John Keells Holdings

JKH - Rs.157.0

Yasas Wijethunga Key Highlights

Email : [email protected] Phone : +94 77 0532059 4Q18 Results Update

. 4Q18 recurring net profit of Rs.5,946mn for 4Q18 (+32% YoY), above our expectations, driven by increased earnings from the Insurance business, due to a transfer of insurance contract liabilities

. JKH’s group NP forecast broadly maintained at Rs.16,676mn for FY19E (-2% YoY on a recurring basis) and forecast a NP of Rs.17,641mn for FY20E (+6% YoY)

. The JKH share underperformed the broader market during last 12 months and last three months declining -7% and -2% respectively (vs. ASI’s decrease of -3% and -1%)

. The JKH share trades at forward PER multiples of 13.1x for FY19E and 12.4X for FY20E

. Based on our estimated break up Sum of The Parts (SOTP) valuation of Rs.164, the JKH share is currently trading at a 5% discount

. Whilst further significant downside is limited, amid the recent declines and share coupled with the share trading at a slight discount we do not anticipate material share price gains with continuous 28 May 2018 moderate earnings growth expected in the near term. However, JKH may continue to be favored by medium to long term investors, amid its unrivalled share liquidity, being the only company Sri Lanka with over US$1mn average daily turnover on the CSE and potential for upside in its core sectors over the long term Diversified Holdings

Key Trading Information Relative Share Price Movement (%) Shares in Issue (mn) 1,387.5 110 Market Cap (US$ mn) 1,378.7 ASPI Estimated Free Float (%) 97.5 100 3M Avg Daily Volume 637,724 3M Avg Daily Turnover (US$) 650,751 90 12M High / Low (Rs) 164.9 / 137.8 JKH 3M / 12M Price Change (%) -2.2 / -6.6 80 26-May-17 24-Nov-17 25-May-18

JKH: Valuation Ratios Financials - Year to 31 March FY16 FY17 FY18 FY19E FY20E Net Revenue (Rs mn) 93,710 106,273 121,215 141,041 154,412 Net Profit (Rs mn) 13,807 15,792 17,084 16,676 17,641 Earnings per Share (Rs) 10.2 11.5 12.3 12.0 12.7 Earnings per Share Growth (%) 0.8 13.2 7.1 -2.4 5.8 Price / Earnings Ratio (X) 12.8 12.1 13.0 13.1 12.4 Price / Earnings Growth (X) 16.0 0.9 1.8 N/A 2.1 Gross Dividend per Share (Rs) 6.1* 6.0 6.0 6.0 6.0 Gross Dividend Yield (%) 4.7 4.3 3.8 3.8 3.8 Net Book Value per Share (Rs) 114.0 128.7 144.1 150.1 156.8 Price / Book Value (X) 1.1 1.1 1.1 1.0 1.0 Return on Equity (%) 9.4 9.5 9.0 8.2 8.3 Market Price per Share (Rs) 130.4 139.0 160.0 157.0 157.0

Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPS Source: CT CLSA *Includes a special dividend of Rs.3.1

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Stock Exchange John Keells Holdings

The Business

Most liquid stock on the John Keells Holdings (JKH), Sri Lanka’s largest listed company, accounting for ~9% of total CSE accounting for market capitalisation, is a leading conglomerate with a significant presence in Leisure, ~21% of market Transportation, Property, Financial Services, Consumer Foods and Retail (CF&R) and Information turnover in 2017 Technology. The group is also in the process of developing an Integrated Resort, “Cinnamon Life” at an investment of ~US$820mn, slated for completion in 2019. Given its lack of a controlling shareholder and ~98% free float, JKH is the local market’s most liquid share, contributing ~21% of total market turnover in 2017

Recent Financial Performance

4Q18 NP +32% YoY amid JKH reported a recurring Net Profit (NP) of Rs.5,946mn for 4Q18 (+32% YoY), above our change in insurance expectations, driven by the increased earnings from the Insurance business. Meanwhile, key Leisure liabilities and CF&R sectors recorded decreased earnings for the quarter. Consequently, FY18 recurring NP increased +8% YoY to Rs.17,084mn

4Q18 reported earnings adjusted for a transfer of one - off surplus of Rs.3,382mn to shareholders funds in the insurance business. The surplus was previously generated due to a change in policy liability valuation and has held as part of the Restricted Regulatory Reserve. Meanwhile, the change in insurance contract liabilities of Rs.1,177mn (vs. a negative change of –Rs.1,326mn in 4Q17) has been considered recurring

Earnings further adjusted for change in fair value of investment properties of Rs.896mn in 4Q18 and Rs.474mn 4Q17

Key Figures & Ratios 4Q17 4Q18 % YoY FY17 FY18 % YoY Net Revenue (Rs mn) 29,848 33,553 12.4 106,273 121,215 14.1 Gross Profit (Rs mn) 8,425 8,567 1.7 31,115 29,283 -5.9 Net Finance Income (Rs mn) 2,618 2,552 -2.5 9,597 10,747 12.0 Profit Before Tax (Rs mn) 7,408 12,767 72.3 22,888 27,634 20.7 Reported Net Profit (Rs mn) 4,986 9,966 99.9 16,275 21,021 29.2 Recurring Net Profit (Rs mn) 4,512 5,946 31.8 15,792 17,084 8.2 Earnings per Share (Rs) 3.3 4.3 31.8 11.5 12.3 7.1 Net Cash Position (Rs mn) 61,528 45,547 -26.0 61,528 45,547 -26.0 Net Cash Per Share (Rs) 44.3 32.8 -26.0 44.3 32.8 -26.0 Capex (Rs mn) 1,019 11,415 >+100.0 4,332 18,922 >+100.0

