John Keells Holdings- review 3Q 2011

8/6/2019 John Keells Holdings- review 3Q 2011

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BLUE CHIP JOHN KEELLS RECORDS STAGGERING 142% GROWTH FOR CUMULATIVE 3QFY11

JOHN KEELLS HOLDINGS

INTERIM RESULTS UPDATE

Nuwan De Silva: [email protected]

mailto:[email protected]






1

JOHN KEELLS

HOLDINGS INTERIM RESULTS UPDATE Heavy weight John Keells Holdings is a Premier large cap

counter in the Colombo Bourse amounting to a circa 7.4% of the

total market capitalization. The market gaint is a fully fledged

diversified organization holding leading positions in Sri Lanka’s key

sectors.

The benchmark counter surpassed FY10 earnings by a healthy

10% over the 9 month period for FY11 backed by strong earnings

from the transport sector and via capital gains on investments.

Given the expected economic upturn together with strong tourist

arrivals and a higher activity levels in the country the heavy weight

giant acts as a benchmark for the local economy whilst deriving

value through growth.

JKH OUTLOOK

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JKH vs Sector Index

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2

BLUE CHIP JOHN KEELLS TO RECORD

STAGGERING 142% GROWTH FOR

CUMULATIVE 3QFY11.

Heavy weight John Keells Holdings is a preimere large cap counter

in the Colombo Bourse amounting to circa 7.4% stake of the totalmarket capitalization. The benchmark company is a fully fledged

diversified organization holding leading positions in Sri Lanka’s key

sectors. JKH holds business interest across the economy with

holdings in the Leisure, Transportation, Food & Beverage, Property

Development, IT and Financial Services. The blue chip counter

which acts a beacon for investors recorded healthy earnings of

LKR2,027.1 mn by the end of 3QFY11, edging up 63% on a YoY

basis.

The entity boasts of being the only private port terminal operator

via the ownership of SAGT. The transport sector which include

Bunkering facilities contributed a profit of LKR570.5 mn for

3QFY11 as opposed to an earnings figure of LKR485.8mn the

previous year amidst volatility of oil prices and interenal work

stoppages. In addition the highly reputed chain of hotels spread

well across the country, plus within Maldives which caters towards

the up-market tourist segment emerged as the highest earnings

contributor for the diversified group with a profit figure of LKR627.2

mn in 3QFY11.

Further, Property, Food & Beverage and Financial Services

registered net earnings of LKR220.9 mn, LKR58.3 mn and

LKR401.0 mn respectively for the quarter under review. Albeit, the

IT segment witnessed a minute loss of LKR9.4 mn from a previous

loss of LKR6.6 mn YoY.



3

QUARTERLY RESULTS

QUARTERLY FINANCIAL PERFORMANCE

A GLANCE AT 3QFY11 PERFORMANCE

REVENUE TO SPIKE UP WITH THE ECONOMIC

UPBEAT

Consolidated revenue of JKH’s 3QFY11 gained by circa 22% YoY

to LKR15,615.6 mn spearheaded by the high volume Consumer

Foods and Retail segment which contributed 31% of the top-line

on the back of the improved disposable income in the country.

This top-line growth was further shouldered by the healthy turnover

levels of the Leisure sector on the back of the high tourist influx

and the Transport sector activity levels. Also, over the 9 month

period the group turnover witnessed a 25% hike shouldered by the

high geared macro economic climate in the country.

20%

22%

4%

31%

12%

6%5%

Revenue Contribution

Transport Leisure

Property Consumer Foods & Retail

Financial Services IT

Other



4

GROSS PROFIT MARGIN WITNESSED A HEALTHY

SPREAD OF 26%

With the leisure sector seen a revival the cost of sales witnessed a

condensed growth pattern by gaining lesser than the revenue

incline. The cost reduction in transport sector and higher efficiency

level in the consumer food segments strengthened the gross profit

margin whilst recording a gross profit figure of LKR4,115.2 mn in3QFY11 in comparison to LKR3,156.1 mn in 3QFY10 (a YoY gain

of 30%). Further the cumulative 3QFY11 gross profit grew by 24%

YoY to LKR9,349.2 mn.

OTHER INCOME THROUGH HEAVY INVESTMENTS

Albeit the 9% YoY dip in other income to LKR918.7 mn the heavy

balance sheet assets generated a bountiful yield over the past

year. The increase in short term investments to circa LKR15,578

mn together with the doubling impact of cash, fetched high levels

of interest income amidst the lower policy rates prevailing in the

country. Over the cumulative FY11 the other income segmentstaggered due to the disposal of 11.6mn shares held in Asian

Hotels and Properties together with the sale of 37.3mn John

Keells Hotels PLC shares at a total consideration price of LKR2.8

bn.

