue. We expects EBIT from the leisure segment to grow at a CAGR of 11.80% FY15-FY17F.
Upper scale
Developer
180
However Colombo is increasingly becoming an attractive location for City Hotel developments and many hotel
projects are expected to open in the future while this can be a challenge for Cinnamon city hotels.
70
Midscale
Luxury 550
"Cinnamon" city hotels has been able to continue to maintain its market share and leadership among the city hotels.
Currently the brand has the 51% market share (excluding the Cinnamon red) among the other city hotels while the
occupancy rates are also seen a growth over time . Cinnamon red, the latest addition to the leisure segment reported
a 85% occupancy from the start of the opening and we expects this to increase upto 90% FY15/16.
270
Upper scale 200Luxury 800
Room inventory in
Colombo lags far
behind compared to
other regional capital
cities .JKH has the
potential to capitalize
the opportunity by
strengthening the
"Cinnamon" brand
identity
Midscale
60000
31790 3011426113
9100 76004300
Bangkok Manila Kuala Lampur Jakarta Ho Chi Minh City Hanoi Colombo
Rooms
0%
20%
40%
60%
80%
100%
FY10 FY11 FY12 FY13 FY14 FY15E FY16F FY17F
Cinnamon grand Cinnamon Lakeside Cinnamon Red
49%
33%
18%
Cinnomon Grand Cinnomon Lakeside Other City Hotels
58.93% 55.19% 52.35% 44.93% 48.41% 40.91%
71839203
1043812075 13056
16575
0
5,000
10,000
15,000
20,000
2011/12 2012/13 2013/14 2014/15 2015/16F 2016/17F
Leisure segment EBIT Other segments EBIT
LKR Mn
Initiation Coverage: John Keells Holdings PLC | 01 June 15
A buoyant outlook in the SL tourism industry to generate further earnings
Graph 20: Total tourist arrivals to Sri Lanka
Source: JKH annual reports, LOSEC Research estimates
Source: Census and Statistics Dept. Central Bank annual report, LOLC research estimates
Graph 21: Tourist arrivals to SL and the region
Source: AHPL annual report, LOSEC Research Estimates
Source: World Bank and SLTDA data
7 | LOLC Securities Limited 8 | LOLC Securities Limited
Maldivian operations
Sector Valuation
Tourist arrivals to SL is
low comparatively to
our peer countries
indicating that SL has
the potential to further
develop the sector
A sector valuation of LKR 60.62 has been arrived based on a medium term growth rate of 20.00% for FY18F-FY20F
supported by the CAGR of 23.59% in historical tourists arrivals for SL from 2010 to 2014. A terminal growth rate of
6.5% has been used in our valuation considering the international tourist arrivals growth projections for South Asia
by UNWTO . We have assumed that JKH will not open up any new hotel projects in SL and in Maldives other than the
Cinnamon Life (Which has been already accounted under Waterfront).
With the overall outlook for tourism industry in Sri Lanka being positive JKH has the possibility of further increasing
the occupancy rates for SL resorts which is was at 75% as at end of 2014. We estimate that average occupancy rates
for SL resorts to be 77%,79% and 81% in FY15E, FY16F, FY17F . As per management information JKH may consider
to start up a luxury hotel in Nuwaraeliya in four to five years time and a feasibility study is being currently carried
out.
SL is to achieve 2.5 Mn
tourist arrivals by 2016
and thus SL needs an
annual 28% growth in
2015 and 2016
Maldivian operations accounts for 14.00% of the total rooms of JKH while contributing 27% to the total leisure sector
revenue. As at end 2014 Maldivian resorts had an occupancy rate of 91% which is higher than the average occupancy
rate of Maldives. With the expected growth in tourist arrivals of 13% to Maldives in 2015 as forecasted by the
Maldives government (Source: ADB) we expects average occupancy rates of Maldivian resorts to increase up to 93%
FY15/16.
Sri Lankan tourism industry coupled with the recent development in the infrastructure projects are expected to
generate higher earnings for the leisure segment of JKH. During the post war period from 2010 to 2014 SL has
achieved a CAGR of 23.59% in tourist arrivals while SL also surpassed the tourist arrivals target of 1.5 Mn set for the
year of 2014, which is a significant achievement.
7.4
2.2
5.3
0.3 0.1 0.3
26
8.8
26.7
7.6
4
1.3
0
5
10
15
20
25
30
Malaysia Indonesia Thailand Vietnam Cambodia Sri Lanka1990 2013
-2.98%1.87%
-11.72% -11.24%
2.15%
46.12%
30.79%
17.48%
26.75%
19.81%
28% 28% 28%
-20%
-10%
0%
10%
20%
30%
40%
50%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F
Th
ou
san
ds
Tourist arrivals Tourist arrivals growth rate
Mn
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Transportation, a steady cash cow
Graph 22: CPEP to add 7.6 Mn TEUs by 2020E Graph 23: SAGT volume and market share
Source: Census and Statistics Dept. Central Bank annual report, LOLC research estimates
Source: SLPA Source: SAGT web site & CBSL
Graph 24: Bunkering price movements
Source: Bloomberg
Sector Valuation
8 | LOLC Securities Limited 9 | LOLC Securities Limited
Steady growth of bunkering business
JKH’s oil bunkering business imports oil and supplies bunker fuel
primarily to ships calling in for transshipment at the Colombo
port. The three large players (IOC, state controlled Lanka
Maritime Services and JKH) while JKH’s Lanka Marine
Services(LMS) being the industry leader with approximately
50% market share dominates the sector, amidst the stiff
competition from entry of new players and fuel price wars in the
region.
With the decline of Brent Crude Oil prices and relative increase
in bunker fuel consumption, we expect a marginal increase in
bunkering volumes in short run. Considering the Port's objective
to add 7.6 Mn TEU handling capacity by 2020, LMS could be in a
position to capitalize the growth in port activities, if JKH will
continue to invest in strengthening infrastructure and leverage
on its strong brand name.
Though there was a dip in operating income on bunkering business in FY15 due to stiff competition, we expect 5%
YoY growth for next two years due to expected growth in port activities. We assume JKH to gain SAGT's share at 90%
annual throughput capacity till FY18. We expect 4% medium term growth from the container business primarily due
to possible changes in pricing strategies. But in the long run there is a possibility for JKH to have a business expansion
opportunity and hence a 5% terminal growth has been applied for our valuation.
Bunkering volumes to
grow in par with
increase in port
capacity
Transportation sector to record a slow growth via Colombo Port Expansion
Due to the ongoing Colombo Port Expansion Project (CPEP), it is estimated that the capacity of the port to increase
from the existing around 4.1 million TEUs annually to about 11.7 million TEUs by 2020.With the expansion of South
Container Terminal under CPEP, the Colombo port will be a sought after location for Large Container Vessels (vessels
with capacity over 15,000 TEU with over 15.2m depth: source: Colombo Port Authority) in the future. With ongoing
Port expansion coupled with the Port of Colombo being located in a strategic location of the Global Sea Route, we
expect Colombo port activity to grow steadily in years ahead.
Colombo Port to add
11.7 Mn TEUs by 2020
Limited growth
prospects due to
capacity constraints
SAGT remains to be a cash cow
JKH is active in the container business recording 42% of the stake in SAGT as an associate business. The container
business mainly entails loading and unloading container vessels at the Colombo port. SAGT currently operates with a
throughput capacity of 1.7Mn TEUs on a yearly basis which accounts for 85% of the full capacity. Transportation
sector remained to be a “Cash Cow” to the Group mainly through SAGT earnings which had exclusively contributed
near 20% to the Group bottom line in the past.
