John Keells Holdings PLC Equity Research Initiation Coverage
Strategic Player Leveraging on Sri Lanka's Growth Story BUY Sri Lanka is poised for robust economic expansion from the revival of the economy after the LOLC SEC Valuation LKR 262.24 end of civil conflict in 2009 and ensued progression made by the country with more stable Share Price LKR 195.10 macro economic fundamentals. Country's GDP has grown by 7.5% in real terms since 2009 Upside/(Downside) 34.41% and is expected to continue similar growth momentum. JKH has been able to establish strong Risk Level Medium presence in key growth segments of the economy with market leadership in most of its (refer page 29 for recommendation) businesses. Warrants Valuation W0022 JKH historically has been able to make strategic entries into growth sectors. The latest entry LOLC SEC Valuation LKR 16.70 is into mixed development projects via its flagship investment “Waterfront Integrated Resort Warrant Price LKR 20.00 Development Project (IR)” which is expected to drive the next growth phase of the group. We W0023 estimate the project to account for 26% of the valuation of the group and coupled with LOLC SEC Valuation LKR 22.20 existing portfolio of businesses JKH presents a unique opportunity for an investor to get Warrant Price LKR 37.10 exposure to Sri Lankan economy. Share Details Investment Considerations Bloomberg Ticker JKH SL CSE Sector Diversified Well established portfolio of businesses to drive the financials in medium term: JKH GICS Sector Industrials Market Cap (LKR Mn) 194,610 current operation includes well diversified portfolio of businesses with strong foothold on Issued Quantity (Mn) 997 their respective sectors. It has market leadership in key growth segments, tourism (largest 30-day avg T/O (LKR Mn) 82.52 hotel operator in the country) and consumer food (market leader in beverage and ice cream). Beta (6 months) 1.25 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 Investment Fundementals banking further strengthens its business portfolio. Accordingly we forecast JKH to show 13% LKR Bn FY 14 FY 15 FY 16 (F) FY 17 (F) CAGR in bottom line for next two years. 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 Strong Corporate Governance gives flexibility in strategy as well as funding: JKH does Total Assets 202.47 218.09 271.22 318.48 not have single entity or group entity controlling shareholder and the Board of directors ROA(%) 5.79 6.58 5.87 5.73 consist of majority independent directors. Thereby the Board has the flexibility to drive the ROE(%) 9.54 10.41 9.83 10.56 company's strategy to optimize stakeholder expectations including minority shareholders. JKH has 100% free float which consists of majority foreign shareholders gives the group Price Multiples flexibility to raise equity capital with fair degree of ease. PE (X) 14.11 PBV (X) 1.41 Strong Balance Sheet provides aggressive funding options: The group is fairly low geared Price to Sales (X) 2.16 and hence can conveniently leverage up to take up the investment opportunities without Divdend Yield (%) 1.80 putting significant burden to the balance sheet. Price Behavior 295
Water Front Project to drive the next growth phase of the Group: USD 820 million 275 LKR project will drive the next growth phase of JKH. We has estimated a value of LKR 68.5 billion 255 235 (USD 515 million) for the project on our future projections and hence the group's overall 215 195 value will be significantly depend on the project's feasibility in the future. 175 06/05/14 09/05/14 12/05/14 03/05/15 JKH Share Price ASI movement (adjusted to JKH base price) Valuation Per Share Details as at 29.05.2015 (LKR) Earnings per share (trailing 12m) 13.82 We assume a cost of equity of 12.34% taking the nature of investor composition in to account. Net Asset Value per share 138.15 We believe JKH will continue to be a key player in the Sri Lankan economy. We have valued Sales per share (trailing 12m) 90.38 Dividend Per Share (trailing 12m) the company using the SOTP approach. Our valuation model values the share price at LKR 3.50 262.24 and accordingly counter is trading at a discount to our valuation. We give BUY Business Nature recommendation for JKH. JKH is a diversified business operating in Sri Lanka. Its businesses include food and beverage, transportation, Salient Sections of the Report leisure, property development, banking, insurance and other financial services, IT and tea and rubber plantations. 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 Top Shareholder Details as at 31.03.2015 Estate at a growth stage (pg.10)|Financial sector, an underpenetrated growth segment Mr. S E Captain 11.10% (pg.12)|IT, plantation(pg.14)|Financial snapshot of JKH performance (pg.15)| Valuation Broga Hill Investments Limited 10.40% (pg.16)| Sensitivity (pg.18)|Earning risk comment (pg.18)|Appendices (pg.19) Paints & General Industries Limited 6.70% Source:CSE, Bloomberg, LOSEC Research 01 June 15 Analyst (s): Gayan Rajakaruna|+94 117 880837|[email protected] , Hiruni Perera|+94 117 880809|[email protected] Recommendation Guidance, Important Disclosures and Analyst Certification: Page 29 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
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 Graph 1: Composition drive the strategy to optimize the shareholder wealth as a whole with minimal single party influence. The company of EDs and NEDs 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.