Note: Valuations and ratios on a recurring basis; Adjusted for capital issues (if any) Source: Company Interims NP adjusted for non recurring gains/losses amounting to Rs.4,020mn in 4Q18, Rs.93mn in 2Q18, –Rs.176mn in 1Q18, Rs.474mn in 4Q17 and Rs.10mn in 3Q17 Sectoral Analysis Sectoral Analysis Composition (%) 4Q17 4Q18 % YoY FY17 FY18 % YoY (Rs mn) 4Q17 4Q18 Net Revenue 29,848 33,553 12.4 106,273 121,215 14.1 100.0 100.0 Transportation 3,454 4,877 41.2 11,110 17,169 54.5 11.6 14.5 Leisure 8,128 8,281 1.9 25,874 25,040 -3.2 27.2 24.7 Consumer Foods & Retail 11,617 13,860 19.3 45,812 53,211 16.2 38.9 41.3 Financial Services 2,197 2,468 12.4 8,296 10,056 21.2 7.4 7.4 Property 172 730 >+100.0 1,121 1,231 9.8 0.6 2.2 Information Technology 3,397 2,456 -27.7 11,107 11,069 -0.3 11.4 7.3 Others 882 880 -0.2 2,953 3,440 16.5 3.0 2.6

Significant increase in Profit After Tax 5,145 7,013 36.3 17,633 18,941 7.4 100.0 100.0 Financial Services earnings Transportation 816 386 -52.7 2,979 3,084 3.5 14.5 3.4 Leisure 2,127 1,878 -11.7 5,008 3,471 -30.7 37.9 16.6 Consumer Foods & Retail 829 652 -21.3 3,804 2,871 -24.5 16.4 6.0 Financial Services 458 3,036 >+100.0 2,042 5,187 >+100.0 8.1 56.8 Property 64 317 >+100.0 333 438 31.6 6.1 8.2 Information Technology 184 155 -15.7 468 360 -23.1 3.3 1.4 Others 668 588 -12.0 2,999 3,529 17.7 13.7 7.5 PAT adjusted for non recurring items as follows Source: Company Interims Property Sector: Change in fair value of investment properties of Rs.613mn in 4Q18, Rs.281mn in 4Q17 and Rs.10mn gain in 3Q17 Leisure Sector: Accelerated depreciation of -Rs.33mn in 2Q18 and -Rs.203mn in 1Q18, gain on sale of PPE of Rs.108mn in 2Q18 CF&R : Change in fair value of investment properties of Rs.22mn in 4Q18, Rs.92mn in 4Q17 Financial Services: One off change in insurance contract liabilities of Rs.3,382mn in 4Q18 Others Sector: Gain on sale of PPE of Rs.29mn in 2Q18, change in fair value of investment properties of Rs.262mn in 4Q18, Rs.101mn in 4Q17

A CT HOLDINGSEQUITY GROUP REPORT AND TITLE CLSA |GROUP Date COMPANY 2 John Keells Holdings

Transportation Sector

4Q18 PAT of Rs.386mn (-53% YoY and lowest reported figure in last six years, 3% of group PAT); below our expectations, amid decline in earnings in 42% owned associate, South Asia Gateway Terminal (SAGT); FY18 PAT +4% YoY to Rs.3,084mn

SAGT earnings impacted . SAGT earnings were particularly impacted by a write off of some bad debts and deferred tax by bad debt and adjustments as per the new Inland Revenue Act. Excluding these items, SAGT core earnings deferred tax provisions grew YoY in 4Q18 as per management, with volumes growing +14% YoY (vs. +16% YoY growth in the Colombo port)

o SAGT’s market share is estimated to have remained broadly unchanged at ~30% in 4Q18

o Meanwhile, the Colombo International Container Terminal (CICT), which commenced operations in Aug 2013, is estimated to be running at utilisation levels of over 80%, whilst utilisation levels at overall port is expected to be over 75%. CICT captured market share from existing operators in the initial years and the current utilisation levels suggest that all the operators are benefiting from the increased traffic at Colombo port

. According to JKH interims, fully owned oil bunkering subsidiary Lanka Marine Services (LMS) Improved results at LMS witnessed an increase in market share and profitability amid growth in volumes. LMS commissioned “MT Mahaweli” in 2Q18 and “MT Athenia” in 4Q18, a double hulled bunker barge in Sri Lanka, further enhancing LMS’s overall storage capacity. Meanwhile, revenue growth is likely to have been also supported by increased oil prices – crude oil prices increased +14% QoQ and +22% YoY in 4Q18

. Sectoral PAT forecasts broadly maintained at Rs.3,848mn for FY19E (+25% YoY, 21% of total PAT) and forecast at Rs.3,977mn for FY20E (+3% YoY, 20% of total PAT), expected to be driven by the anticipated continued growth in port activity

. FY19E YoY growth is off a relatively low base, as FY18 earnings were impacted from off adjustments in 4Q18. Overall, sector earnings growth is expected to be moderate amid the overall capacity constraints, especially at the SAGT facility. Whilst SAGT management is expected to increase overall capacity levels through increasing efficiency levels, physical expansion would be limited with constraints on area

. In Sep 2016, JKH expressed interest in the Colombo port East Container Terminal in partnership with APM Terminals of Maersk Group and Container Corporation of India Ltd (Concor), which is under the Government of India. However press articles in early 2017 indicated that the Government of Sri Lanka (GoSL) brought in fresh conditions which disqualified all parties. It was further mentioned that the GoSL is planning to operate the terminal on its own. There have however been no official disclosures since calling for EOIs on the development and the proceedings of the bidding China Merchant may act as a competitor to o JKH was also in the process of evaluating oil bunkering opportunities within the Port of Colombo port Hambantota. This is however expected to be on hold with the GoSL transferring the ownership of the port to China Merchants Ports Holding Company on 29 July 2017. Accordingly, China Merchant would start the port developments in Hambantota and it may act as a competitor to the Colombo port in the medium term