We expect SAGT to stabilize at 90% capacity in years ahead, amidst the competition stemming from Colombo South
Container Terminal. We expect that JKH’s container business will generate stable returns in FY 16 – 18 at 90% TEU
handling capacity. However, the management has raised concerns over SAGT’s capacity constraints and Government’s
control on bunkering services. If Govt allows, the management has to plan to operate in upcoming terminals in
Colombo Port and/or Hambantota Port.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2004 2008 2012 2014 2020 E
To
tal
TE
Us
(Mn
)
SC
T
CP
EP
Co
mp
leti
on
44%45%
42%39%
36%35%
33% 33%35%
25%
30%
35%
40%
45%
50%
0
200
400
600
800
1000
1200
1400
SAGT Other SAGT Market Share
TEUs
200
300
400
500
600
700
800
40
50
60
70
80
90
100
110
120
130
18
-Ju
n-1
2
18
-Au
g-1
2
18
-Oct
-12
18
-Dec
-12
18
-Feb
-13
18
-Ap
r-1
3
18
-Ju
n-1
3
18
-Au
g-1
3
18
-Oct
-13
18
-Dec
-13
18
-Feb
-14
18
-Ap
r-1
4
18
-Ju
n-1
4
18
-Au
g-1
4
18
-Oct
-14
18
-Dec
-14
18
-Feb
-15
18
-Ap
r-1
5
Brent Crude Oil (RSH)-USD/bbl
380cST Bunker Fuel Price (LSH)-USD/bbl
180cST Bunker Fuel Price (LSH)-USD/bbl
USD USD
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Real Estate at a growth stage
Graph 25: Sri Lanka GDP by sectors
Source: SAGT web site & CBSL
Source: CBSL
Table 4: Proposed & operational luxury and upper mid apartments Table 5: Upcoming malls in ColomboApt Name Location Com. Yr # Units Com Yr BAU (sqft)
110 Rajagiriya 2014 188 2014 60,000 On three 20 Colombo 2 2014 475 2017 40,000 7th Sense Colombo 7 2015 65 2017 250,000 Elements Rajagiriya 2016 132 2017 160,000 Destiny Slave Island 2017 205 2017 30,000 Altair Beira Lake 2017 400 2018 250,000 Belvedere Kotahena 2018 260 2018 400,000 Waterfront Glennie St 2018 431 2018 315,000 Astoria Duplication Rd 2018 350 2018 60,000 City Center Beira Lake 2018 182 2018 150,000
Source: JLL Reseach 2014 Source: JLL Reseach 2014
9 | LOLC Securities Limited 10 | LOLC Securities Limited
JKH
Havlock City Mall
Shangri-laAltairLiberty Pz- phase II
Supply to overweigh
the demand for
residential properties
AVICSilver Needle - Abans
Positive outlook of country property developments
Sri Lanka is proactively investing in various infrastructural projects, from improving transport networks to
telecommunications and electricity generation. This has resulted steady increase in construction sector stake in Sri
Lankan Real GDP from 7.1% in 2011 to 9.7% in 2014.The construction sector demonstrates a strong correlation with
the growth momentum of the country enabling the investments in property development also to become more
attractive in the medium run. Real estate values within Colombo is also increasing at a rapid phase making sector
investments more viable with superior returns.
Construction sector to
record a positive
correlation with Real
GDP
Waterfront properties will drive the segment earnings
JKH’s property segment currently accounts for a relatively small percentage of revenue, ranging from 3.4% to 4.63%
over FY08-FY14.However, it accounts for a volatile and outsized contribution to profitability. The revenue streams of
property segment is derived primarily from apartment sales and property rentals of Crescat and two K-Zone
shopping malls located in Colombo and the suburb. With almost 100% sales of OnThree20 and 100% unit
reservations on 7th Sense residential property by FY2014/15, the revenue flow of this segment for next 3 years will
mainly limit to pre-sales of proposed residential towers (Tower 1 and 2) under Waterfront Development project.
The company receives 20 – 30% of revenue at the time of sales of upcoming tower 1 & 2 as the first installment, with
the balance being payable by the customer under another two installments based on the proportion of project
completion. Due to property management fee which is in average LKR 25,000 - 30,000 per unit per month, we believe
that the property segment will earn a marginal net income which is about 40% of the management fees (LOSEC
estimates) from existing apartment complexes.
Witnessing a
significant demand for
luxury apartments
Supply to overweigh the demand amidst low interest rates
We expect the demand of apartments to be in an upward momentum provided that the CBSL will continue to
maintain low interest rate environment in the future. However, a large number of high-end residential real estate
development projects in Colombo are currently in progress with plans for completing them with in next 4 years. This
could lead to oversupply and, demand could come under pressure.
South City Pr
JKH
Destiny Mall
Tata Residential
Mall name
JKHKrrish Square
JKH
ITC Hotel
DeveloperApurva Natvar Parikh
Fairway Holdings
Keppel CT Developments
Silver Needle Abans
16% 7.1%8.1% 8.7%
9.7%
2%
3%
4%
5%
6%
7%
8%
9%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2010 2011 2012 2013 2014
LK
R B
n
Services Industry (except construction) Agriculture Construction Real GDP Rate
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Property segment (cont…)
Graph 26: Square metre prices, premier city centre, US$. (Premium location apartments)
Source: JLL Reseach 2014, LOSEC Estimates
Graph 27: Rental charges in retail cities of regional countries
Source: JLL Reseach 2014, LOSEC Estimates
Graph 28: Office space rental charges in regional countries
Source: JLL Reseach 2014
Source: JLL Reseach 2014, LOSEC Estimates
Sector Valuation
10 | LOLC Securities Limited 11 | LOLC Securities Limited
Tapping Colombo office market with high expectations
Currently, the Colombo office market is witnessing a steady demand for small to mid-size ‘Grade A’office space from
Banking, Financial Services & Insurance (BFSI) and IT/ITES sector companies. It is further estimated that Sri Lanka
would require at least 15 million sqft of office space by 2022 in order to achieve government’s ambitious target of
creating another 200,000 jobs in IT/ITES sector by 2022. The total ‘Grade A’ office space generated from the on-going
development projects will account for only 0.6Mn sqft by 2016. Thus we believe that proposed office complex under
Waterfront Development project enjoy a high occupancy rate which is about 85% - 98% from FY20 onwards.
We assume all residential apartments except “7th Sense” have been fully sold and accounted by FY15. We assume that
all units of 7th Sense have been reserved and 40% of sales receipts have been recognized in company books by FY15.
The remaining 60% receivables of 7th Sense will be evenly distributed to FY16 and FY17 with completion time to be
registering as end of 2017. we expect property segment revenue (except Waterfront Development) to decline by
60% over next 3 years. Crescat and K-Zone malls will continue to generate stable returns registering average 95%
occupancy levels.
Invest in retail market
to capitalize tourism
boom and increase in
spending
JKH to capture retail market in Colombo
Sri Lanka being a prime business destination and gateway for tourists, the retail market in Colombo is growing
rapidly. The increasing disposable income and the rising living standards of Sri Lankans are changing their spending
patterns and preferences towards better quality branded goods and services. JKH is already in the run to tap the
market through their existing high end shopping malls and proposed 400,000 sqft giant international quality
shopping mall under their flagship mixed development Waterfront Project.
Waterfront office
complex to cater
growing demand of
office space
2734
4036
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000
MalaysiaSri Lanka - Colombo
IndonesiaCambodia
PhilippinesThailand
WaterfrontChina
TaiwanJapanIndia
SingaporeHong Kong
3.50
5.00
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0
Colombo Crescat BoulevardManila Makati CBD
Colombo Waterfront-ColomboChennai CBD II shopping centre
Jakarta Shopping CentreThailand Central Retail District
Mumbai Linking Road, Western SuburbanVietnam Shopping Centre
Delhi Khan MarketKL Suria KLCC
Singapore Orchard Road
USD/sq.ft per month
2.50
5.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00
India - ChennaiPhillipines - Manila
Sri Lanka - ColomboThailand - Bangkok
Malaysis - KLVietnam - Ho Chi Minh City
WaterfrontIndonesia - Jakarta
India - MumbaiSingapore
India - Delhi
USD/sq.ft per month
USD/sq.m
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Financial sector, an underpenetrated growth segment in the country
Underpenetrated life insurance market and rapid credit growth to bolster segment earnings
Source: JLL Reseach 2014, LOSEC Estimates
Graph 29: Life insurance growth and market share Graph 30: Life insurance penetration in Sri Lanka
Source: Insurance Board, CBSL Source: Insurance Board,UAL Annual Report, CBSL
Source: JLL Reseach 2014, LOSEC Estimates
Graph 31: Life Business penetration in Asia
Source: JLL Reseach 2014, LOSEC Estimates
Source: Resigma N03/2014
11 | LOLC Securities Limited 12 | LOLC Securities Limited
Sri Lanka remains heavily under-penetrated by insurance with the total premium/GDP ratio falling further to just
1.05% in 2014 with 0.46% penetration for life. When compared with average life business penetration in emerging
Asian countries which is 1.85%, Sri Lanka has resulted very low penetration of 0.48%. Considering this low
penetration coupled with overall GDP and last 6 years real per capita income growth of 40%, we believe that UAL
could obtain a net premium annual growth of 8% in years ahead. However the demand for life insurance may
somewhat diminish due to Govt’s provision of free health-care. But increased per capita income of the country will
have a strong growth phase for life insurance industry.