30%
70% 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 Executive directors opportunities, with latest being the waterfront mixed development project. Non Executive Directors
Graph 2: Transformation of JKH through strategic acquisitions/developments
Source: Annual reports & LOSEC Research Strong asset base and flexibility of raising funds
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%. Graph 3: Total Asset value comparison (LKR Mn)
202,474 159,388
Strong assets base 81,355 relative to peers 61,145 49,126 34,379
JKH CARS HAYL SPEN CTHR HHL
Source: Annual reports Graph 4: Composition of PPE Graph 5: Total Lands and Buildings (LKR Bn)
45 land and buildings 24% 40 38.82 Significant proportion 35 36.15 55% Buildings on 30 of PPE consist of lands 21% leasehold lands 25 23.56 24.04 and Buildings owned 20 20.85 by JKH Other 15 10 Source:CSE, Bloomberg, LOSEC Research 2010 2011 2012 2013 2014
Source: JKH annual report Source: JKH annual report 2 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Balanced Shareholding Structure to generate equity raising opportunities
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.
Strong cash position and low gearing to allow for investments
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 Strong cash position interim results). The company also has been able to generate strong free cash flow balances and gearing has combined with less continued be in a declining trend over last 4 years whilst retaining below 30% in FY14. However due to the debt gearing will open up financing of approximately USD 456Mnfor JKH’s flagship project “Waterfront Development”, gearing is likely to further avenues for increase at the latter part of the project period .However the company has remained largely a self-financed business raising debt to venture during previous years, in relation to its local peers. JKH’s cash position also places it at a considerable advantage into new projects relative to other domestic conglomerates.
Graph 6: Cash and Cash equivalents of JKH and peers (LKR Mn)
70,000 60,508 60,000
50,000
40,000
30,000 18,067 13,316 20,000
10,000 2,674 2,691 3,133 - JKH SPEN CARS EXPO HAYL HEMS Source: Annual reports & LOSEC Research Source: Annual reports 2014, Bloomberg
Graph 7: Comparison of gearing ratio of JKH and peers Graph 8: Cash position and gearing of JKH LKR Mn 100 200,000 Increased 45% gearing 90 180,000 due to 40% waterfront 80 160,000 35% 140,000 70 30% 120,000 % 60 25% 100,000 50 20% 80,000 40 15% 60,000 30 40,000 10% 20 20,000 5% 10 0 0% 0 2012 2013 2014 2015 2016F 2017F JKH SPEN CARS EXPO HAYL HEMS Total debt Total equity 2012 2013 2014 Net Cash and Cash Equivalent Gearing
Source: Annual reports, Bloomberg Source: Annual reports, Bloomberg Source: Annual reports
Source: JKH annual report 2 | LOLC Securities Limited 3 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Waterfront Integrated Resort Development Project (IR): The next big thing
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. IR project to increase JKH value by 35% 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) 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.
Diagram 1: Artist impression of resort Graph 9: Estimated NPV distribution
Luxury hotel
2% Conferencing facility 6% 9% 34% Shopping mall
Integrated 28% Entertainment 10% Facility 11% Tower 1 and 2
Office complex
Car park
Source: JKH web site Source: LOSEC Estimates Valuation We have carried out a comprehensive analysis of IR Project based on publicly available information and management Source: Annual reports 2014, Bloomberg 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).