. Meanwhile, National Budget 2018 proposed to lift restrictions on the foreign ownership on shipping and freight forwarding agencies. Whist the proposal is yet to be implemented, enactment of the same would increase competition for local players

Colombo Port Volumes (TEUs mn) & SAGT Mkt Transportation Sector : PAT (Rs mn) Share (%)

1,200 Others SAGT SAGT Market Share - RHS 8.0 50 900 6.0 40 600 4.0 30 2.0

300 0.0 20 4Q16 2Q17 4Q17 2Q18 4Q18 FY13 FY14 FY15 FY16 FY17 FY18 Others include Jaya Container Terminal (JCT) and CICT volumes Source: CBSL, SAGT

CT CLSA SECURITIES (PVT)EQUITY LIMITED REPORT | A MemberTITLE | of Date the Colombo Stock Exchange 3 John Keells Holdings

Leisure Sector

4Q18 PAT of Rs.1,878mn (-12% YoY; 17% of group PAT), below our expectations, due to Leisure Sector PAT (Rs mn) decline in both city and resort hotel segments. City hotels were impacted by increased competitive pressure whilst Resorts segment earnings are anticipated to have been impacted by lack FY16 FY17 FY18 of contribution from the 133 room Bentota Beach by Cinnamon (BBH); FY18 recurring PAT -31% 2,250 YoY to Rs.3,471mn . City hotels : Comprise five star city hotels Cinnamon Grand (CG : 501 rooms) and Cinnamon 1,750 Lakeside (CL : 346 room Trans Asia Hotels - TRAN) through 79% owned, listed subsidiary, Asian Hotels & Properties (AHPL). AHPL reported a 4Q18 recurring NP of Rs.338mn (-41% YoY) 1,250 o Segment results were impacted by lower occupancy levels amid an increase in room 750 inventory in Colombo - 219 room 5-star Movenpick hotel was opened in Jan 2017 and 500 room Shangri La was opened in Nov 2017 250 1Q 2Q 3Q 4Q • As per JKH, segmental occupancy levels decreased to 67% (vs. 77% in 4Q17), whilst ARRs have increased to US$124 in 4Q18 (vs. US$122 in 4Q17). Whilst tourist arrivals were somewhat impacted by the state of emergency declared in Sri Lanka Sri Lanka : during Mar 2018, overall tourist arrivals to Sri Lanka increased +17% YoY to 707,924 Tourist Arrivals (persons 000’s) individuals in 4Q18. This was however off a low base, where 4Q17 was impacted by the 2015 2016 part closure of Bandaranayake International Airport 2017 2018 280 • Resort hotels : Exposure through 80% owned listed subsidiary, John Keells Hotels (KHL), which owns hotel properties in Sri Lanka (863 rooms excluding BBH) and Maldives (340 rooms). 230 Resorts segment was likely impacted by the closure of hotels, coupled with political uncertainty that prevailed within Maldives. KHL is yet to report 4Q18 earnings 180 o Sri Lanka resorts : As per JKH, 4Q18 occupancy levels remained broadly unchanged 130 at 90% whilst ARRs decreased to US$112 (vs. US$116 in 4Q17), with competitive pressure anticipated to have stiffened further in the resort space. Quarterly earnings lacked 80 contribution from 133 room BBH, which was closed for reconstruction in May 2017. Jan Mar May Jul Sep Nov According to KHL, construction cost would amount to ~Rs.4.8bn and construction would last for two years Source: Sri Lanka Tourism Development Authority (SLTDA) o Maldives resorts : JKH management indicated that Maldivian occupancy levels Maldives : decreased to 92% in 4Q18 (vs. 95% in 4Q17), whilst ARRs increased to US$385 (vs. US$365 in 4Q17) – Tourist arrivals to Maldives increased +15% YoY to 391,533 Tourist Arrivals (persons 000’s) during the quarter, despite the political uncertainty and travel advisories 2015 2016 2017 2018 • The Sri Lankan Hotel and Destination Management businesses are assumed to have been 150 impacted by increased competitive pressures

130 . Sectoral PAT forecasts revised down by -13% to Rs.4,080mn for FY19E (+18% YoY off a low base, 22% of total PAT) amid the City hotel segment in particular facing increased 110 challenges from the growing competition. Meanwhile, YoY growth is to be driven by the expected pickup in the Resorts segment. Meanwhile, FY20E PAT forecast at Rs.4,649mn (+14% 90 YoY, 26% of total PAT), also comprising contribution from BBH, which is expected to be part 70 operational during the year Jan Mar May Jul Sep Nov o City hotels are expected to witness further increased competition in the medium term from further additions of five star and mid tier properties in the next few years. Indirect Source: Maldives Tourist Authority competition is also seen from increasing apartment properties within city limits. Moreover, the GoSL has invited for requests for Proposals for Grand Hyatt and Hilton properties in Upcoming 5-star class Hotels in Colombo. Colombo o As per the new Inland Revenue Act, tourism sector tax rate is expected to increase to 14% No. of Opening Hotels (from current 12% concessionary rate) w.e.f 01 Apr 2018 and is expected to slightly impact Rooms Timeline sector profitability in FY19E – this has already been factored into our forecasts Sheraton 306 1H2018 Park Inn by 199 2H2019 Radisson Cinnamon 800 2020 Life – JKH ITC 305 2021 Colombo Grand 475 N/A Hyatt Source: CT CLSA

