Sri Lanka Equities Corporate Update John Keells Holdings PLC (JKH) Rs. 78.00 50.00 Volume JKH Adjusted Price / Volume Graph 9,000,000 Volume Price 8,000,000 7,000,000 6,000,000 5,000,000 Price 200 180 160 140 120 BUY With a market capitalization of US$ 319m, JKH is the largest listed conglomerate on the Colombo bourse, with an exposure to Leisure, Transportation, Property Development Food & Beverage, IT and Financial Services Sectors. The financial impact of a nonrecurring write off and the market downturn has pulled the counter down by over 53% over the last 6 months. However, with a rebound on the cards for FY10 and strong long term prospects through its portfolio of domestic hotels and vast land bank along with its strong net cash positive balance sheet making a strong case for accumulation at current levels. 4,000,000 3,000,000 2,000,000 1,000,000 Chinthaka Ranasinghe chinthaka@jkstock.keells.com John Keells Stock Brokers (Pvt) Ltd. Company No. PV 89 130, Glennie Street, Colombo 2, Sri Lanka. Tel: 0 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 JKH Reuters Code Bloomberg Code Share Price LKR Issued Share Capital (Shares) Voting 12mth High / Low (Rs.) Average Daily Volume (Shares) Market Capitalisation Rs. Mn Price Performance (%) 94 11 242 1101-9 (Gen.) 94 11 234 2066/7 94 11 243 9047/8 Fax: 94 11 234 2068 94 11 232 6863 December 2008 100 80 60 40 20 0 JKH.CM JKH.SL 50.00 610,500,000 128.50 / 54.75 273,731 30,525 1 mth 6 mth 12 mth ASPI (11.11) (37.25) (39.08) JKH (16.03) (52.65) (58.01) FY09E earnings are expected to be depressed by 20% yoy on account of the combined effects of the loss of LMS post hand over, and back taxes thereon and reduced leisure sector earnings from Maldives following the handover of the 100-room Velidhu in April 08 after the expiry of the lease and closure of the up-market Alidhoo for structural changes till October 08. However, a rebound is likely in FY10, on a full years operation at Alidhoo, the bounce back from the distortions of the non-recurring items and improving margins in the Food & Beverage Sector. With a portfolio of 774 rooms in strategic locations in Sri Lanka, and 40% of the city 5 star room supply, the company is primed to be a key beneficiary of a cessation of hostilities. In addition, the company also holds a real estate portfolio in excess of 35 acres in prime locations in Colombo, of which 24.6 is freehold and the balance on long term lease. The group balance sheet is extremely healthy with a net cash surplus estimated at approximately Rs.3,536m by end FY09E and 24% debt to equity, of which 50% (Rs.8,000m) is from an IFC facility on a 9 - year repayment cycle with a 2 - year grace period commencing April 08 at a rate of LIBOR +2.75%. Total cash balances approximate Rs.19,300 (approx US$ 175m) by year end FY09 on our estimates, an ideal launching pad when opportunities are mined. At 5.9x FY10E earnings the counter, which has traditionally traded at steep premiums to the market, is valued on par with market multiples. Significantly, the counter is also at a 20% discount to unadjusted book value, whereas, the share traditionally trades at a significant premium to book value. The market adjusted asset values are likely to be considerably higher than the book value of assets, implying significant upside potential in the long term. Fiscal Year Net Earnings (Rs.m) EV/EBIDT (x) EPS (Rs.) EPS Growth (%) PER (x) Mar-04 1889.4 8.5 3.1 27.7 16.2 Mar-05 1696.3 7.4 2.8 (10.2) 18.0 Mar-06 3050.4 5.3 5.0 79.8 10.0 Mar-07 3532.0 4.3 5.8 15.8 8.6 Mar-08 5100.0 3.2 8.4 44.4 6.0 Mar-09E 4068.6 3.3 6.7 (20.2) 7.5 Mar-10E 5202.0 3.2 8.5 27.9 5.9 Page 1 of 6
43% Breakdown of Operating Profit FY09E 8% 20% 5% 18% 5% 1% Consumer Food & Retail Tea, Tea Broking & Warehousing Leisure & Real Estate Transportation Information Technology Net Other income Associate earnings Leisure JKH has a portfolio of 774 resort rooms in Sri Lanka in key strategic locations including Southern and eastern coastal, Hill country and the heart of Sri Lanka s cultural triangle in Habarana, accounting for approximately 9% of the graded room supply in the country. The Company has approximately 40% share of the city 5-star room supply through the 500 room Cinnamon Grand and the 367 room Trans Asia. JKH expanded its capacity significantly in the Maldives in FY07, adding approximately 357 rooms with the acquisition of the 150 room Dhonveli, the 107 room Ellaidhoo and the up-market 100 room Alidhoo. Dhonveli and Ellaidhoo were fully opened