Table 1: Valuation breakdown
Facility Value Value derived from USD (Mn) LKR (Mn) Waterfront is LKR 68 Luxury Hotel 173 22,966 per share 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 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 Facility Estimated Built up area Estimated Construction Revenue Estimates Expected Other assumptions/ explanations Investment - Cost Estimates terminal USD Mn -USD/sq.ft
Luxury hotel 800,000 sq.ft 146 150 Average Room Rate - USD 180, 7% The estimated built up area will (800 guest hotel rooms) (inflatation adjusted rate of Cinnamon include 400,000 sq.ft of common Grand Executive room) *in par with area and 800 luxury suits of the tourist size of 500 sq.ft average each. F&B and Banquet revenue = Cinnamon arrival Grand revenue composition growth
Occupancy rate - 75% and 5% YoY growth Conferencing 400,000 sq.ft (2500 pax) 73 125 2 events/day * 2500 pax 10% This will be the largest facility *size equivivalant to 1 pax - USD 100 revenue conferencing facility in Colombo proposed shopping mall * LOSEC which will include ball room (source: LOSEC estimates) Year 1 - 60% capacity estimates facilities, conferencing Year 2 & 3 - 95% capacity utilisation halls/rooms in different capacity, meeting rooms and car park facility. The management expects very high yield on this conferencing facility.
Shopping Built up area - 400,000 sq.ft 73 100 Rent price - USD 5 per sq.ft per month 5% This is a high end shopping mall mall Rentable area - 307,000 (inflatation adjusted rate of Crescat which will largely attract sq.ft (207,000 sq.ft Boulevard) * in par with tourists for their shopping +100,000 sq.ft) estimated needs. Year 1 - 30% occupancy YoY rent *100,000 sq.ft rentable area Year 2 & 3 - 95% 95% occupancy price to be added from vacant *Crescat Boulevard currently operates at increase Casino facility (source: 95% occupancy LOSEC estimates) Integrated Estimated Built up area - 285 150 Average visitors per year - 100,000 3% We assume that Integrated Entertainme 1.56Mn sq.ft Entertainment Facility nt facility (source: LOSEC estimates) Average revenue per visit - USD 30 *low growth (excluding Casino) will have a due to significant contribution to the Source: LOSEC Estimates Estimated operating margin - 30% absence of overall project valuation. We casino believe that this will be in par Year 1 - 50% occupancy with entertainment facilities of Year 2 - 80% occupancy mixed development projects in Year 3 - 95% occupancy 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.
Residential Tower 1: built up area - Tower 1 - 67 150 Tower 1 - 1% As per management discussions, Tower 1 366,000 sq.ft (231 units) Average price per sq.ft - USD 375 both towers will fall in to Tower 2 - 47 FY 15 - 30%, FY16 - 30% and FY 17 - 40% *in par with premium residential category Residential Tower 2: built up area - pre sales of total number of units increase in which will be equivalent to Tower 2 258,000 sq.ft (200 units) Tower 2 - YoY existing JKH residencies Average Price per sq.ft - USD 386 management "Monarch" and "Emperor". (estimated based on 3% premium added fee Target market will be rich and tp Tower 1 rate) upper middle class segment. FY17 - 30%, FY18 - 30% and FY 19 - 40% pre sales of total number of units The management is very optimistic on apartment unit *Both towers be fully occupied and sales with plans to sell off all operational by FY20(source: LOSEC 431 units by end of FY20. estimates) Office Built up area - 400,000 sq.ft 73 100 Rent price - USD 5 per sq.ft per month 5% This is a large office complex Complex (inflation adjusted peer avarage rent rate) * in par with with Grade A office space. The Rentable area - 254,000sq.ft Year 1 - 30% sales of rentable space increase in JKH is on the view that JKH will Year 2 - 85% " local office be able to sell at least 95% of Year 3 - 98% " space rates the rentable space by FY 21. Car park Built up area - 310,000 sq.ft Daily revenue=USD 20/day Estimated size of standard car (2450 slot) 56 - No. of parking slots to be rented=1000 - park slot = 7.9ft * 16ft *Remaining 1450 to be allocated for hotel 4 | LOLC Securities Limited 5 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
CF & R, a key growth sector of the Group
Consumer segment remains as the largest contributor to the total group revenue while this percentage was hovering Largest contributor to around 28% for the last three years .As the consumer spending behavior through per capita GDP growth has clear the top line of the implications for the CF & R industry, ( we see a strong correlation of 0.97 between two variables) we expect with the group projected increase in the GDP per capita, CF& R segment revenue to increase by CAGR of 13.01% during FY15-17F.