A CT HOLDINGSEQUITY GROUP REPORT AND TITLE CLSA |GROUP Date COMPANY 4 John Keells Holdings

Consumer Food and Retail (CF&R) Sector CF&R - Recurring PAT (Rs mn)*

FY16 FY17 FY18 4Q18 recurring PAT declined -21% YoY to Rs.652mn (6% of group PAT), broadly in line 1,200 with our expectations. Decline in earnings likely due to the weak performance in 81% 1,000 owned, Ceylon Cold Stores (CCS); FY18 PAT -25% YoY to Rs.2,871mn 800 . Whilst CCS is yet to release quarterly results, earnings expected to have been impacted by 600 continued weak performance in both Manufacturing and Retail segments 400 o Manufacturing segment : Earnings came under pressure subsequent to the introduction of a 200 tax on carbonated soft drinks based on the sugar content via the National Budget in Nov 1Q 2Q 3Q 4Q 2017. As a result, average prices of carbonated beverages increased +40% impacting *Excluding fair value adjustments volumes. Meanwhile, zero sugar products, which did not witness price changes were aggressively marketed by competitor Coca-Cola, further dampening sales volumes. CCS only had EGB Lite as a zero sugar offering initially, and introduced zero sugar variants under “go sugar free” during May 2018. CCS has previously used natural sweetener stevia to reduce the sugar content in its overall portfolio. The segment was also impacted by the slowdown in Sugar tax impacted consumer demand, amid macro tightening measures, overall rise in cost of living and erratic sales volumes weather conditions. In Apr 2018, CCS entered the dairy market, introducing flavored milk in 190ml Rs.50 tetra packs (with vanilla, chocolate and strawberry flavors) Sugar Content (grams per 100ml), Tax and Price Increase of Select Carbonated Beverages Manufacturer Beverage Sugar content Tax Price Increase g per 100ml 500ml 2L 500ml 2L CCS Elephant Ginger Beer 10.2 Rs.25.5 Rs.100.0 Rs.15.0 Rs.120.0 Necto 9.6 Rs.24.0 Rs.96.0 Rs.25.0 Rs.120.0 Cream Soda 8.6 Rs.21.5 Rs.86.0 Rs.25.0 Rs.120.0 Coca-Cola – Sri Lanka Ltd Coca Cola 10.6 Rs.21.2* Rs.106.0 Rs.30.0* Rs.90.0 Sprite 10.2 Rs.20.4* Rs.102.0 Rs.30.0* Rs.90.0 Ole Springs Bottlers (Pvt) Ltd Pepsi 11.0 Rs.27.5 Rs.110.0 Rs.25.0 Rs.140.0 *400ml Source: CT CLSA o Retail segment : Likely impacted by the erosion in margins despite the rise in revenue, amid higher costs incurred as part of the outlet expansion, rebranding exercise and controlled prices for several essential items. In 4Q18, eight new supermarkets were opened, bringing the total number of supermarkets to 80 as at 31 Mar 2018 (23 new outlets were added in FY18, whilst seven were closed)

. 90% owned Keells Food Products (KFP) is also yet to report 4Q18 earnings – expected to have recovered off a low base

. Total capex for the sector increased to Rs.1,687mn in 4Q18 (+87% YoY), largely expected to be for the construction of the new ice cream plant and retail expansion

. Sectoral PAT forecasts revised up by +4% to Rs.3,493mn for FY19E (+22% YoY on a recurring basis and off a low base, 17% of total PAT) and forecast at Rs.4,095mn for FY20E (+17% YoY, 18% of total PAT) largely due to the higher contribution expected from the new ice cream plant and growth anticipated from the newly opened retail outlets

o CCS is seemingly increasing its presence in consumer foods and soft drinks in the medium term. The new ice cream production facility (built at a cost of ~Rs.4.2bn) is expected to New ice cream plant to contribute to earnings from 1Q19E and CCS is expected to aggressively look at improving contribute from 1Q19E network and distribution. Meanwhile, planned ~Rs.2.5bn bottling line is currently on hold with recent impact on volumes freeing up capacity. CCS may also look to add to the total product portfolio, continuing from the addition of flavored milk. Whilst the sugar tax implemented is expected to impact overall volumes in the near term, this would partly be offset by the introduction of sugar free beverages. We also anticipate a rebound in local consumer sentiment in FY19E, amid the improving local macro conditions

o JKH mentioned that retail expansion process is ongoing and according to management 40 more outlets would be added through FY19E, which may impact near term margins. We have Ongoing retail expansion conservatively forecasted net additions of 25 outlets for FY19E and 20 for FY20E. Meanwhile, main competitor Cargills (Ceylon) (CARG) is also expected to be expanding its network (currently at ~351), which would increase competition. The new retail distribution center at a cost of Rs.3.2bn, which would consolidate the distribution of both dry and fresh produce is expected to be under construction

o Whilst short term challenges remain, the sector is anticipated to benefit in the medium to longer term from the overall rise in disposable income levels coupled with the prevailing low penetration of both consumer food items and modern retail trade

o Despite long term growth potential, contribution from KFP to the overall sector is expected to be limited

CT CLSA SECURITIES (PVT)EQUITY LIMITED REPORT | A MemberTITLE | of Date the Colombo Stock Exchange 5 John Keells Holdings

Financial Services Sector

4Q18 recurring PAT of Rs.3,036mn (vs. Rs.458mn in 4Q17; 57% of group PAT), above our expectations amid change in insurance liabilities of 96% owned Union Assurance (UAL); FY18 PAT of Rs.5,187mn (vs. Rs.2,042mn in FY17)