Underpenetrated life
insurance segment
JKH’s financial services sector mainly consists with insurance (UAL), banking and leasing (NTB) and stock brokering
(JKBS) businesses. With estimated earning in FY14/15, the sector has posted 6% revenue CAGR and 26% PAT CAGR
over last four years.
Union Assurance Limited (UAL)
UAL is a mid-tier insurance underwriter operating largely in life insurance segment. JKH being the parent company
holds 88.25% of UAL as at 31st Dec 2014 after making 78% divestment of its general insurance business to Fairfax
Asia Limited for a total consideration of LKR 3.66 Bn while gaining a capital gain of LKR 1.22 Bn. UAL net earned
premium increased YoY by 5.4% between FY14-15 while net earned premium of life segment has gained 7.3% YoY
growth over FY14. UAL total earnings are likely to decline in 4QFY15 and following years due to sale of UAL non-life
segment. However, the management of JKH is in the process of deciding the best use of the cash proceeds received
from the sale, but the decision is not finalized yet.
Underpenetrated life
insurance segment
0%
10%
20%
30%
40%
0
20,000
40,000
60,000
80,000
100,000
120,000
2009 2010 2011 2012 2013 2014General Insurance (Rs. millions)Life Insurance (Rs. millions)Growth Rate in Premium - Life (%)
LKRMn
0%1%2%3%4%5%6%7%8%9%
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2009 2010 2011 2012 2013 2014
Per capita income - USD
GDP Growth Rate %*
Penetration % (Premium of life Insurance as a % of GDP)
USD
68.3
35.2
0.16 0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
05
1015202530354045505560657075
Emerging Asia Middle East and Central Asia Sri Lanka
Premiums per capita (USD) Premiums in % of GDP -2013
USD%
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Financial sector (cont…)
Graph 32: NTB has grown significantly over the years Graph 33: NTB has superior profitability
Source: Annual Reports Source: Annual Reports
Source: Insurance Board,UAL Annual Report, CBSL
Sri Lanka's loan penetration remains significantly low in the region.
Source: Resigma N03/2014
12 | LOLC Securities Limited 13 | LOLC Securities Limited
Sector Valuation
We have used Residual Income Valuation and Market Multiple Valuation approaches in deriving the valuation for
UAL. We have applied an estimated peer average P/BV of 2.18 to UAL's net book value of LKR 7.4 billion after
adjusting the sales proceed of 78% stake of its non-life segment. Accordingly we estimate the total valuation for UAL
at LKR 16.2 billion. Under Residual Income Valuation, we expect 16% YoY operating income decline in FY15/16
compared with previous year due to the divestment of non-life segment. However, we estimate UML to register 8%
YoY operating income growth there onwards till FY20 which will be mainly driven by expected increase in per capita
income and capturing more market share by implementing effective marketing campaigns for life insurance business.
We have used Residual Income Valuation in deriving the valuation of JKH's share of NTB. Accordingly we estimate the
valuation of JKH's share of NTB at LKR 7.1 billion by applying 18% YoY net income growth till FY17 and 7% and 5%
medium term and terminal growth respectively. We assume that JKH's stake at NTB will remain at 29.9% level for our
valuation.
Nation Trust Bank (NTB)
JKH owns 29.9% stake of NTBas at 31st December 2015 accounting the bank as an associate of JKH businesses. NTB
has been one of the fastest growing mid-size LCB in Sri Lanka and it is also one of most profitable banks in the
country. NTB’s high profitability is mainly driven by strong presence in credit card business with American Express
franchise and high yielding advances such as leasing products. NTB mainly operates in retail and SME sectors and
increasingly looking forward to diversifying into corporate loans.
Despite strong profitability and rapid growth NTB has maintained sound asset quality with diversified portfolio of
advances and sound NPL levels.
NTB is a fast growing
bank with high
profitability
We expect NTB to continue with the growth momentum supported with branch expansion and fast credit growth. JKH
carries NTB in its book at LKR 1.56 billion. NTB will continue to generate superior return on assets for JKH and will
add a significant value to John Keells Group.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Total Assets Customer Deposits
LKRMn
0
1
2
3
4
5
6
7
0
5
10
15
20
25
COMB NTB NDB SEYB HNB SAMP UBC PABC
ROE NIM
%%
Initiation Coverage: John Keells Holdings PLC | 01 June 15
IT, Plantation and Other segments
IT Sector Valuation
Source: Annual Reports
Graph 34: Tea price movement
Source: Department of Census & Statistics and Forbes & Walkers
13 | LOLC Securities Limited 14 | LOLC Securities Limited
We expect plantation sector to post a 11% revenue decline and 20% operating income decline over FY 16 and 17 due
to factors discussed above. However, we anticipate plantation segment to record a slow medium term growth of 4%
as a result of growing demand from the Middle East and North African countries, together with regaining the demand
of Ukraine. However, the tea production is likely to be affected in the short to medium term due to unpredictable
weather patterns.
Plantation and other Sector Valuation
Other businesses
JKH’s other businesses mainly comprise with John Keells Holdings, John KeellsCapital (investment banking arm of the
Group) and Strategic Group Information Technology (SGIT) which supports the Group’s IT requirements for internal
and external clients.
Plantation sector
JKH’s plantation sector mainly includes operations of tea factories, tea and rubber broking and pre-auction produce
warehousing. Tea Small Holder Factories PLC (TSML), a subsidiary of JKH with the holding of 37.62% as of FY14 is
amongst the top manufacturers of orthodox low grown teas and is also recognized as a top quality producer of CTC
teas in Sri Lanka. With the positive trend of global tea production, TSML showed a production volume increase while
recording 12% and 16% revenue and EBIT YoY growth in FY14.TSML purchases low green tea from small tea
plantation holders to operate its 8 tea factories. With the down turn of global tea prices and increase in cost of
production coupled with wage increases of plantation sector workers, we expect plantation sector margins to decline
by 5% in FY16 and17.
JKOA business to grow
with increase in
consumer spending
Sector may become
vulnerable to
unfavorable weather
conditions
We have used Residual Income valuation approach to value the IT sector and valued the sector at LKR 2.4 billion.
Sector revenue and operating income is largely driven by office automation business and we expect 11% YoY
operating income growth (excluding associate share) till FY 17 considering the rapid change in consumer patterns
together with the popularity of social media flatforms in recent times. We assume medium growth of the sector
primarily to be driven by the GDP growth of 7%.
JKH’s Information Technology (IT) sector accounts for 8% of group revenue (inclusive of share of associate company
revenue) and 2% of group EBIT as of FY14. John Keells Office Automation (JKOA), a leading distributor of branded office
automation products stands out as the main contributor in the segment recording 77% contribution to the segmental
EBIT. JKH’s BPO business, InfoMate (pvt) ltd. with 282% YoY growth in operating profits has continued its positive
growth trajectory driven by the increased demand from emerging regions in Asia and Europe. John Keells Computer
Services (JKCS) saw a marginal decline of 0.4% YoY in FY13/14.