EXPENSES IN LINE ALBEIT HIGH TURNOVER

A marginal increase of 3.7% YoY was witnessed in the operating

cost segment during 3QFY11 albeit, a healthy revenue growth of

22% YoY. Yet on a cumulative perspect the operating costs grew

by circa 10% YoY on the back of heavy advertising expenditure on

lieu of many new product launches throughout FY11.

RELIEF IN FINANCE EXPENSES

The overall finance cost witnessed a significant reduction of 46%

YoY as a result of the rate cut by the Government of Sri Lanka.

The payment of a debenture over the 3Q period further reduced

the interest burden of the group. This in turn has increased the

entity’s interest cover from a lower range of 4.0X to 12.5X by the

end of 3QFY11. Further, apart from the local borrowings,

retirement of the IFC loan is due within next quarter, which is

definitely achievable based on the group’s high liquidity position. -2000 2000 6000 10000

PBIT 3QFY11

PBIT 3QFY10

EBT 3QFY11

EBT 3QFY10

Profit 3QFY11

Profit 3QFY10

Profit Contribution

Transport Leisure

Property Consumer Foods & Retail

Financial Services IT

Other

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Quarterly Margin

GP Margin EBITDA Margin

EBIT Margin NP Margin



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TAX BURDEN EFFORTLESS

Even though the tax burden increased by a 44% YoY on a

cumulative basis the effective tax rate remained at a low figure of

16% for the diversified entity throughout the period. The 3QFY11’s

tax expense growth of 26% was as a result of the increase in

taxable components of the company.

3QFY11 CUMULATIVE TO SURPASS FY10 EARNINGS

The benchmark counter surpassed FY10 earnings by a healthy

10% over the 9 month period for FY11 backed by strong earnings

from the transport sector and via capital gains on investments. The

sprouting economy further shouldered the 142% YoY growth to

LKR6,142.3 mn in cumulative 3QFY11. Over the latest quarter the

predominent earnings contribution came from the leisure sector

backed by the tourism hype.

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A High Flying Transport Sector

JKH's key sector, transportation, is mainly represented by the fully

owned subsidiary Lanka Marine Services (LMS) and 42.2% owned

associate South Asia Gateway Terminals, (SAGT); reported a 17%

YoY gain in the bottom line to LKR570.5 mn in line with the top line

growth of circa 17%. On a cumulative perspect for FY11 the

earnings of the sector recorded a figure of LKR8,872.1 mncompared to LKR6,790.6 mn in the previous year.

LMS, the bunkering arm of JKH spearheaded the sector revenue

despite the volatile oil prices together with the added competition.

(Subsequent to the Supreme Court ruling on a Fundamental Rights

Application on the bunkering unit LMS. Further, currently there are

3 active players in the bunkering business). With the court orders

in place LMS currently has 40% market share whilst LIOC acts as

a strong competitor with a similar market share.

The high level of performance via the port operator SAGT backed

the strong transport sector earning of the organization. Theaverage monthly throughput increased by circa 14% to 166,028

TEU’s per month whilst further heavy activity levels was witnessed

on the back of the improving logistics and airline units.

Furthermore, Board of Investment (BOI) of Sri Lanka has affirmed

that SAGT has fully complied with the BOI agreement and that the

tax exempted status of it remains. We believe that this segment of

the group holds great potential with the increase in the foreseen

improvement in port services, airline operations and logistic

activities in the country.

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200,000

TEU Throughput

2010 2009 2008



7

Revival of Leisure Sector

Leisure sector witnessed a doubling of the previous years quarterly

performance to LKR627.2 mn in 3QFY11 on the back of the 46%

increase in the tourist arrival to the nation. Of the leisure income a

bulk of circa 40% was derived through the city hotel segment,

further, JKH was positioned to charge a premium on its high end

clients after the complete refurbishment of the city hotel cluster.Amidst this the leisure sector contributed LKR863.1 mn in

cumulative 3QFY witnessing an impressive hike of 525% YoY.

Despite the full or partial closure of some hotels for upgrading and

refurbishment over the said period the sector managed to perform

exceptionally over time.