Graph 10: CF& R revenue vs group revenue Graph 11: GDP per capita and CF&R seg. revenue USD 120,000 6000 30% 97,289 105,225 91,582 24.12% 100,000 85,408 89,256 5000 25% 77,690 19.67% 80,000 17.09% CF & R growth was 4000 15.87% 20% 60,000 12.63%13.39% forecasted backed by 3000 16.27% 10.46% 15% 34.45% 36.12% 40,000 32.49% 12.13% Mn 28.41% 28.47% 2000 10% high expectations on 28.28% 4.73% per capita GDP 20,000 1000 5% 0 0 0% 2011/12 2012/13 2013/14 2014/15 2015/16F2016/17F 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F CF& R revenue Other revenue GDP per capita( USD) CF & R revenue growth of JKH Source: Bloomberg, LOSEC estimates Source: Central Bank forecasts, Bloomberg data, LOSEC Research estimates Higher consumer demand for consumer food volumes Better consumer sentiment and spending patterns witnessed during the fourth quarter of the 14/15 financial year Higher purchasing will continue while SL is expected to post an increase in the consumer demand driven by the low interest rate power and environment, single digit inflation and increased disposable income. On the other hand currently JKH is the market consumption gaps in SL leader in the ice cream, beverages and processed meat markets accounting for approximately 56%, 40%, and 80% of will boost the volumes local market share respectively. With per Capita Consumption of soft drinks, ice cream and meat in SL being much in the consumer foods lower compared to regional peer countries we see a growth potential in this segment. segment Graph 12: Per capita consumption of ice cream (Lr) Graph 13: Per capita consumption of soft drinks(Lr)
We expect revenue of India 0.1 consumer foods (ice Indonesia 0.1 Sri Lanka 8.2 Pakistan cream, carbonated soft 0.4 Philippines 0.8 Malaysia 19 drinks and frozen china 1 foods) to grow at a Thailand 1.5 Singapore 31.4 CAGR of 10% during Sri Lanka 1.7 Malaysia 1.9 Thailand 39 FY15-17F Singapore 2.4 Canada 10.6 Philippines 52 The United States 20.8
Source: Web articles Source: Web articles Emerging growth in the retail sector Modern vs Traditional In the super market business, CCS will continuously expand the network of outlets in a similar size and format as trade in Sri Lanka 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 16% potential in the Keells Super segment along with the growth in the disposable income which would likely to generate higher footfall for supermarkets.
84% Graph 14: Modern retail penetration Graph 15: Retail sector revenue of Keells LKR Mn 80% 70% 30,000 40% 70% Modern Traditional 60% 30% 49% 48% 20,000 50% 43% 40% 20% 40% 30% 10,000 16% 10% Retail revenue to grow 20% at CAGR of 15% ,FY15- 10% 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F 0% 17F due to expansion of Retail segment revenue of keells Singapore Malaysia Hong Kong Taiwan Thailand Sri Lanka outlets and increase in Retail segment revenue growth of Keells disposable income Source: Web Articles Source: Company Annual reports,LOSEC Research estimates
Sector Valuation 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.
5 | LOLC Securities Limited 6 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Leisure the growth star
Highest contributor for Leisure segment has able to maintain its position as the highest EBIT generator for the group over the past and we the EBIT of the group expect this to continue. We expects EBIT from the leisure segment to grow at a CAGR of 11.80% FY15-FY17F. Graph 16: EBIT contribution by leisure segment
20,000 LKR Mn 16575
15,000 12075 13056 10438 10,000 9203 7183
5,000 40.91% 52.35% 44.93% 48.41% 58.93% 55.19% 0 2011/12 2012/13 2013/14 2014/15 2015/16F 2016/17F Leisure segment EBIT Other segments EBIT Source: JKH annual reports, LOSEC Research estimates
Cinnamon City hotels performing well with the dominating market share
"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. Graph 17: Current market share of Cinnamon City Hotels Graph 18: Occupancy rates of JKH City Hotels
100% 80% 18% 49% 60% 40% 33% 20% 0% FY10 FY11 FY12 FY13 FY14 FY15E FY16F FY17F
Cinnamon grand Cinnamon Lakeside Cinnamon Red Cinnomon Grand Cinnomon Lakeside Other City Hotels
Source: AHPL annual report Source: AHPL annual report, LOSEC Research Estimates
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.