. Quarterly results adjusted transfer of one-off surplus amounting to Rs.3,382mn. Meanwhile, the Transfer of higher higher earnings for the Insurance business was due to the transfer of Rs.3.6bn from the Life surplus during the quarter Insurance Fund to Shareholders Funds (vs. Rs.1.1bn transferred during 4Q17). Change in contract liabilities at similar levels are however not expected going forward

. UAL also benefited from the growth in gross written premiums during the quarter, further boosting its bottom-line

o UAL continues to hold a 22% stake in Fairfirst Insurance, of which UAL sold a 78% stake to Fairfax Asia on Jan 2015

o The life insurance business is expected to be somewhat affected by the changes in taxation as per the new Inland Revenue Act w.e.f 01 Apr 2018. According to the Act, transfer of surplus from policyholders funds will now be taxed, which was previously tax exempt – rates and implementation are yet to be clarified

. Meanwhile, 30% owned banking associate Nations Trust Bank (NTB) recorded stronger earnings CBSL directed JKH to amid growth in the loan book – NTB 1Q2018/4Q18 NP +30% YoY to Rs.939mn reduce shareholding in NTB o Private credit growth remained strong during the quarter; +15% YoY in Mar 2017 o During Feb 2018, NTB announced the completion of its Rs.3.2bn Rights Issue, in order to boost its Tier I Capital to comply with Basel III requirements – 40mn convertible non-voting shares in the ratio of 04 convertible non-voting shares for every 23 ordinary voting shares held at an issue price of Rs.80.0 per share. JKH subscribed to 18mn shares at an investment of Rs.1.4bn

o It was also mentioned that the Director of Bank Supervision of the CBSL on 12 October 2017 informed NTB that the Monetary Board of the CBSL has permitted JKH and Central Finance (CFIN – other promoter with 20% stake) to retain their current shareholdings in the Bank till 31 Dec 2020 and to reduce the stakes to 15% afterwards. The Monetary Board has also directed NTB to limit voting rights of JKH and CFIN to 10% each w.e.f 31 Mar 2018

. Sectoral PAT forecasts broadly maintained at Rs.2,917mn for FY19E (-44% YoY off a high base, 15% of total PAT), due to life fund transfers normalising from the levels witnessed NTB expected benefit in FY18. Meanwhile, FY20E PAT forecast at Rs.3,247mn for FY19E (+11% YoY, 16% of from reduced vehicle total PAT), driven by both NTB and UAL prices o NTB is expected to increase its presence in SMEs to counter the slowdown in loan growth. NTB’s leasing business is also expected to improve from current levels with reduced prices of small vehicle variants as per National Budget 2018

o UAL’s life segment is expected to be a beneficiary of potential increase in local insurance penetration in the longer term although there may be a slowdown in the near term in industry Insurance industry is profitability with the potential increase in taxes. Sri Lanka’s total industry GWP as a % of underpenetrated in Sri GDP was 1.2% in 2016, which is relatively low compared to regional peers. Lanka Meanwhile, short term benefits are expected to be minimal with lack of awareness of insurance, especially in rural areas as per the Insurance Board of Sri Lanka (IBSL). Further opportunities are expected to arise in the life insurance space in the medium to long term with possible consolidation in the insurance industry. Meanwhile, contribution from the stock brokering arm, John Keells Stock Brokers (JKSB) would continue to be relatively immaterial to sector bottom line

Life Insurance Industry Market Share (%) Financial Services Sector Reported PAT (Rs mn)

2016 AIA FY16 FY17 FY18 16% 2,000 Rs.6,418mn 29% 20% 17% Ceylinco 1,500 14% 2012 SLIC 29%24% 1,000 13% 20% UAL 500 19% Other CINS – Ceylinco Insurance, SLIC - Sri Lanka Insurance 0 Corporation, AIA – subsidiary of AIA Group Limited, JINS – 1Q 2Q 3Q 4Q Janashakthi Insurance Source: IBSL

A CT HOLDINGSEQUITY GROUP REPORT AND TITLE CLSA |GROUP Date COMPANY 6 John Keells Holdings

Property Sector

4Q18 recurring PAT of Rs.317mn (vs. Rs.64mn in 4Q17; 8% of group PAT), above our JKH : Unused and Underutilised Land expectations. Quarterly income consisting of one-off recognition of lease revenue at Area Rajawella Holdings; FY18 PAT +32% YoY to Rs.438mn Owning company (acres) . Shopping mall in Colombo, , is anticipated to have contributed positively with Ahungalla Holiday Resort 6.5 steady rental income. Crescat currently operates at ~100% occupancy. Property sector earnings Ahungalla also include rental income from the K-Zone malls, franchise outlets in key suburbs, Moratuwa Facets (Pvt) Ltd 6.3 and Ja-Ela, both of which are expected to be enjoying ~80% occupancy levels Ahungalla John Keells PLC . JKH in late 2017 initiated 891-apartment 50% joint venture residential development project, 3.6 “Tri-Zen”, in Union Place, Colombo at an investment of Rs.1.8bn, and pre sales have Ja-Ela commenced. Construction will commence in 2H19E and would be completed in FY22/23E John Keells PLC 0.1 Kirulapone Pricing for Tri-Zen apartments Sentinel Reality (Pvt) Ltd 8.4 Quoted rate Vakarai Room type Range (sqft) Price (Rs.mn) Trinco Walk Inn Ltd (USD/sqft) 14.6 Trincomalee One bed room 471-520 21-27 ~345 Wirawila Walk Inn Ltd 25.2 Two bed room 716-764 30.8-39.2 ~335 Wirawila Vauxhall Land Three bed room 989-1,041 43.8-51.8 ~323 9.4 Developments (Pvt) Ltd Note: Price excluding parking spot which cost additional Rs.2.5mn (~US$15,800) Source: Tri-Zen Source: JKH . Sectoral PAT forecasts revised up to Rs.658mn for FY19E (+50% YoY) and forecast at Rs.974mn for FY20E (+48% YoY), driven by revenue recognition from “Tri-Zen”