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
0
50
100
150
200
250
300
350
400
2009 2010 2011 2012 2013
Total cost per kg of made tea - US cents/kg Avg. export tea price - US cents/kg
YoY Growth of total cost per kg of made tea YoY Growth of avg. export tea price per kg
UScents/kg
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Financial snapshot of JKH performance
Source: Bloomberg Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: Department of Census & Statistics and Forbes & Walkers
Source: Annual reports Source: Annual reports
14 | LOLC Securities Limited 15 | LOLC Securities Limited
Graph 35: Quarterly Revenue and Profit Graph 36: Quarterly EBITDA margin
Graph 37: ROA and ROE Graph 38: Gearing
Graph 39: Segmental Revenue Breakdown Graph 40: Segmental Operating Margins
-
5,000
10,000
15,000
20,000
25,000
30,000
2015-Q1 2015-Q2 2015-Q3 2015-Q4
LK
R M
n
Revenue Profit
- 2 4 6 8
10 12 14 16 18 20 22 24 26 28 30
2015-Q1 2015-Q2 2015-Q3 2015-Q4
%
EBITDA Margin
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
2010 2011 2012 2013 2014 2015
%
ROA ROE
10
15
20
25
30
35
2010 2011 2012 2013 2014 2015
%
Gearing: Total Debt/Equity
0
5,000
10,000
15,000
20,000
25,000
30,000
2009 2010 2011 2012 2013 2014
LK
R M
n
Consumer Foods & Retail Leisure Transportation
Financial Services Information Technology Property
Others
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
2012 2013 2014
Consumer Foods & Retail Leisure
Transportation Financial Services
Information Technology Property
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Valuation
Table 6: Valuation Sensitivity Matrix
6.34% 6.84% 7.34% 7.84% 8.34%3% 440 334 387 336 3054% 387 336 305 281 2625% 305 281 262 246 2336% 262 246 233 221 2117% 233 221 211 202 194
Source:CSE, Bloomberg, LOSEC Research
Table 7: Contribution by segment to JKH's value per share
LKR per share Contribution Mix Leisure 60,464 60.62 23%CF&R 26,204 26.27 10%Transportation 22,074 22.13 8%Property 15,284 15.32 6%Financial 23,980 24.04 9%IT 3,230 3.24 1%Other 3,959 3.97 2%Cash 37,893 37.99 14%Waterfront 68,495 68.67 26%Total NPV 261,582 262.24
Source:LOSEC Estimates
Table 8: Peer ComparisonName PE (x) PBV (X) Dividend ROE %
John Keells Holdings Plc (Sri Lanka) 1441 13.50 1.41 1.80 11.01Aitken Spence Plc (Sri Lanka) 301 11.33 1.16 2.00 10.64Hemas Holdings Plc (Sri Lanka) 341 17.95 2.81 1.37 15.01Hayleys Plc (Sri Lanka) 197 10.31 0.91 1.69 9.77Beijing Enterprises Hldgs (Hong Kong) 11258 17.98 1.53 1.32 8.69Yakult Honsha Co Ltd (Japan) 9707 45.13 3.48 n.a 8.35
Source:CSE, Bloomberg, LOSEC Research
Source: Annual reports
15 | LOLC Securities Limited 16 | LOLC Securities Limited
Underlining parameters:
Market Cap (USD Mn)
Equity Value (LKR Mn)
Table 9: Valuation of JKH warrants in 2015 and 2016 (using Black Scholes Pricing Model)
- Exercise price of the options: W022 - LKR 185, W023 - LKR 195
- No. of periods to exercise in years: W0228 - 0.46 Yrs, W0236 - 1.47 Yrs
- Compounded risk free interest rate: 7.34%
- Standard Deviation (annualised): 10%
Expiration Date 12-Nov-15 12-Nov-16
Warrant023
16.70 22.20LOSEC Valuation - LKR
Current Trading Price - LKR
Share price in LKRRisk Free Rate
20.00 37.10
Warrant022
We have taken into account a cost of equity of 12.34.% assuming a risk free rate of 7.34% and a risk premium of 5%.
A risk premium of 5% have been taken due to the majority of shareholders of JKH being foreign shareholders which
bears a lower opportunity cost of capital than local shareholders. We have taken different medium term growth rates
and terminal growth rates for different sectors considering each sectors' growth potential. Our SOTP model values
the counter at LKR 262.24. At the current share price, JKH is trading at forward PE of 14.11X and a forward PBV of
1.41X.
We have taken SPEN as a local peer for the comparison.
Ris
k
Pre
miu
m
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Impact of share subdivision
Source:LOSEC Estimates
Source:CSE, Bloomberg, LOSEC Research
16 | LOLC Securities Limited 17 | LOLC Securities Limited
JKH has announced a subdivision of ordinary shares (7 existing shares to be divided to 8) and will be in effect upon
shareholder approval. The impact would be valuation per share coming down to LKR 229.46(-LKR32.78), remaining as
BUY.
Supergain tax
As per interim budget proposal on 29 January 2015, where the aggregate profits of subsidiaries and the holding
company, within a group of Companies, exceed Rs.2Bn for the Year of assessment 2013/14, each company of such group
is liable to pay a levy known as Super Gains Tax which is 25% of the taxable income of such company for the Year of
assessment 2013/14. However, the Bill is yet to be enacted. If the bill became enacted, JKH has made a taxable profit in
excess of such amount for the said financial year of assessment and will become liable to pay the additional tax in the
future. For FY 2013/14 JKH has made consolidated taxable profit of LKR 9073 million and will be liable to pay for a new
tax of LKR 2268 million. The impact would be valuation per share coming down to LKR 259.97(-LKR 2.27), remaining as
a BUY.
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Summarized Sentivity of Assumptions
Graph 41: Tourist arrival growth sensitivity: Strong Graph 42: Country's GDP growth sensitivity for CF&R: Medium
Source: LOSEC Research Source: LOSEC Research
Graph 43: Selling price sensitivity of residential apartments: Medium Graph 44: Retail space rental price sensitivity: Medium
Source: LOSEC Research Source: LOSEC Research
17 | LOLC Securities Limited 18 | LOLC Securities Limited
Earning Risk Comment
JKH is the largest diversified conglomerate in the country and it is heavily exposed Sri Lankan economy with very
limited overseas operations. Therefore any broader economic slowdown of the country can significantly affect the
future earnings of the company. However with the more stable macroeconomic fundamentals of the country, it is
unlikely that a major event will take place in short to medium term which will lead to create an economic crisis in the
country thereby dampening JKH performance. We expect Sri Lanka’s GDP level to fluctuate at 6% - 8% in the medium
run enabling JKH to operate smoothly.
The Waterfront Development Project is a critical project for JKH’s future outlook which accounts for over 50% of total
balance sheet asset value of JKH. Since it is an integrated development, the project will expose to various business
risks stemming from property and real estate, leisure and entertainment sectors. The greenfield project will have
significant impact on future value generation of the company and any risk pertaining to the project will have
significant impact on valuations of JKH as well.
One of key risk factor that could affect future earnings of JKH is its exposure to property market. Since IR project and
JKH account for the largest land bank in Colombo, the company is heavily exposed to Sri Lankan property market
movements. History tells that the property markets are prone to bubbles and therefore any unexpected real estate
bubbles or market crashes could hamper the value of the company. A number of other property development projects
are also in progress in the present context leading the supply of residential and commercial properties to surpass the
demand. This could lead JKH to underperform in achieving its sale targets in a timely manner.
JKH is also heavily exposed to leisure sector through its hotel operations as well as the IR project. But we don’t see
much risk in the sector except for cyclical impacts as the country is still some distance from becoming an
overcrowded tourist destination and will attract tourists to the country. But any social adverse incidents such as civil
unrest can have significantly impact the industry.
In summary, we don’t see much risk for the economy of Sri Lanka, despite short term political uncertainties.
Therefore with the stable outlook of the country coupled with steady growth of GDP, we are confident that JKH will
not run into significant risks in medium term.