During 2QFY11 the company also exited one of its loss making

operations in Maldives – Cinnamon Alidhoo and instead acquired

the head lease of Chaaya Island, Dhonveli. The three Maldivian

resorts that were operational during the quarter registered lower

occupancy levels. Therefore, the Maldivian market was not in par

with its expected earnings due to the adverse weather climatetaking a toll on the occupancy levels.

The leisure sector, which represents the entity’s single largest net

asset exposure encompasses 2 city hotels which holds 40% of the

5-Star room capacity in Colombo and 7 resorts spread across the

nation. The well renowned city hotels attracted a high occupancy

rate of circa 80% over the period whereas the peak season kept

the resorts working at near full capacity.

Coral Gardens which is currently under heavy renovation is

targeted to be re-open in early next year branded as Chaaya Tranz

with an investment of LKR1 bn. Chaaya Bay – Beruwala iscurrently under construction with a capital inflow of circa USD25

mn with operations to be commenced by 2013. Further, the most

recent addition Chaaya Blue, with a refurbishment cost of

LKR450mn is said to attract a high flow of guests to the Eastern

region.

The leisure sector with its refurbished infrastructure has opened up

stronger avenues to maximize future prospects of the emerging

industry. With the Government envivaging to make Sri Lanka a

prime tourist destination, JKH is bound to be a key benificiary.

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Tourist Arrivals

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Leisure Sector Contribution

City Hotels Resort Hotels Maldives Resorts



8

Disposable Income Shouldering

Consumer Demand

Backed by well renowned brands and listed subsidiaries such as

Ceylon Cold Stores (CCS:LKR590.1) and Keells Food Products

(KFP:LKR140.0) the sector attained a profit figure of LKR57.9

mn in 3QFY11 from a previous loss figure of LKR1.8 mn. Withstrong local demand empowered by increased disposable income

and higher consumption patterns, the top-line of the segment

witnessed a healthy growth of circa 15% YoY to LKR4,940.6 mn in

3QFY11.

Over FY11 the group has introduced various new products to the

market such as KIK Cola which has won customer confidence in a

short period of time. Further, rebranding of the Elephant House

brand took place giving a new edge to the counter in the food and

beverage sector. The entity has also focused on strengthening the

distribution network throughout the nation whilst introducing a new

back office system to streamline the work process. Further, JKH is

equipped with a supermarket network of 46 and is cautious about

its expansion plans in the segment due to the high competition in

the industry.

The high volume yet low margin segment has also invested

LKR500mn in its factory capacity to increase the production of ice

cream in the island. With the island’s consumption patterns

changing together with income levels rising the sector is inlinefor

exponential growth.



9

Property, a Turnaround Sector

JKH which is one of the largest private sector holders of real estate

in the island is the owners and promoters of Crescat City, the 30-

storey luxury apartment ‘The Monarch’, and the 35-storey luxury

apartment, ‘The Emperor’. Further the sector is in progress of

building a 475 apartment complex in Union Place, where interest

has been expressed for near 70% of the units. With the final call inFebruary the 1st tranch is proposed to be kicked off for the newly

launched project ‘On Three 20’ .

The property sector witnessed high growth levels of circa 246%

YoY for 3QFY11 on the back of the seasonality of the payment

structure. Further the sector recorded earnings of LKR483.4 mn for

cumulative 9 month period as opposed to LKR140.5 mn the

previous year.

With the land and property sector in a turnaround phase together

with the land prices set to rise with the expected economic growth

in the island we foresee that the property arm of JKH to have

immense prospects in the near future. Phrase



10

Insurance to Back Financials

The financial services sector witnessed its bottom line doubling to

LKR401.0 mn in 3QFY11, with the inflow of life segment profit from

Union Assurance coming into play. Further, the cumulative

3QFY11 recorded an 69% YoY jump to LKR 758.3 mn backed by

the strong performance of John Keells Stock Brokers and the

group’s banking associate, Nation Trust Bank.

Information and Other Sector Adding

Strength

Even though the IT sector recorded an loss of LKR9.4mn for

quarter ended December 2010 The Other business segment of

JKH which include Plantation Services, Strategic investments,

Central Hospitals recorded a huge leap in profits driven by the gain

on the sale of shares of KHLs and AHPL during the trailing 3-

quarter period.