. Further Vauxhall Land Developments (Pvt) Ltd, a subsidiary of JKH, purchased land worth Rs.4.4bn in Colombo 2 during 3Q18. This was consolidated with an existing land plot of 3.6 acres, and 3.7 acres of land owned by Finlays Colombo Ltd through a joint venture agreement signed in March 2018, bringing total land area to 9.4 acres. The group would likely look to further develop property development projects utilising the land

Information Technology Sector

4Q18 PAT of Rs.155mn (-16% YoY; 1% of group PAT), above our expectations. decline largely due to 4Q17 results including earnings from John Keells BPO Solutions India (Pvt) Ltd, which was divested in Sep 2017; FY18 PAT -23% YoY to Rs.360mn

. The sector consists of IT Services, Office Automation and IT enabled Services

. Sector earnings were further affected by lower consumer discretionary spending affecting the Office Automation business

. Sectoral PAT forecasts revised up to Rs.481mn (vs. Rs.334mn previously) for FY19E (+33% YoY) and forecast at Rs.518mn for FY19E (+8% YoY)

. Sector earnings remain immaterial to overall JKH group earnings and we would not rule out a possible further divestiture of sector operations in the longer term

Others Sector

Others - PAT (Rs mn) and % of Group 4Q18 PAT of Rs.588mn (-12% YoY; 8% of group PAT), slightly below our expectations – Others decline due to lower finance income; FY18 PAT +18% YoY to Rs.3,529mn % of Group PAT - LHS . Net finance income for the sector decreased to Rs.1,673mn (-11% YoY); likely due to the 40 1,500 decreased cash position

30 . Sectoral PAT forecasts broadly maintained at Rs.2,995mn for FY19E (-15% YoY on a 1,000 recurring basis, 16% of PAT) and forecast at Rs.2,145mn for FY20E (-28% YoY; 11% 20 of group PAT). Interest income expected to diminish in the near term as cash will be utilised for 500 the Cinnamon Life project construction 10 o Plantation services segment is expected to improve from lows witnessed in recent years - 0 0 however the contribution is still expected to be negligible 4Q16 2Q17 4Q17 2Q18 4Q18

CT CLSA SECURITIES (PVT)EQUITY LIMITED REPORT | A MemberTITLE | of Date the Colombo Stock Exchange 7 John Keells Holdings

Integrated Resort (IR) – Cinnamon Life

. JKH’s luxury IR, “Cinnamon Life” Project, at an investment of ~US$820mn comprising an 800 “Cinnamon Life” at an room five star+ hotel, convention center, entertainment facilities, shopping complex, investment of apartments, luxury condominiums and office space, is proceeding with its construction. The US$820mn project is located at the former JKH head office premises of approximately 11 acres. Construction commenced in Mar 2014 and currently JKH is expected to have incurred ~40% of the total project cost with piling work already being completed and excavation and foundation processes being initiated

. The project is anticipated to be completed in 2019 and the operations would start from 2020 - returns on the project are likely expected to commence from FY21

. The change in the local political landscape in Jan 2015 prevented large-scale gaming facilities from being operated within integrated resorts such as Cinnamon Life. Nevertheless, the project appears to be continuing with the same scale, though returns from same are expected Project continuing with to be significantly lower the same scale . The space of 150,000 sq ft previously dedicated for casinos may be used for an alternate purpose, such as to expand conference or retail space or to bring in other indoor entertainment facilities. Further, the space is expected to be built in a way that would allow conversion into any operation, should there be a change in stance by the GoSL. JKH would likely tap into the growing MICE market, primarily from India. Supply for MICE market is currently limited in Plans to tap into MICE Sri Lanka and Cinnamon Life will be a potential beneficiary of the increase of the same. market, primarily from Meanwhile, other hoteliers which have entered and are expecting to enter Colombo are also India expected to compete for the MICE market space

. As per JKH, 238 units of both residential towers have been sold (out of a total 427 units). Competition has ramped up with more high end residential complexes set to enter Colombo in the next few years. JKH has a proven track record in the residential property development space, and increased promotion of Sri Lanka by other international property developers are expected to bode relatively well for Cinnamon Life

. The pre-sales for the 24-storey standalone office complex is also anticipated to be receiving positive interest (four floors out of ten floors that are up for sale is sold – rest will be rented out). Demand for office space is likely to be strong, amid the anticipated growth in investments and business environment in the next few years. Despite the new additions of office space, demand would likely outweigh supply, presenting potential further development opportunities for JKH and other industry dominant players

. The overall success of the IR project would be dependent on new initiatives taken by JKH to attract tourists and on the level of support from and engagement with the GoSL

Select Upcoming Residential Projects in the Colombo Area Quoted Completion Total Project Name Location Developer rate Year Units (USD/sqft) 02 JKH 2019 427 ~360 Destiny Residency Colombo 02 Imperial Builder 2018 205 > 231 Beira Lake South City Projects 2018 445 > 326 Astoria Duplication Road AVIC 2018 608 > 260 Beira Lake Silver Needle - Abans 2018 182 > 315 ITC Colombo ITC 2018 130 TBA – phase 3 Colombo 05 Mireka Capital Land 2019 304 >210 One Galle Face Galle Face Shangri La 2019 406 >400 Achilleion Colombo 04 Blue Mountain 2020 590 >350 Source: Jones Lang LaSalle Lanka, CT CLSA