245.57
262.24
286.15
230235240245250255260265270275280285290
4.5% 6.5% 8.5%Tourist arrival growth at current rate
-6%
+9%
LKR
258.5
262.24
269.43
252
254
256
258
260
262
264
266
268
270
272
5.00% 7.00% 9.00%Consumer sector GDP growth rate
-1%
+3%
LKR
259.22
262.24
265.27
256
258
260
262
264
266
325 375 425
Average selling price - USD per sq.ft per month
LKR
-1%
+1%
255.09
262.24
269.4
245
250
255
260
265
270
275
3 5 7
Rental price-USD per sq.ft per month
LKR
-3%
+3%
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Appendices
Table 10: Return comparison
3 months -6.78 -1.13 -3.60 -3.946 months -24.21 -1.63 -2.86 -0.60YTD -23.60 -2.44 -3.51 -3.381 year -18.72 13.39 13.59 -0.99
Source:CSE, Bloomberg
Graph 45: Share Price Movement
Source: LOSEC Research
Source:CSE, Bloomberg
Source: LOSEC Research
Source:CSE, Bloomberg Source:CSE, Bloomberg
Source:CSE, Bloomberg Source:CSE, Bloomberg
Source:CSE, Bloomberg Source:CSE, Bloomberg
18 | LOLC Securities Limited 19 | LOLC Securities Limited
Graph 50: CSE PE Chart Graph 51: CSE PBV Chart
Graph 48: Price per Sales Graph 49: Dividend Yield
Graph 46: PE Chart Graph 47: PBV Chart
ASI IndexJKH %S&P SL 20
IndexSPEN
50
100
150
200
250
300
350
-
10,000,000
20,000,000
30,000,000
40,000,000
Rs
Vo
lum
e
Volume Price
SMAVG (50) SMAVG (100)
0255075
100
6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14
RSI (14)
0
5
10
15
20
25
6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14
PE ratio Highest Average Lowest
0
0.5
1
1.5
2
2.5
3
06/05/12 12/05/12 06/05/13 12/05/13 06/05/14 12/05/14
PBV ratio Highest Average Lowest
0
0.5
1
1.5
2
2.5
3
3.5
6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14
Price to Sales ratio Highest Average Lowest
8
10
12
14
16
18
20
22
06/05/12 12/05/12 06/05/13 12/05/13 06/05/14 12/05/14
ASI PE ratio Highest Average Lowest
1
1.2
1.4
1.6
1.8
2
2.2
6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14
ASI PBV ratio Highest Average Lowest
0
0.5
1
1.5
2
2.5
6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14
JKH dividend yield Highest Average Lowest
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Table 11: Financial Summary ForecastFigures in LKR Mn (31st March) FY 12 FY 13 FY 14 FY 15 FY 16 (F) FY 17 (F)Income StatementRevenue 77,690 85,408 89,256 91,582 97,289 105,225
Cost of Revenue -59,507 -62,535 -64,652 66,191 70,825 74,403
Gross Profit 18,182 22,873 24,604 25,391 26,464 30,822
Operating Expenses -9,503 -11,993 -13,119 -12,678 -13,468 -14,566
Operating Income 7,183 9,203 10,438 12,075 13,056 16,575
Net Non-Operating Gains (Losses) 5,637 6,461 4,960 7,000 8,020 7,411
Pretax Income 12,820 15,664 15,399 19,075 21,076 23,986
Net Profit att. to shareholders 9,686 12,113 11,719 14,348 15,930 18,259
Balance Sheet Cash & Near Cash Items 4,267 3,555 5,955 4,511 6,660 6,430
Accounts & Notes Receivable 9,773 10,737 10,389 10,270 13,645 14,563
Inventories 4,350 3,999 6,966 5,589 6,341 6,803
Total Current Assets 47,746 50,018 83,188 90,493 85,992 79,028
Total Long-Term Assets 86,712 109,100 119,286 127,593 185,227 239,448
Total Assets 134,458 159,118 202,474 218,086 271,219 318,475
Accounts Payable 11,008 10,471 10,346 11,267 12,688 13,596
Other Short-Term Liabilities 13,460 15,028 24,024 23,905 31,589 37,073
Total Current Liabilities 24,468 25,499 34,369 35,172 44,278 50,669
Total Long-Term Liabilities 29,788 32,434 33,594 32,837 51,128 79,545
Total Liabilities 54,257 57,933 67,963 68,009 95,405 130,214
Share Capital 25,111 26,480 49,749 50,703 58,842 67,421
Retained Earnings & Other Equity 55,090 74,705 84,761 99,374 116,972 120,842
Total Equity 80,201 101,185 134,510 150,077 175,814 188,263
Total Liabilities & Equity 134,458 159,118 202,474 218,086 271,219 318,475
FY 12 FY 13 FY 14 FY 15 FY 16 (F) FY 17 (F)Cashflow Statement
Net Income 9,687 12,113 11,719 14,348 15,930 18,259
Depreciation & Amortization 2,635 3,177 3,533 3,715 3,325 3,403
Changes in Non-Cash Capital 4,155 (723) (6,889) (1,169) (9,583) (13,027)
Cash From Operations 16,476 14,568 8,363 20,855 9,672 8,634
Capital Expenditures (5,341) (5,025) (3,605) (2,734) (35,093) (29,864)
Increase/Decrease in Investments (3,662) (11,174) (16,357) 1,479 (1,971) (5,153)
Cash From Investing Activities (9,003) (16,199) (19,962) (1,255) (37,064) (35,017)
Dividends Paid (2,314) (2,982) (3,267) (4,269) (4,056) (4,649)
Change in Short-Term Borrowings 777 845 7,898 2,871 7,536 8,325
Change in long term borrowings 1,747 221 (1,571) (4,390) 17,923 13,898
Change in Capital Stocks 486 1,362 23,041 951 8,139 8,579
Change in other finance activities (201) (765) (722) - - -
Cash from Financing Activities 496 (1,320) 25,378 (4,838) 29,542 26,153
Net Changes in Cash 7,970 (2,950) 13,779 14,762 2,150 (231)
Opening Cash Balance 2,113 4,267 3,555 5,955 4,511 6,660
Closing Cash Balance 4,267 3,555 5,955 4,511 6,660 6,430
Source:CSE, Bloomberg, LOSEC Research
19 | LOLC Securities Limited 20 | LOLC Securities Limited
Figures in LKR Mn
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Table 12: Forecast Ratios FY 12 FY 13 FY 14 FY 15 FY 16 (F) FY 17 (F)
Profitability Ratios
GP Margin (%) 23% 27% 28% 28% 27% 29%
NP Margin (%) 12% 14% 13% 16% 16% 17%
ROE (%) 14% 13% 10% 10% 10% 11%
ROA (%) 7% 8% 6% 7% 6% 6%
Earnings per share (LKR) 11.19 13.37 12.66 14.44 15.19 16.60
Dividend per Share (LKR) 2.91 3.40 3.50 3.50 3.87 4.23
Credit Ratios
Debt/Equity Ratio (%) 37% 32% 25% 22% 29% 42%
Interest Coverage (X) 5 9 9 18 19 25
Total Assets/Equity (X) 1.7 1.6 1.5 1.5 1.5 1.7
Net Debt/EBIT (X) -1.6 -1.3 -4.1 -5.3 -2.6 0.1
Liquidity Ratios
Current Ratio (X) 2.0 2.0 2.4 2.6 1.9 1.6
Quick Ratio (X) 1.8 1.8 2.2 2.4 1.8 1.4
Asset Turnover Ratio (X) 0.6 0.5 0.4 0.4 0.4 0.3
Net Asset Value per share (LKR) 80.4 101.4 134.8 150.5 176.3 188.7
Growth Ratios
Revenue Growth YOY% 10% 5% 3% 6% 8%
Earnings growth YOY% 25% -3% 22% 11% 15%
Total Assets YOY% 18% 27% 8% 24% 17%
Total Debt YOY% 7% 17% 0% 40% 36%
Investment Ratios
PE Ratio (X) 17.88 17.95 18.02 13.81 17.26 15.80
Price to Book Value (X) 2.44 2.36 1.83 1.44 1.49 1.39
Dividend Yield (%) 1.16 1.45 1.47 1.49 1.47 1.61
Source:CSE, Bloomberg, LOSEC Research
Source:CSE, Bloomberg, LOSEC Research
20 | LOLC Securities Limited 21 | LOLC Securities Limited
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Company overview
Strengths
- Brand name of JKH - Qualified and experience Board of Directors- Majority of shareholders being Foreigners- Strong Corporate governance structure- Largest private sector land bank - Low gearing ratio
Weaknesses
- Declining performance in some segments, ex:Plantations - Heavy reliance on Sri Lankan economy
Opportunities
- Increase in disposable income of consumers Source:CSE, Bloomberg, LOSEC Research - Anticipated growth in GDP of Sri Lanka
- Anticipated growth in tourist arrivals to Sri Lanka
Threats - Competitive threats arising from similar conglomerates.- Possibility of political uncertainty within the Country- Uncertainty with relation to key economic variables such as interest rates, exchange rates etc.- Adverse impacts that might stem from global economic events
21 | LOLC Securities Limited 22 | LOLC Securities Limited
SWOT analysis
John Keells Holdings is the largest publicly traded company on the Colombo Stock Exchange (CSE) with a market capitalization of LKR
206bn(USD 1.54bn) as of 5 May 2014. The currently operates in seven business segments: consumer food and retail (CF&R), leisure,
transportation, property development, financial services, information technology and plantation and few other small businesses. CF&R, leisure
and transportation segments largely contribute to the company’s top line and bottom line, together accounting 71% of revenue and 56% of
EBIT in FY14. JKH has been recognized amongst the investor community for its relatively high level of transparency and strong corporate
governance.