QUICK PERFORMANCE REVIEW

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11

FUTURE OUTLOOK

On a future perspective, we expect JKH to be spearheaded by the

Tourism sector by contributing higher earnings over the next few

years. With the sector being refurbished and renovated to carter

towards the highend tourists, the counter would be able to

strengthen the margin levels whilst maintaining high occupancy

levels. Further, the occupancy levels in the country would be

shouldered by the government initiatives of making Sri Lanka the

most sought after tourist destinantion in the Asian region attracting

2.5mn tourist by 2016. With a minimum room rate of USD125

according to the 2011 budget the hotel sector is poised to see a

growth in price levels. JKH with its portfolio of 2,000 rooms

comprising of 40% of the entire five star city-room capacity in

Colombo and 775 resort rooms in Sri Lanka, is well poised to reap

the benefits of the local tourism upside. Further the growth in

sector revenues in the future would be strenghthen by the heavy

upgrading and refurbishment carried out among the existingproperties together with ‘Chaya Tranz’ and Maldivian operations

generating return.

The improvement of future earnings potential would be

strengthened by the transport sector on the back of the high

performance by SAGT coupled by improved competition of LMS.

Volumes at the Sout Asian Gate Terminal is expected to grow at

double digit figures of circa 10%-12% during the coming year

backed by competitive rates and the regional trade gathering an

upward momentum amidst high economic growth.

The decrease in the risk rating in Sri Lanka would also be working

in favour of JKH whereby the insurance costs of ships docking has

reduced drastically than earlier. Due to the expected change in the

mix between domestic container volumes (which gives thrice the

revenue of transshipment containers) and the transshipment

containers (contributes 78% of total volume) we expect profitability

of SAGT to improve.

Land and property sector in Sri Lanka, which is at a turnaround

stage in Sri Lanka is poised to grow on the back of the



12

high geared economy coupled with the construction and

infrastructure boom. JKH holding being the largest private land

bank, has over 33 acres of prime land in Colombo and a further

133 acres outside the capital, the sector is in-line to benefit from

the land and property sector turnaround. Further, with the per

capita income levels soaring and demand for luxury apartments

increasing, the expected earnings via The Monrach, The Emperor

and The One Three 20 would stagger in the near future.

Furthermore, with the declined policy rates in the island the sector

is poised to grow.

Backed by a high turnover equity market and a strong banking

sector the conglomarates financial sector would reap hefty yields

over time. The Nation Trust Bank’s (NTB:LKR84.50 ) aggressive

banking activity is set to increase earnings levels in the near future.

Further, the 4th largest insurer in the country, Union Assurance is

inline for a growth based on its current market share of 11.5% and

9.5% in the life and general insurance sector respectively.

With the demand and consumption patterns augmenting on the

back of higher disposable income and the economic uptrend the

Consumer Food and Retail arm of John Keells Holdings is set to

gain with higher volume levels. With the counter backed by

additional capacity and a strong distribution network, JKH has

created a strong value chain. Further, with the introduction of new

products and rebranding taking place the counter is set to edge up

in the near future.

Furthermore, the newly implicated BPO segment is expected to

generate profit over the years once the Indian operation covers its

initial operating expenses.



13

VALUATIONS

On an analysis of the recent performance measures and the

potential opportunities in the Sri Lankan economy as well as the

global market we strongly believe that JKH has a definite upside

potential backed by its high earnings growth rate. In the current

market context with high levels of activities we expect JKH to posta profit figure of LKR8,166.3 mn in FY2011 edging up 57% YoY

whilst in FY2012 to pertain an earnings figure of LKR9,061.2mn

(11% growth)

Share is priced at 22.5X forecast FY11E earnings. With the

counter peaking at LKR358.00 during early 3QFY11 witnessed a

declining momentum to saturate at the current market prices.

Following a volatile price movement for JKH which has gained over

60% in the current period is currently trading at a project 22.5X

projected FY11E net profit whilst on an earnings potential of 20.5X

for FY12E. Based on an analysis of a historic 1 year price

movement, we derive a price volatility of +/-55.6 on a mean of

LKR238.70. hence, the flux is circa +/-23%. Furthermore, if it is

assumed that the same upside momentum is witnessed pushing

the price to LKR362.9 (from a current level of LKR295.0), the

forward PE multiples would increase to a figure of 27.7X and 25.0X

for FY11E and FY12E respectively. [LEAF OVER TO REFER PRICE

ASSIMILATION]

Further, on an adjustment of JKH’s returns to its risk (deviation of

the share price), the derived Sharpe ratio of the counter is at 2.32

whilst the Diversified sector and the market records a Sharpe ratio

of

3.1 and 3.9 respectively below the market risk. JKH’s risk adjusted

risk is lower due to the counters deviation of returns has been

much higher than at 23.1% as opposed to 19.3% and 15.6% for

the diversified sector and the market respectively. Hence JKH

display a lower risk adjusted return when compared to the

diversified sector and the market. [LEAF OVER TO REFER

VALUATION DASH BOARD]

Given the expected economic upturn together with strong

tourist arrivals and a higher activity levels in the country the heavy weight giant acts as a benchmark for the local

economy whilst deriving value through high earnings growth.