A CT HOLDINGSEQUITY GROUP REPORT AND TITLE CLSA |GROUP Date COMPANY 8 John Keells Holdings

Group Financial Performance

Net cash position at . JKH posted a net cash position of Rs.45.5bn as at 31 Mar 2018 (vs. Rs.47.3bn as at 31 Rs.45.5bn Dec 2017 and Rs.61.5bn as at 31 Mar 2017)

o Group gross finance income decreased -11% YoY Rs.1,780mn in 4Q18 – excluding interest income from life policyholders

o Whilst major future capex will be for the Cinnamon Life Project, JKH is able to leverage its strong balance sheet for expansion in other key sectors as well

Major capex targeted at . Total group capex increased to Rs.11,415mn (vs. Rs.1,019mn in 4Q17); Property and CF&R Property and CF&R sectors were the key beneficiaries accounting for 80% and 15% of spending respectively sectors o Further capex expected for new supermarket openings and capacity expansions under the CF&R sector, whilst the Leisure sector would incur expenses relating to reconstruction of existing hotel properties

Recurring Quarterly EPS (Rs) Sectoral PAT (Rs mn)

FY16 FY17 FY18 4Q17 4Q18 5 2,500 2,000 4 1,500 3 1,000 500 2 0 1 Tran. Leis. Prop. CF&R Fin. IT Others Serv. 1Q 2Q 3Q 4Q Source: JKH Interims

Sectoral Contribution to PAT (%) Annual Capex (Rs bn) Transportation 4Q18 6 9% 3% Leisure Rs.18.9bn 8% 17% 17% 15% Consumer Foods & 5 6% 6% Retail 8% 4Q17 Financial Services 4 38% 7% Property 3 57% Others* 2 * Also includes Information Technology sectors FY13 FY14 FY15 FY16 FY17 FY18

Net Cash (Rs bn) and Net Cash : Equity (%) Gross Fin. Income & Contribution to Group PBT

Net Cash - RHS Net Cash : Equity Finance Income (Rs mn) - RHS* % of PBT 35 70 64 2,200

30 48 60 1,700 25 32 50 1,200 20 16

15 40 0 700 4Q16 2Q17 4Q17 2Q18 4Q18 4Q16 2Q17 4Q17 2Q18 4Q18 * Excluding capital gains

CT CLSA SECURITIES (PVT)EQUITY LIMITED REPORT | A MemberTITLE | of Date the Colombo Stock Exchange 9 John Keells Holdings

Outlook & Valuations

. JKH’s group NP forecast broadly maintained at Rs.16,676mn for FY19E (-2% YoY on a recurring basis) and forecast a NP of Rs.17,641mn for FY20E (+6% YoY)

o The Leisure sector would remain the main contributor to group earnings (~22-24% of group PAT) followed by Transportation sector (~21% of group PAT) and CF&R sector (~19-21% of group PAT)

. The JKH share underperformed the broader market during last 12 months and last three months declining -7% and -2% respectively (vs. ASI’s decrease of -3% and -1%)

. The JKH share trades at forward PER multiples of 13.1x for FY19E and 12.4X for FY20E

Estimated break up NAV . Based on our estimated break up Sum of The Parts (SOTP) valuation of Rs.164, the JKH share is of Rs.164 currently trading at a 5% discount

. Whilst further significant downside is limited, amid the recent declines and share coupled with the share trading at a slight discount we do not anticipate material share price gains with continuous moderate earnings growth expected in the near term. However, JKH may continue to be favored by medium to long term investors, amid its unrivalled share liquidity, being the only company with over US$1mn average daily turnover on the CSE and potential for upside in its core sectors over the long term

. A potential catalyst to re-rate the share in the medium term would hinge upon new developments on the Cinnamon Life Project, especially the casino aspect

JKH Share Price – Premium / JKH: Sum-of-the-parts (SOTP) Valuation (Discount) to SOTP Sector Fair Value (Rs mn) Main Valuation Basis Date % Transportation 33,255 12x FY19E NP 29 May 2015 +1 Leisure 52,404 13x FY19E NP 30 Jul 2015 +14 CF&R 49,698 MV for KFP and DCF for CCS 05 Nov 2015 +3 Property 5,969 DCF at a cost of equity of 18%* 29 Jan 2016 -7 Finance 20,706 MV for stakes in UAL and NTB 27 May 2016 -9 IT 2,498 6x FY19E NP 29 Jul 2016 -6 Others (excluding interest income) 180 5x FY19E NP 04 Nov 2016 -5 Unutilised Land 1,367 JKH FY17 Annual Report 27 Jan 2017 -15 Net cash position 49,592 Company net cash as at 31 Mar 2018 27 May 2017 0 IR Project 12,075 DCF with cost of capital of 18% Total Value 28 July 2017 +3 227,743 No of Shares (mn) 1,387 02 Nov 2018 -2 Value per share (Rs) 164 02 Feb 2018 +4 28 May 2018 -5 Source: CT CLSA Note: Based on valuations Source: CT CLSA on report release dates

A CT HOLDINGSEQUITY GROUP REPORT AND TITLE CLSA |GROUP Date COMPANY 10 John Keells Holdings