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Waterfront Integrated Development Project
Land value 7,860 60Rights Nov-13 23,098 176 Warrant - W0022 Nov-15 8,139 62 Warrant - W0023 Nov-16 8,579 65 Debt 59,744 456Total 107,420 820
22 | LOLC Securities Limited 23 | LOLC Securities Limited
Project fundingExercise
date LKR Mn USD Mn
The investment vehicle and its shareholders
Waterfront Properties Private Limited(WPL), the Project Company, a subsidiary of JKH, has been incorporated to
undertake the development of the project. Land owned and occupied by subsidiaries of JKH; Ceylon Cold Stores (CCS),
John Keells PLS (JKL), John KeellsProperties (JKP) andWPL in Colombo 02 will be utilized for the project while CCS,
JKL, JKP will receive shares in the project company in consideration for the land transferred to the project company.
JKH, together with its subsidiaries CCS, JKL, and JKP will be majority shareholders in the Project Company while JKH
will own approximately 79.24%, with CCS, JKL and JKP owing 14.15%, 5.03% and 1.57% respectively. JKH will have
effective control of 96.70% over the project. The project investment of USD 820 Mnis funded through a mix of debt
and equity (ratio - 60:40).
Overview of the project
The Project is an integrated resort consisting of multiple businesses including luxury hotels, conferencing center,
entertainment facilities, international standard shopping mall, luxury condominiums, serviced apartments and office
spaces similar to the integrated resort developments seen in the South East Asian region. It is a tourism related
Project targeted towards the creation of a large and unique development, which will aesthetically and functionally
add to transforming the landscape of Colombo, potentially making it one of the most sought after destinations in
South Asia and will further complement the businesses of the main industry groups of the John Keells Group.
The project is for the development, construction, equipping, commissioning, owning, managing, operating, selling,
leasing, and renting a luxury multi/mixed use “iconic” integrated resort and to carry on all related business activities
associated therewith including but not limited to the managing, leasing/renting, selling and operating the aforesaid
luxury hotel, conferencing center, entertainment facilities, international standard shopping mall, luxury
condominiums, serviced apartments and office space.
The project will cater to multiple emerging demand drivers including the growing mobility and spending power of
outbound South Asian regional travelers, the increase in global connectivity to Sri Lanka and the accompanying
growth in Sri Lanka’s tourism sector and the growing demand for entertainment and retail from the Middle East,
India and East Asia.
Tax concessions
The project comes under the Board of Investments (BoI) of Sri Lanka as a strategic development project. Thus the
project is exempt from:
• The imposition of income tax on the Project Company on the profit and income generated from the business
activities of the Integrated Resort for a period of 10 years. After expiration of this tax exemption period, the profit and
income of the Project Company shall be charged at the rate of the lower of 6% or 50% of the prevailing tax rate for
the hotel industry, for a period of 15 years immediately succeeding the last date of the Tax Exemption period.
• Income tax on dividends distributed to the shareholders out of the exempted profit during the said Tax Exemption
period and 1 year thereafter.
• Withholding Tax(WHT), on interest paid on foreign loans and debt obtained for capital expenditure and on technical
fees.
• Value Added Tax (VAT) on the importation of the project related goods and services and the local purchases of
project related goods and services, PAYE tax for foreign employees, Custom Duty and Airport Development Levy on
the project related items and Construction Industry Guarantee Fund Levy.
Project funding mechanism
Planned equity infusion is approximately USD304Mn.The estimated balance of USD 456Mn to be raised via 7 year US
Dollar dominated syndicated loan at Project Company.
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Business Segments
ConsumerLKR Mn 2013/14 2012/13 Chg% 2011/12 Retail segment
Revenue 25,414 24,042 6% 21,969 EBIT 1,480 2,479 -40% 2,822 PAT 1,005 1,987 -49% 2,370 Total Assets 12,171 17,305 -30% 12,670 Total Equity 5,977 10,804 -45% 7,868 Total Debt 1,699 1,704 0% 1,167
Contribution to JKH group
Revenue 22,548 20,593 9.49% 17,415EBIT 5,912 5,706 3.61% 4,442PAT 4,824 4,746 1.64% 3,707Total Assets 52,662 49,795 5.76% 41,275Total Equity 41,570 37,606 10.54% 28,642Total Debt 6,697 7,435 -9.93% 8,077
Contribution to the JKH group
LKR Mn 2013/14 2012/13 Chg% 2011/12 Ports and Shipping
Revenue 21,796 25,113 -13% 23,651 EBIT 2,774 3,680 -25% 3,329 PAT 2,510 3,388 -26% 3,120 Total Assets 19,367 19,233 1% 20,179 Total Equity 14,669 15,139 -3% 15,149 Total Debt 2,250 1,953 15% 1,491
Contribution to JKH group
23 | LOLC Securities Limited 24 | LOLC Securities Limited
Table 13: Details of business segments
Operation of a private container
terminal in the Port of Colombo on a
BOT basis under South Asia Gateway
Terminals (SAGT)
Retail segment comprises of
"Keells super chain of modern
retail outlets which are
operated by JayKay Marketing
Services (JMSL) which is a 100%
owned subsidiary of CCS.
Cinnamon Lakeside
Colombo
LKR Mn
Consumer foods
KFP produces a range of processed
meat items under the brand name of
"Keells","Krest" and " Elephant
House"
Businesses
within the
sector
CCS and KFP are the subsidiaries
operate under this segment.
CCS produces a portfolio of
carbonated soft drinks, ice creams
and related confectionary products
under the “Elephant House” brand
and an energy drink under the “Wild
Elephant brand.
Sri Lankan Resorts and
Maldivian Resorts2012/13 Chg% 2011/12
Bunkering services under Lanka
Marine Services (LMS);
Logistics services which include
operations of DHL Express in Sri
Lanka;
Third party logistics and freight
forwarding solutions under the
John Keells Logistics brand; and
JV with Norbert Dentressangle
Overseas (NDO)
The Nexus network operates the
Nexus loyalty
programme in collaboration
with Nations
Trust Bank.
Representation of airlines as
general sales agents
through Mack Air in Sri Lanka
and through its subsidiary in
Maldives; On-line operations by
Jet Airways; Travel agency
business through Mackinnons
American Express Travels;
A domestic air taxi service
Cinnamon Air through Saffron
Associate stake in Maersk Lanka
Businesses
within the
sector
Leisure
Businesses
within the
sector
During the year ending 2005,
KHL was created as a holding
company for all group resorts
which owns and operates
resort hotels in Sri Lanka and
Maldives. Holding of JKH in
John Keells Hotels PLC is
80.32%.
Destination Mgt.
Destination
managemement
business
comprises of
Walkers Tours
and Travels (
Ceylon) which
was acquired in
1973 and Whittall
Boustead
(Travel) Limited.
Cinnamon Red
AHPL owns and
operates cinnamon
Grand in Colombo
while it also acts as
the holding
company (43.41%)
of Trans Asia Hotels
PLC which operates
Cinnamon Lakeside.