after refurbishment in December 07. However, Alidhoo was closed for structural adjustments including the construction of a US$4m breakwater, till end October 2008. However, the lease of the 100 room Velidhu expired in April 08 and the property has been duly handed over. With these developments, JKH now has 416 rooms in Maldives. Tourist arrivals to Maldives were buoyant in 2007, reaching a record 675,889. Arrivals for the first six months of FY09, however, have grown only by a marginal 0.3%, leading to occupancy concerns stemming through additional room supply coming on stream in the islands. The Sri Lankan tourism sector continues to suffer under the fresh outbreak of fighting in the North and East, with arrivals for the first 6 months of FY09 slumping 14.2% yoy. Our forecasts are based on assumptions of the trend extending for the full year of FY09. However, with the portfolio of properties already in place in prime locations and over 860 city five star rooms, the company will be one of the prime beneficiaries in the event of a cessation of the hostilities. The group is exploring extending its reach to India and the Middle East, both in terms of owned hotels and in terms of hotel management contracts. Property Development 38% 11% Revenue Breakdown FY09E 1% 9% 41% Consumer Food & Retail Tea, Tea Broking & Warehousing Leisure & Real Estate Transportation Information Technology The handover of the fully sold 195 apartment Monarch Residential Apartment Tower was delayed by a short margin, with only half being handed over on schedule by end FY08. The balance will be handed over in FY09. Therefore, the final 50% payment due is expected to be spread through 4Q FY08 and through FY09, as opposed to our earlier estimates of a full booking for FY08. Pre-selling has commenced for the 164-apartment 3rd residential apartment project Emperor, at the Asian Hotel property with down payments being paid on approximately 80%. The scheduled handover however, has been postponed to FY012 from our earlier estimates of FY10 with allowances for construction delays. We have assumed approximately 25% revenue recognition by end FY08, a further 25% in FY09 and FY10 and the remainder upon handover in FY12. The Asian Hotel property has space left for a similar fourth residential/ commercial high rise. In all, JKH boasts of a 24.6 acre freehold land bank of prime real estate including 5 cleared acres bordering the Beira Lake in Colombo and 3 acres earmarked for a joint 10 acre development with AMW and James Finlays in Union Place, Colombo. The group is also exploring opportunities for property development in the region including Malaysia and Singapore. Page 2 of 6
Transportation JKH currently owns an associate stake in South Asian Gateway Terminals, which operates the 1.9m TEU capacity Queen Elizebeth Quay at the Colombo Port on a 30 year BOT arrangement commencing September 1999. The Company upped its stake in SAGT by 4.2% to 37.9% in September 2008, buying out its entitlement of the ADB stake for a consideration of US$4.41m, at an approximate multiple of 2x FY09E earnings. The full year of the additional consolidation will come through in FY10. Container thru-put which expanded by 11% in FY08 to approximately 1.6m TEUs have grown by a further 12.5% in the first 7 months of FY09. SAGT ramped capacity to approximately 1.9m TEU in August 07. The increased volumes however are mainly from the lower margin T/S traffic, which has increased from 60% overall volumes in FY06, to approximately 73%. The thru-put traffic however, may be affected from 4Q FY09 amidst a slow down in global trade. Following a Supreme Court ruling in August 2008, the bunkering subsidiary LMS vacated the tank farm at Orugodawatte and handed over the land and the facility to the Ports Authority. With the hand over, the company lost its ability to carry out shore based bunkering, and has currently switched to offshore barge/vessel based bunkering with the possibility of commercial co-sharing the tank farm facility, which will significantly cut its earnings capacity. The company provided approximately Rs.150m as VRS costs for the existing workforce. The Court ruling also annulled the BOI status of the company, forcing the company to pay taxes with retrospective effect. We have assumed the following in our forecasts. 