Outlook & Valuations

JKH: Recurring Sectoral PAT (Rs mn) Var Var % Var % FY18 FY19E FY20E % YoY YoY YoY Transportation 3,084 3.5 3,848 24.8 3,977 3.3 Leisure 3,471 -30.7 4,080 17.5 4,649 14.0 Consumer Foods & Retail 2,871 40.6 3,493 21.7 4,095 17.3 Financial Services 5,187 >+100.0 2,917 -43.8 3,247 11.3 Property 438 -88.5 658 50.0 974 48.1 Information Technology 360 -23.0 481 33.4 518 7.9 Others 3,529 17.7 2,995 -15.1 2,145 -28.4 Group PAT 18,941 7.4 18,471 -2.5 19,607 6.1 Minority Interest -1,857 0.8 -1,795 -3.4 -1,965 9.5 Group Net Profit 17,084 8.2 16,676 -2.4 17,641 5.8

Peer Conglomerate Analysis – FY18E Relative Valuations JKH SPEN MELS HHL MPS (Rs) 157.0 55.5 56.0 124.9 Earnings per Share (Rs) 12.0 8.5 5.5 8.1 EPS Growth (%) -2.4 19.4 23.0 72.7 Price / Earnings Ratio (X) 13.1 6.5 10.2 15.4 Price / Earnings Growth (X) -5.5 0.3 0.4 0.2 Return on Equity (%) 8.2 7.9 9.5 16.5 Key Sector Contr. to Group PAT (%) 22.1 37.4 ~82.3 43.7 3M Avg Daily Turnover (US$) 650,751 86,188 230,043 125,343 SPEN: Aitken Spence, MELS: Melstacorp Limited, HHL: Hemas Holdings Source: CT CLSA ~Key Sector Contribution to Group PBT

JKH: Trailing Twelve Month PER (X) : 2015 – 2018YTD

23

19

15

11 6-Jan-2015 6-Feb-2016 6-Mar-2017 6-Apr-2018 Source: CT CLSA

CT CLSA SECURITIES (PVT)EQUITY LIMITED REPORT | A MemberTITLE | of Date the Colombo Stock Exchange 11 John Keells Holdings

Major Shareholder Movements

Major Shareholder Movements as at 31 March 2018

Change Name No. of Shares % Comment (Shares)* Part of Malaysia’s 1. Broga Hill Investment Ltd 141,854,717 10.2 - Khazanah National Bhd

2. Mr S E Captain 140,676,895 10.1 21,187

Schroder International Selection 3. 85,596,116 6.2 -913,553 Fund Related Party of Mr. S E 4. Paints & General Industries Ltd 83,598,751 6.0 -2,866,334 Captain

5. Melstacorp PLC 48,519,886 3.5 -533,620

6. HWIC Asia Fund 36,000,982 2.6 -

Aberdeen Global-Asian Smaller 7. 28,413,338 2.0 - Companies Aberdeen Institutional Commingled 8. 26,583,813 1.9 -890,000 Funds Aberdeen Global Asia Pacific Equity 9. 26,257,908 1.9 - Fund Northen Trust Co S/A Edgbaston 10. 24,812,535 1.8 1,043,222 Asian Equity Aberdeen Global - Emerging Markets 11. 21,040,581 1.5 -2,422,900 Smaller

12. Employees Trust Fund 20,359,711 1.5 -900,000 GoSL Related Party

13. Mr K Balendra 19,606,476 1.4 -

14. BBH Luxfidelity Fund-Pacific 18,911,322 1.4 -

15. Deutsche Bank AG-London 15,512,571 1.1 -

16. First State Investments ICVC 15,486,461 1.1 -

17. London- Edinburgh Dragon Trust PLC 15,447,390 1.1 -

18. Mrs S A J De Fonseka 12,935,666 0.9 -

19. Mr C S De Fonseka 12,896,423 0.9 -

20. T Rowe New Asia Fund 12,831,617 0.9 -

Sub Total 814,805,157 58.4

*Change since 31 December 2017; Exited top 20 (Name & Number of shares): None ^ Also a shareholder of associate companies NTB and Union Assurance General

A CT HOLDINGSEQUITY GROUP REPORT AND TITLE CLSA |GROUP Date COMPANY 12 Research Trading & Sales Consultant / Sales

Sanjeewa Fernando Lasantha Iddamalgoda Rohan Fernando [email protected] [email protected] [email protected] +94 77 742 7439 +94 11 255 2295 +94 11 255 2297 +94 77 778 2103 +94 76 778 2101 Chayanika Ranasinghe [email protected] Dyan Morris +94 77 237 9731 [email protected] +94 11 255 2320 Yasas Wijethunga +94 77 722 4951 [email protected] +94 77 053 2059 Manura Hemachandra [email protected] Shahan de Silva +94 77 261 4797 [email protected] +94 11 255 2290 Rosco Todd [email protected] Subecca Sothylingam +94 77 262 7233 [email protected] +94 11 255 2290 Dhammika de Silva [email protected] Shahana Kanagaratnam +94 77 356 2699 [email protected] +94 11 255 2290 Arusha Michael [email protected] Madhusha Sivanathan +94 77 395 6765 [email protected] +94 11 255 2290 Nuwan Madusanka [email protected] +94 76 858 9722

Ryan Jansz [email protected] +94 77 547 9233

Disclaimer : This document has been prepared and issued by CT CLSA Securities (Pvt) Ltd. on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated are accurate and the opinions given are fair and reasonable, neither CT CLSA Securities (Pvt) Ltd. nor any director, officer or employee, shall in any way be responsible for the contents. CT CLSA Securities (Pvt) Ltd. may act as a Broker in the investments which are the subject of this document or in related investments and may have acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. CT CLSA Securities (Pvt) Ltd., its directors, officers or employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to buy or sell the investments referred to in this document. It is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek your own professional advice, including tax advice.

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