Cinnamon Red is an
associate business
which JKH owna
27.8%.Tranportation
Transportation
2013/14
Cinnamon Grand
Colombo
City Hotels
28%
14%
EBITRevenue
25%
Revenue
43%
EBIT
19%
Revenue
26%
EBIT
Initiation Coverage: John Keells Holdings PLC | 01 June 15
LKR Mn 2013/14 2012/13 Chg% 2011/12Revenue 4,138 3,170 31% 3,790 EBIT 1,364 1,264 8% 1,016 PAT 1,291 1,190 8% 932 Total Assets 32,460 12,690 156% 10,354 Total Equity 19,423 10,472 85% 8,961 Total Debt 10,767 2,142 403% 990
LKR Mn 2013/14 2012/13 Chg% 2011/12Revenue 12,568 11,108 13% 9,874 EBIT 1,995 1,776 12% 1,934 PAT 1,636 1,399 17% 1,171 Total Assets 35,586 31,507 13% 26,921 Total Equity 9,248 8,157 13% 6,857 Total Debt 175 147 19% 328 Contribution to the JKH group
LKR Mn 2013/14 2012/13 Chg% 2011/12Revenue 7,502 6,797 10% 6,723 EBIT 394 380 4% 183 PAT 245 231 6% 66 Total Assets 3,445 3,717 -7% 3,368 Total Equity 2,104 2,166 -3% 1,901 Total Debt 468 434 8% 560
Contribution to the JKH group
LKR Mn 2013/14 2012/13 Chg% 2011/12Revenue 4,037 3,629 11% 2,684 EBIT 2,734 1,463 87% 509 PAT 1,500 540 178% (388) Total Assets 46,783 24,870 88% 19,691 Total Equity 41,519 16,842 147% 10,823 Total Debt 4,199 6,302 -33% 7,440
Contribution to the JKH group
24 | LOLC Securities Limited 25 | LOLC Securities Limited
Property Development
Businesses
within the
sector
Financial Services
John Keells Computer
Services (JKCS) offeres
software products and
services to a wide range of
clients in Sri Lanka and
overseas
Sole distributor for Toshiba
copiers. National distributor
for
Samsung mobile phones,
Asus, and Toshiba
notebooks and other office
automation products such
as Samsung printers, RISO
duplication solutions
Insurance Banking and Leasing Stock Brokering
Commenced work of the premium
residential development project, “7th
Sense” at Gregory’s Road
The superstructure of the “OnThree20”
residential project was completed
Maintained over 90 per cent
occupancy
across the sites
John Keells Capital, a division of JKH,
is the
private equity arm of the Group
Tea Smallholder Factories PLC (TSF PLC) –
operates 8 tea factories and is a leading
manufacturer of low grown teas in the
country, specially the CTC variety
Property Real Estate
Development and sale of residential and
commercial properties
Renting of commercial office spaces
and the management of the Group's
real estate within the city
Businesses
within the
sector
Provider of shared
service solutions in the
finance, accounting and
payroll verticals to the
Group and external
clients
under InfoMate
Other Including Plantation Services Plantation Services Other
Businesses
within
the sector
John Keells PLC (JK PLC) – leading tea and
rubber broker
JKH and other businesses
Union Assurance (UA) offers
comprehensive insurance
solutions in the life and non-
life insurance segments
Nations Trust Bank (NTB)
offers complete banking
solutions
through its network of
branches for corporate,
retail and SME clients and is
the franchise holder for
American Express credit
cards in Sri Lanka. Nations
Leasing is the leasing arm of
NTB
John Keells Stock
Brokers (JKSB) is one
of the leading stock
broking companies in
Sri Lanka and has a
number of trading tie
ups with leading
foreign securities
houses
Information Technology IT Services Office Automation IT Enabled Services
Businesses
within
the sector
Business Process
Outsourcing (BPO)
operations, primarily
in the voice vertical
through JK BPO,
operating approx.
1,000 seats with
operations in India, US
and Canada
John Keells Office
Automation
(JKOA) are authorised
distributors for some of the
leading office automation
brands in the world
John Keells Warehousing – operating a
state-of-the-art warehouse for pre-auction
produce
The Strategic Group Information
Technology (SGIT) supports the
Group’s IT requirements
and also provides consulting services
and SAP implementation services to
external companies
5%
Revenue
13%
EBIT
10%
Revenue
1
EBIT
9%
Revenue
4%
EBIT
4%
Revenue
26%
EBIT
Initiation Coverage: John Keells Holdings PLC | 01 June 15
JKH Shareholding Distribution (as at 31.03.2015)
Mr S E Captain 11.10%Broga Hill Investments Limited 10.40%Paints & General Industries Limited 6.70%Melstacorp (Private) Limited 3.70%Aberdeen Global-Asian Smaller Companies Fund 3.60%Schroder International Selection Fund 3.50%Deutsche Bank AG – London 3.00%Aberdeen Global Asia Pacific Equity Fund 2.20%Aberdeen Institutional Commingled Funds, LLC 1.60%Aberdeen Global-Emerging Markets Smaller companies fund 1.50%Mr K Balendra 1.50%London- Edinburgh Dragon Trust PLC 1.30%All Country Fund 1.10%Aberdeen Asia Pacific Equity Fund 1.00%Mrs C S De Fonseka 1.00%Mrs S A J De Fonseka 1.00%Employees Trust Fund 0.90%Aberdeen Global Frontier Markets Equity Fund 0.90%CF Ruffer Total Return Fund 0.90%Employees Provident Fund 0.80%OthersTotal
Graph 52: Shareholder structure 01 Graph 53: Shareholder structure 02
Table 14: ESOP Details
Plan 6 09.12.2010
Plan 7 07.12.2011
Plan 8 01.07.2013
Total
** Adjusted for Bonus Issues/Right Issues/Sub-divisions
25 | LOLC Securities Limited 26 | LOLC Securities Limited
Shareholder Number of shares %stake
4,672,823
6,306,182
6,426,719
Outstanding
08.12.2015
06.12.2016
30.06.2018
292
172.1
265.18
213.13
End Current
Price
Date of
Grant
Share Granted Expiry Date Option Grant Price
34,504,41730,065,96121,978,15815,569,62015,342,272
996,364,422
6,298,054
6,058,329
7,273,616
26,230,780
JKH has implemented an Employee Share Option Scheme (ESOP) by granting the share options of JKH to executives of the Group
generally with more than 12 months of service. The exercise price of the share option is equal to the 30 day volume weighted
average market price of the underlying shares of the date of the grant. Details of the options granted, the grant price and
outstanding as at 31st March 2014 is illustrated below.
Employee Share Option Plan (ESOP)
23,532,684
253.16
172.49
420,780,063
15,227,172
104,084,164110,775,563
11,362,20710,470,26410,051,585
9,868,701
66,913,81136,498,341
8,540,0008,435,708
35,822,854
12,619,227
8,817,6818,636,653
54%
46%
Foreign Local
21.93%
9.09%68.98%
Individual Corporation Other
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Key Management of JKH
Acres
26 | LOLC Securities Limited 27 | LOLC Securities Limited
1. Mr. Susantha Rathnayake Susantha Ratnayake was appointed as the Chairman and CEO of John Keells Holdings PLC
(JKH) in January 2006 and has served on the JKH Board since 1992/1993 and has 36 years
of management experience, all of which is within the John Keells Group. He is the Chairman
of Ceylon Tobacco Company PLC, Vice Chairman of the Employers Federation of Ceylon and
serves as a member of several clusters of the National Council of Economic Development. A
past Chairman of the Sri Lanka Tea Board, immediate past Chairman of the Ceylon
Chamber of Commerce, he serves on the Board of the national carrier Sri Lankan Airlines.
2. Mr. Ajith Gunawardene Ajit Gunewardene is the Deputy Chairman of John Keells Holdings PLC and has been a
member of the Board for over 20 years. He is the Chairman of Union Assurance PLC. He is
member of the Board of SLINTEC, a company established for the development of
nanotechnology in Sri Lanka under the auspices of the Ministry of Science and Technology.
He is also an Advisory Committee Member of COSTI, the Coordinating Secretariat for
Science Technology and Innovation under the purview of the Minister (Senior) of the
Minister (Senior) of Scientific Affairs. He has also served as the Chairman of the Colombo
Stock Exchange. Ajit has a Degree in Economics and brings over 31 years of management
experience.3. Mr. Ronnie Peiris Group Finance director of the board since 2002/2003 and he has the overall responsibility
for the Group’s Finance and accounting, Taxation, Corporate Finance, Treasury, Group
Initiatives and the Information Technology functions. He has 40 years finance and general
management experience in Sri Lanka and abroad. He is a Fellow of the Chartered Institute
of Management Accountants, UK, Association of Chartered Certified Accountants, UK, and
the Society of Certified Management Accountants, Sri Lanka and holds an MBA from the
University of Cape Town, South Africa.