Table 3: Upcoming city hotel projects in Colombo Developments Developer Proposed positioning No of rooms Opening year
Grand Hyatt Sino Lanka Hotels Upper scale 475 2015 Sheraton Lanka Hotels Upper scale 306 2015 Marino Sands Damro Midscale 270 2017 Movenpick Softlogic Upper scale 180 2015 NEXT Hotel by SilverNeedleColombo City Centre Upper scale 200 2017 Cinnamon Life JKH Luxury 800 2018 Shangri-La Shangri-la Hotels Luxury 550 2017 Jetwings Jetwings Midscale 70 2016 Welcome Hotel Lanka WelcomHotel Luxury 300 2018 Indo Lanka Hotels Crown Plaza Upper scale 225 2019 Total rooms 3376
Source: JLL Reseach 2014
Graph 19: Room Inventory in Colombo Room inventory in Rooms Colombo lags far 60000 behind compared to other regional capital cities .JKH has the 31790 30114 26113 potential to capitalize the opportunity by 9100 7600 4300 strengthening the "Cinnamon" brand Bangkok Manila Kuala Lampur Jakarta Ho Chi Minh City Hanoi Colombo identity
Source: Web Articles
6 | LOLC Securities Limited 7 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
A buoyant outlook in the SL tourism industry to generate further earnings 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.
Graph 20: Total tourist arrivals to Sri Lanka
SL is to achieve 2.5 Mn 3,500 50% 46.12% tourist arrivals by 2016 3,000 40% and thus SL needs an 2,500 30.79% 30%
26.75% 28% 28% 28% Thousands annual 28% growth in 2,000 19.81% 20% 17.48% 2015 and 2016 1,500 10% 1,000 1.87% 2.15% 0% -2.98% 500 -11.72% -11.24% -10% Source: JKH annual reports, LOSEC Research estimates 0 -20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F
Tourist arrivals Tourist arrivals growth rate
Source: Census and Statistics Dept. Central Bank annual report, LOLC research estimates
Tourist arrivals to SL is Graph 21: Tourist arrivals to SL and the region low comparatively to Mn 30 26 26.7 our peer countries 25 indicating that SL has the potential to further 20 develop the sector 15
8.8 10 7.4 7.6 5.3 4 5 2.2 1.3 0.3 0.1 0.3 0 Malaysia Indonesia Thailand Vietnam Cambodia Sri Lanka 1990 2013 Source: AHPL annual report, LOSEC Research Estimates Source: World Bank and SLTDA data
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. Maldivian operations
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.
Sector Valuation
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).
7 | LOLC Securities Limited 8 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Transportation, a steady cash cow
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 Colombo Port to add from the existing around 4.1 million TEUs annually to about 11.7 million TEUs by 2020.With the expansion of South 11.7 Mn TEUs by 2020 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.
Graph 22: CPEP to add 7.6 Mn TEUs by 2020E Graph 23: SAGT volume and market share TEUs 14.0 1400 50% 1200 12.0 45% 45% 1000 44% 42% 10.0 800 39% 40% 8.0 600 36% 35% 35% 35% 33% 33% 6.0 400 Source: Census and Statistics Dept. Central Bank annual report, LOLC research estimates 30%
SCT SCT 200 4.0 Completion CPEP Total Total TEUs (Mn) 0 25% 2.0 0.0 2004 2008 2012 2014 2020 E SAGT Other SAGT Market Share Source: SLPA Source: SAGT web site & CBSL 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 Limited growth near 20% to the Group bottom line in the past. prospects due to capacity constraints 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.
Graph 24: Bunkering price movements Steady growth of bunkering business USD USD 130 800 JKH’s oil bunkering business imports oil and supplies bunker fuel 120 700 primarily to ships calling in for transshipment at the Colombo 110 port. The three large players (IOC, state controlled Lanka 100 600 Maritime Services and JKH) while JKH’s Lanka Marine 90 Services(LMS) being the industry leader with approximately 500 80 50% market share dominates the sector, amidst the stiff 70 400 competition from entry of new players and fuel price wars in the 60 region. 300 50 40 200 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
18-Jun-12 18-Jun-13 18-Jun-14
18-Oct-12 18-Oct-13 18-Oct-14
18-Feb-13 18-Feb-14 18-Feb-15
18-Dec-12 18-Dec-13 18-Dec-14
18-Apr-13 18-Apr-14 18-Apr-15
18-Aug-13 18-Aug-14 18-Aug-12 to add 7.6 Mn TEU handling capacity by 2020, LMS could be in a Brent Crude Oil (RSH)-USD/bbl 380cST Bunker Fuel Price (LSH)-USD/bbl position to capitalize the growth in port activities, if JKH will 180cST Bunker Fuel Price (LSH)-USD/bbl continue to invest in strengthening infrastructure and leverage on its strong brand name. Source: Bloomberg Sector Valuation Though there was a dip in operating income on bunkering business in FY15 due to stiff competition, we expect 5% Bunkering volumes to YoY growth for next two years due to expected growth in port activities. We assume JKH to gain SAGT's share at 90% grow in par with annual throughput capacity till FY18. We expect 4% medium term growth from the container business primarily due increase in port to possible changes in pricing strategies. But in the long run there is a possibility for JKH to have a business expansion capacity opportunity and hence a 5% terminal growth has been applied for our valuation.