1. Loss of recurring annual PBT is assumed at Rs.780m, on the base case assumption of zero earnings from bunkering herein, with the net impact for FY09 on loss of earnings alone on our estimates, standing at Rs.590m. However, the company estimates that offshore bunkering earnings can net in at least Rs.120m per annum. One off items including 1. Tax with retrospective effect @ 15% of Rs.705m 2. Asset write-off of RS.730m 3. VRS and loss of oil of Rs.173m. Other Associate Companies The group associate companies (ex. SAGT) further include a 29.9% stake in Nations Trust Bank (NTB) and a 37% stake in life and general insurer Union Assurance (UAL). NTB is a mid-tier bank which focuses on high end corporate and retail lending. The bank also has diversified financial interests with subsidiaries in fixed income and leasing and significant contributions from its American Express credit card portfolio and trade finance activities. The bank has grown assets at an average of 32% over the last five years and currently has a loan book of Rs.42.7 billion. UAL is one of the leading insurance providers in Sri Lanka with a market share of 10.44% and 9.03% in Life and Non Life segments, respectively. During the last 5 years, UAL witnessed a CAGR of 20.5% in Gross Written Premium (GWP) being in line with industry growth. Page 3 of 6
Share Buyback JKH completed a 4% pro-rata voluntary buy back of share capital at a price of Rs.90 per share in November 2008. The share capital accordingly reduced by approximately 25.5m shares to Rs.2,295m. Earnings FY09E Transportation: We have assumed a total net impact on LMS of Rs.2,190m in FY09, of which one off costs approximate Rs.1600m on LMS. Leisure & Property development: The closure of the flagship Maldives property Alidhoo and the loss of earnings from Velidhu following its handover will depress Maldives operational earnings by approximately 73% yoy in FY09 whilst the continued conflict in the North will be compounded by turbulent economies in the key European markets. Associate Companies: Associate earnings are likely to sustain momentum in FY09 with volume growth at SAGT and improving earnings at financial services subsidiaries Union Assurance and Nations Trust Bank. The company cashed out of its investment in AMW in August 08, realizing cashflows of Rs1,900m and a capital gain of Rs.1,025m. Treasury: Whilst the company is proactively evaluating sound long term investment options, interest income should further augment bottom-line. The combination of treasury income, one off losses at LMS and the capital gain on the sale of the 20% stake of AMW is reflected under other income in our forecasts. Combined, we expect group earnings to fall by 20% in FY09. FY10E Leisure & Property development: Leisure sector earnings from the Maldives should spike sharply in FY10, with Elaidhoo, Alidhoo and Dhonveli being fully operational for the entire year, making up for the loss of the 100 room Velidhu. However, if the LTTE is not marginalized, the domestic leisure industry will continue to post negative earnings. Real estate earnings will dip by approximately 32% with the Monarch being fully accounted for in FY09. Treasury: Unless invested on projects with long gestation periods/ greenfields, the group s extensive cash resources will continue to provide an interest income base. Associates: Associate earnings are expected to grow by a muted 8.4% on the back of slower growth at SAGT and the Financial Sector associates NTB and UAL. Both SAGT and NTB are indirect sufferers of the global economic crunch. We expect net earnings to rebound by 28.5% in FY10. Page 4 of 6
(x) 4.00 3.50 Price to Book Value (x) Growth Prospects With investments already in place in the domestic leisure sector and its large real estate portfolio, the company is primed to reap significant benefits in the event of a cessation of hostilities. 3.00 2.50 2.00 1.50 1.00 0.50 The group balance sheet is extremely healthy with a net cash surplus estimated at approximately Rs.3,536m by end FY09 and 24% debt to equity, of which 50% (Rs.8,000m) is from an IFC facility on a 9 - year repayment cycle with a 2 - year grace period commencing April 08 at a rate of LIBOR +2.75%. Total cash balances approximate Rs.19,300 (approx US$ 175m) by year end FY09 on our estimates, an ideal launching pad when opportunities are mined. JKH has received an in-principle approval from the government to reclaim and develop 459 acres of land from the sea off the port of Colombo under a public private partnership, at an estimated investment of US$ 500m. Discussions are currently underway to finalize required approvals. 0.00 2002 2003 2004 2005 Valuations Price Rs. 200 175 150 125 JKH PER BAND Price 4 8 12 16 20 At 5.9x FY10E earnings the counter, which has traditionally traded at steep premiums to the market, is valued on par with market multiples. Significantly, the counter is also at a 20% discount to unadjusted book value. The market adjusted asset vales are likely to be considerably higher than the book value of assets, implying significant upside potential in the long term. 100 75 50 25 0 2002 2003 2004 2005 2006 2007 2008 2006 2007 2008 Page 5 of 6