267.04
7.91Cinnamon Grand
premises, Colombo 02
Lands Outside Colombo
Slave Island Complex,
Colombo 02
York Street, Colombo
No 20, St. Michael’s Rd,
Colombo 03
Union Place, Colombo 02
148, Vauxhall street,
Colombo 02100, Glennie Street,
Colombo 02
Diagram 2: Colombo Land bank of JKH Table 15: Location and size of lands
Location
0.45
0.58
0.50
0.37
3.06
130, Glennie Street,
Colombo 02Kirulapone Avenue,
Colombo 05125, Glennie Street,
Colombo 02Ferguson Road, Colombo
15
4.49
1.71
0.08
0.53
1.22
Name of the person Description
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Diversified Sector in Sri Lanka
Ticker Mkt Cap Total Assets PE PBV
JKH 201,393 202,474 14.50 1.54 1.73 11.06SPEN 40,600 61,145 11.40 1.21 2.00 11.21CTHR 23,803 49,126 33.41 1.41 0.62 7.07CARS 81,501 159,388 14.97 1.75 0.24 14.20CSEC 4,034 17,366 5.05 2.16 3.05 48.92EXPO 16,421 22,164 21.54 1.57 N/A 7.29JFIN 10,500 7,034 43.44 1.80 1.00 4.31HAYL 26,243 93,358 10.17 0.90 1.71 9.77HEMS 47,407 34,379 18.78 2.89 1.33 15.01RICH 16,891 32,576 10.00 1.76 3.01 18.20SHL 11,919 65,863 31.88 1.62 1.63 5.10SUN 6,946 13,500 12.39 1.34 1.85 11.60
JKH SPEN CARS EXPO FLCH HAYL HHL RICH SHL
Tranportation/Logistic √ √ √ √ √ √
√ √ √
√ √ √ √ √
√ √ √ √ √ √ √ √
√ √ √ √ √ √ √
√ √ √ √ √
√ √ √ √ √
√
√ √ √ √
√
√
√ √
√
√
√ √ √
Trading √ √
√ √ √ √ √ √ √
Indicator Value
PE 22.40PBV 2.00Div . Yield 1.50
27 | LOLC Securities Limited 28 | LOLC Securities Limited
*Company Overview, SWOT Analysis, Business Segments, JKH Shareholding Distribution, Employee Share Option Plan (ESOP), Key Management, Land Bank, Peer
Information are taken from the extracts of websites, Annual Reports, Bloomberg and LOSEC Research materials.
Plantation/Agriculture
Table 18: Selected Diversified sector indicators
Table 17: Business Sector Comparison of Peers
Graph 54: Earnings comparison of peers
Land and Property/ Real
Power and Energy
FMCG/Retail/Beverage
IT/BPO
Palm oil
Manufacturing
Sector
Diversified business a business that is made up of a number of different, seemingly unrelated businesses. Diversified sector in Sri Lanka consist
of 19 listed companies and unlisted players such as Unsilver, Capital Maharaja Organization, Upali group of business etc. In addition to
companies that have classified under diversified sector there are other companies operate in Sri Lanka which operate under different business
segment although they have been categorized for a specific segment. CIC, LOLC, RHL, GREG, DIST and LCEY are among them. Compared to the
late 1970s of the economy when big companies slowly began diversifying connected to core operations, today it has changed completely with
new conglomerates are reaching all over irrespective whether there is expertise in the company or not and becoming ‘seemingly’ successful.
Table 16: Financial results comparison of peers
Services
Div Yield
(%)
ROE(%)
Chemicals & phama
Construction
Bank, Finance & Insurance
Hotels and Travels
Health care
Footware and texttile
Motor
-2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
JKH SPEN CTHR CARS CSEC EXPO JFIN HAYL HEMS RICH SHL SUN
2013 2014
Initiation Coverage: John Keells Holdings PLC | 01 June 15
Recommendation Guidance
BUY – expected return > 10% in excess of benchmark return
SELL – expected return less than benchmark return
HOLD – expected return between 0% and 10% in excess of benchmark return
Investment Horizon: 3 years
Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.
Risk Level Evaluation
High: Maximum price volatility to be up or down more than 50% monthly
Medium: Maximum price volatility to be up or down between 25% - 50% monthly.
Low: Maximum price volatility to be up or down less than 25% monthly.
Risk Level is calculated taking the historical standard deviation measures.
Financial Glossary
EPS = Earnings per Share
ROA = Return on Assets (adjusted net profit/average total assets)
ROE = Return on Equity (adjusted net profit/average total equity)
CAGR = Compound Annual Growth Rate ((End Value/Start Value) ̂(1/number of years) -1)
GP= Gross Profit
EBITDA= Earnings before interest, tax, depreciation and amortization
PBT= Profit before tax
PAT= Profit after tax
NP= Net Profit
PBV= Price to book value ratio
PE= Price to earnings ratio
T/O = Turnover
28 | LOLC Securities Limited 29 | LOLC Securities Limited
Analyst certification: The Analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s) of the research certify that the
views expressed in this research accurately reflect the personal view of the analyst(s) about the subject securities and issuers and/or other subject matter as appropriate and has
taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. No part of the compensation received by the analyst(s) was, is or
will be directly or indirectly related to specific inclusion of specific recommendation or views in this research. On a general basis analyst’s performance appraisal may be influenced
by quality of the content and efficacy of the research. The analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s)
receive compensation based on overall revenues of LOLC Securities Limited and its holding company (Lanka ORIX Company PLC – LOLC Group), which may include brokerage
revenue from transactions involved with the securities mentioned in this research.
General Disclaimer: LOLC Securities Limited is a company incorporated in Sri Lanka and licensed by the Securities and Exchange Commission of Sri Lanka to operate as a
stockbroker/stock dealer in Sri Lanka. LOLC Securities Limited is a trading member of Colombo Stock Exchange. This research is based on information from sources that LOLC
Securities Limited believes to be reliable. Whilst reasonable care has been taken to ensure accuracy of the information presented in the research, LOLC Securities Limited does
not give a guarantee on the accuracy of the information presented in the paper nor will take the responsibility on investment decisions taken based on the information provided by
the research and hence LOLC Securities Limited nor its employees accepts any liability whatsoever for any loss arising from investments decisions taken using the information
provided in this paper. The reader also should note this paper does not give recommendations to any particular category of investors and investor should consult investment
advisors for further clarifications regarding risks involved in investing in equity market. Investing in securities has inherent risks with no guaranteed return and price may be
subjected to significant volatilities. No part of this report should be considered as a solicitation to buy or sell any security or product or to engage in or refrain from engaging in any
transaction. LOLC Securities Limited or its employees may or may not hold positions in the securities discussed in the research and the information provided in the research should
not be construed as a buy or sell instruction for any securities mentioned in the research, Unless otherwise specifically mentioned. This research is intended for general use for
clients of LOLC Securities Limited and must not be copied in whole or in part or distributed to any third party for commercial use without permission from LOLC Securities Limited.
If the reader is not the intended recipient please inform LOLC Securities Limited immediately by return email to research@lolcsecurities.com. LOLC Securities Limited’s other staff
including sales people, traders and other professionals may provide oral or written market commentaries or trading strategies to our clients which reflect opinions which are
contrary to the opinions expressed in this research which may be influenced by different circumstances.
Initiation Coverage: John Keells Holdings PLC | 01 June 15
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Matara Branch
Lalinda Liyanapathirana Investment Advisor 041 4936079/ 077 3692257 lalindal@ lolcsecurities.com
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Hiruni Perera Associate Research Analyst 011 7880809 / 077 0652797 hirunipe@ lolcsecurities.com
Head Office Kurunegala Branch Galle Branch Matara Branch
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LOLC SEC Research Reports are also available at Bloomberg LOLC <GO>
30 | LOLC Securities Limited
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