8 | LOLC Securities Limited 9 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Real Estate at a growth stage
Positive outlook of country property developments
Construction sector to Sri Lanka is proactively investing in various infrastructural projects, from improving transport networks to record a positive telecommunications and electricity generation. This has resulted steady increase in construction sector stake in Sri correlation with Real Lankan Real GDP from 7.1% in 2011 to 9.7% in 2014.The construction sector demonstrates a strong correlation with GDP 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.
Graph 25: Sri Lanka GDP by sectors
4,000 9%
3,500 9.7% 8%
LKR Bn 8.1% 3,000 8.7% 16% 7.1% 7% 2,500 6% 2,000 5% 1,500 4% 1,000
500 3%
Source: SAGT web site & CBSL - 2% 2010 2011 2012 2013 2014 Services Industry (except construction) Agriculture Construction Real GDP Rate
Source: CBSL 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 Witnessing a shopping malls located in Colombo and the suburb. With almost 100% sales of OnThree20 and 100% unit significant demand for reservations on 7th Sense residential property by FY2014/15, the revenue flow of this segment for next 3 years will luxury apartments 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.
Table 4: Proposed & operational luxury and upper mid apartments Table 5: Upcoming malls in Colombo Apt Name Location Developer Com. Yr # Units Mall name Com Yr BAU (sqft) 110 Rajagiriya Apurva Natvar Parikh 2014 188 Liberty Pz- phase II 2014 60,000 On three 20 Colombo 2 JKH 2014 475 Altair 2017 40,000 7th Sense Colombo 7 JKH 2015 65 Shangri-la 2017 250,000 Elements Rajagiriya 2016 132 Silver Needle Abans 2017 160,000 Destiny Slave Island Fairway Holdings 2017 205 Destiny Mall 2017 30,000 Altair Beira Lake South City Pr 2017 400 Havlock City Mall 2018 250,000 Belvedere Kotahena Keppel CT Developments 2018 260 JKH 2018 400,000 Waterfront Glennie St JKH 2018 431 Krrish Square 2018 315,000 Astoria Duplication RdAVIC 2018 350 ITC Hotel 2018 60,000 City Center Beira Lake Silver Needle - Abans 2018 182 Tata Residential 2018 150,000
Source: JLL Reseach 2014 Source: JLL Reseach 2014
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 Supply to overweigh maintain low interest rate environment in the future. However, a large number of high-end residential real estate the demand for development projects in Colombo are currently in progress with plans for completing them with in next 4 years. This residential properties could lead to oversupply and, demand could come under pressure.
9 | LOLC Securities Limited 10 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Property segment (cont…)
Graph 26: Square metre prices, premier city centre, US$. (Premium location apartments)
Hong Kong Singapore India Japan Taiwan China Waterfront 4036 Thailand Philippines Cambodia Indonesia Sri Lanka - Colombo 2734 Malaysia 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 USD/sq.m Source: JLL Reseach 2014, LOSEC Estimates 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 Invest in retail market rapidly. The increasing disposable income and the rising living standards of Sri Lankans are changing their spending to capitalize tourism patterns and preferences towards better quality branded goods and services. JKH is already in the run to tap the boom and increase in market through their existing high end shopping malls and proposed 400,000 sqft giant international quality spending shopping mall under their flagship mixed development Waterfront Project.