14

VALUATION DASHBOARD

PRICE ASSIMILATION

*PRICE BAND LKR362.9 IS BASED ON AN UPSIDE GROWTH OF

23%, DERIVED VIA THE ANNUAL STANDARD DEVIATION OF THE

MARKET PRICE. THE PRICE RANGE OF LKR358.0 IS DERIVED BY

THE HIGHEST PRICE JKH HAS REACHED OVER TIME.



RESEARCH.................................................................................................…………………… … Head of Research Saminda Weerasinghe Senior Analyst Amali Perera

(94-11)5320250 (94-11)5320256

[email protected] [email protected]

Corporates Economy

Akeela Rasheed (94-11)5320252 Umayangana Randeniya (94-11)5320254Nuwan De Silva (94-11)5320258 Dhanusha Pathirana (94-11)5320257

Crishani Perera (94-11)5320251 Nuwan Pradeep (94-11)5320257

Minoli Mallwaarachchi (94-11)5320360

Nirmala Samarawickrama (94-11)5320253

Shehara Fernando (94-11)5320253

SALES

....................................................................................…………………… INSTITUTIONAL SALES RETAIL SALES Sabri Marikar (94-11) 5320224, 077 3576868 [email protected] Shiyam Subaulla (94-11) 5320218, 0773502016 [email protected] Wijayakoon (94-11) 5320208, 0777 713645 [email protected] Gagani Jayawardhana (94-11) 5320236, [email protected] Aboobucker (94-11) 5320213, 0777-727352 [email protected] Priyantha Hingurage (94-11) 5320217, 0773502015 [email protected]

Andre Lowe (94-11) 5320223, 0777 230040 [email protected] Neluka Rodrigo (94-11) 5320214, 0777366280 [email protected] Hedigallage (94-11) 5320211, 0777 713663 [email protected] Subeeth Perera (94-11) 5320227, 0714042683 [email protected] Bibile (94-11) 5320238, 0777 352032 [email protected] Chelaka Hapugoda (94-11-5320240, 0777 256740 [email protected]

BRANCHESKiribathgoda Asian Alliance Building, No.04, Sirimawo Bandaranayake Mw, Kadawatha. Asiri Perera 011-5734773, 0773-692812 [email protected]

Kurunegala Asian Alliance Building, No.254, Colombo Rd, Kurunegala. Asanka Samarakoon 037-5628844, 0773-690749 [email protected]

Matara Asian Alliance Building, No. 312,Galle Road Nupe, Matara. Sumeda Jayawardena 041-5677525,0773-687307 [email protected]

Galle Capital Reach Building, 2nd Floor, No. 16A, Gamini Mw, Galle. Ruchira Silva 091-5629998, 0773-687027 [email protected] Wijewardena 091-5676766, 077-6681884 [email protected]

CSE Floor CSE,01-04, World Trade Centre, Colombo – 1. Thushara Adhikari 011-5735122, 0773-688202 [email protected]

Negombo Asia Asset Finance, 171/1, Station Road, Negombo. Uthpala Karunatilake 031-5676881, 0773691685 [email protected]

SERVICE CENTRESKandy Capital Reach Building, No.165, Katugodella Veediya, Kandy. Nilupul Hettiarachchi 081-5628500, 0773-691816 [email protected]

Radhika Hettiarachchi 081-5625577, 0777-810694 [email protected]

Hambantota Hambanthota Chember of Commerce, Thangalle Road, Hambantota. Gayan Sanjeewa 047-5679240, [email protected]

Anusha Muthumali 047-5679241, 0772-351716 [email protected] Ranasinghe 0772378352 [email protected]

Ampara 2nd Floor, T.K.S. Building, D.S. Senanayake Street, Ampara. Fawshan Mohamed 063-5679070, 0778-848870 [email protected]

Jaffna 11-8, First Floor, Stanley Road, Jaffna. Elilan Kugaval 0775-539137 [email protected] Sutharshan 021-5671800, 0772-395811 [email protected]

Nirmalan 021-5671801, 0778-449773 [email protected]

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John Keells Holdings- review 3Q 2011