Profit and Loss Statement (Rs.m) Financial year ended 31 March 2003 2004 2005 2006 2007 2008 Turnover 16,827 22,285 22,851 29,492 32,818 41,641 33,679 35,542 Operating Profit by Sector Consumer Food & Retail 246 (402) 245 390 630 569 521 633 Tea, Tea Broking & Warehousing 108 369 325 229 182 429 347 167 Leisure & Real Estate 384 1,186 652 1,611 1,742 1,825 1,151 1,677 Transportation 631 595 1,056 1,507 1,447 1,089 284 289 Information Technology 42 51 (4) 115 131 65 70 75 Others 163 172 51 (450) (375) (390) (390) (390) Total 1,574 1,971 2,326 3,402 3,757 3,587 1,983 2,452 Other income 268 159-481 630 2,341 3,000 2,700 Finance costs 329 457 404 525 1,315 1,618 1,718 1,534 Share of Associate company profits 451 703 833 956 1,700 2,242 2,755 2,989 Profit before taxation 1,964 2,375 2,754 4,314 4,772 6,551 6,021 6,607 Taxation 316 285 645 822 831 1,040 1,625 1,047 Profit after taxation 1,648 2,090 2,109 3,491 3,940 5,511 4,396 5,560 Minority Interest 169 201 413 441 408 411 327 358 Profit attributable to shareholders 1,479 1,889 1,696 3,050 3,532 5,100 4,069 5,202 2009E 2010E Balance Sheet As at 31 March (Rs.m) 2003 2004 2005 2006 2007 2008 Fixed Assets 13,968 22,544 26,113 27,978 38,187 45,759 45,404 46,840 Current Assets Inventories 1,285 1,473 1,642 2,083 3,400 3,985 3,223 3,401 Receivables 3,293 4,537 6,428 5,263 6,593 6,807 5,505 5,810 Short term investments 598 1,601 3,030 2,537 16,138 10,455 16,000 16,000 Cash 951 2,161 2,090 1,329 1,626 2,910 3,382 4,312 6,127 9,772 13,190 11,212 27,757 24,157 28,110 29,524 Current Liabilities Short term loans & OD 2,642 2,429 6,303 3,268 8,880 4,836 3,075 3,075 Other 2,450 3,731 5,636 5,372 6,019 8,230 6,721 7,076 5,092 6,160 11,939 8,640 14,899 13,066 9,796 10,151 Long term Liabilities Term Debt 1,476 1,601 2,786 2,058 6,504 5,946 12,771 11,771 Other 1,698 2,387 2,477 2,332 1,643 1,947 2,066 2,183 3,174 3,988 5,263 4,390 8,147 7,893 14,837 13,954 Net Assets 11,829 22,169 22,100 26,158 42,898 48,957 48,881 52,259 Issued Capital 1,876 3,001 3,316 4,000 5,529 6,360 6,106 6,106 Capital Reserves 2,855 7,896 7,894 8,201 19,853 22,170 20,135 20,135 Revenue Reserves 5,082 6,331 7,209 10,328 13,851 15,688 17,864 21,173 Shareholders Funds 9,813 17,228 18,419 22,529 39,233 44,218 44,104 47,413 Minority Interest 2,016 4,941 3,681 3,629 3,665 4,739 4,777 4,846 Capital Employed 11,829 22,169 22,100 26,158 42,898 48,957 48,881 52,259 2009E 2010E Cashflow Statement As at 31 March 2003 2004 2005 2006 2007 2008 2009E 2010E Profit After Tax 1,808 2,375 2,754 4,314 4,772 6,551 6,021 6,607 Depreciation 738 862 1,074 1,083 1,257 1,622 1,660 1,660 Other Non Cash Items (785) (342) (617) (1,162) (1,486) (1,824) (2,870) (2,143) Net Working Capital Changes 109 283 2,226 (1,426) (256) (1,013) 554 (130) Cashflow from Operations 1,870 3,179 5,438 2,809 4,287 5,337 5,365 5,994 Acquisition Of Fixed Assets (2,023) (6,633) (4,263) (4,081) (5,499) (3,476) (1,400) (1,400) Investments & Associate Stakes 20 (111) 404 1,228 (4,587) (879) 1,459 (481) Net Cashflow From Investing (2,003) (6,744) (3,859) (2,853) (10,086) (4,355) 59 (1,881) Dividends (467) (688) (1,364) (1,431) (1,695) (3,294) (2,182) (2,182) Issue Of Shares 103 6,210 90 110 13,040 218 (2,289) - Term Loans 640 354 685 1,617 5,900 1,139 8,025 200 Loan Repayments (307) (505) (713) (1,322) (545) (2,011) (1,060) (1,200) Other 163 Net Cashflow From Financing (31) 5,371 (1,139) (1,026) 16,700 (3,948) 2,494 (3,182) Net Cash In/Outflow (164) 1,806 440 (1,070) 10,901 (2,966) 7,918 930 Cash & Equivalents b/f 136 855 2,661 3,100 2,030 12,931 9,965 17,882 Cash & Equivalents c/f (28) 2,661 3,100 2,030 12,931 9,965 17,882 18,813 Page 6 of 6 This document is published by John Keells Stockbrokers (Pvt.) Limited for the exclusive use of their clients. All information has been compiled from available documentation and JKSB s own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this issue, neither JKSB nor its employees can accept responsibility for any decisions made by investors based on information contained herein.