Graph 27: Rental charges in retail cities of regional countries
Singapore Orchard Road KL Suria KLCC Delhi Khan Market Vietnam Shopping Centre Mumbai Linking Road, Western Suburban Thailand Central Retail District Jakarta Shopping Centre Chennai CBD II shopping centre Colombo Waterfront-Colombo 5.00 Manila Makati CBD Colombo Crescat Boulevard 3.50 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 USD/sq.ft per month
Source: JLL Reseach 2014, LOSEC Estimates
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 Waterfront office would require at least 15 million sqft of office space by 2022 in order to achieve government’s ambitious target of complex to cater creating another 200,000 jobs in IT/ITES sector by 2022. The total ‘Grade A’ office space generated from the on-going growing demand of development projects will account for only 0.6Mn sqft by 2016. Thus we believe that proposed office complex under office space Waterfront Development project enjoy a high occupancy rate which is about 85% - 98% from FY20 onwards.
Graph 28: Office space rental charges in regional countries
India - Delhi Singapore India - Mumbai Indonesia - Jakarta Waterfront 5.00 Vietnam - Ho Chi Minh City Malaysis - KL Thailand - Bangkok Sri Lanka - Colombo 2.50 Phillipines - Manila Source: JLL Reseach 2014 India - Chennai 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 USD/sq.ft per month Source: JLL Reseach 2014, LOSEC Estimates Sector Valuation 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. 10 | LOLC Securities Limited 11 | LOLC Securities Limited 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 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 Underpenetrated life Asia Limited for a total consideration of LKR 3.66 Bn while gaining a capital gain of LKR 1.22 Bn. UAL net earned insurance segment 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 Source: JLL Reseach 2014, LOSEC Estimates from the sale, but the decision is not finalized yet.
Graph 29: Life insurance growth and market share Graph 30: Life insurance penetration in Sri Lanka USD LKR 4,000 9% Mn120,000 40% 8% 3,500 100,000 7% 30% 3,000 6% 80,000 5% 2,500 60,000 20% 4% 2,000 3% 40,000 2% 10% 1,500 20,000 1% 1,000 0% 0 0% 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 Per capita income - USD General Insurance (Rs. millions) Life Insurance (Rs. millions) GDP Growth Rate %* Growth Rate in Premium - Life (%) Penetration % (Premium of life Insurance as a % of GDP) Source: Insurance Board, CBSL Source: Insurance Board,UAL Annual Report, CBSL
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 Source: JLL Reseach 2014, LOSEC Estimates Asian countries which is 1.85%, Sri Lanka has resulted very low penetration of 0.48%. Considering this low Underpenetrated life penetration coupled with overall GDP and last 6 years real per capita income growth of 40%, we believe that UAL insurance segment 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.
Graph 31: Life Business penetration in Asia
75 68.3 2.0 70 1.8 65 60 1.6 55 1.4 50 USD 45 1.2 40 35.2 % 1.0 35 30 0.8 25 0.6 20 15 0.4 10 0.2 5 0.16 0 0.0 Emerging Asia Middle East and Central Asia Sri Lanka Premiums per capita (USD) Premiums in % of GDP -2013
Source: JLL Reseach 2014, LOSEC Estimates Source: Resigma N03/2014
11 | LOLC Securities Limited 12 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Financial sector (cont…)
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. NTB is a fast growing bank with high Despite strong profitability and rapid growth NTB has maintained sound asset quality with diversified portfolio of profitability advances and sound NPL levels.
Graph 32: NTB has grown significantly over the years Graph 33: NTB has superior profitability LKR Mn180,000 25 7 160,000 6 140,000 20 120,000 5 % 100,000 % 15 4 80,000 60,000 10 3 40,000 2 20,000 5 0 1
0 0 COMB NTB NDB SEYB HNB SAMP UBC PABC Total Assets Customer Deposits ROE NIM Source: Annual Reports Source: Annual Reports
Source: Insurance Board,UAL Annual Report, CBSL 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.
Sri Lanka's loan penetration remains significantly low in the region.
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.
Source: Resigma N03/2014
12 | LOLC Securities Limited 13 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
IT, Plantation and Other segments
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 JKOA business to grow automation products stands out as the main contributor in the segment recording 77% contribution to the segmental with increase in EBIT. JKH’s BPO business, InfoMate (pvt) ltd. with 282% YoY growth in operating profits has continued its positive consumer spending 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.
IT Sector Valuation 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%.
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 Sector may become amongst the top manufacturers of orthodox low grown teas and is also recognized as a top quality producer of CTC vulnerable to teas in Sri Lanka. With the positive trend of global tea production, TSML showed a production volume increase while unfavorable weather recording 12% and 16% revenue and EBIT YoY growth in FY14.TSML purchases low green tea from small tea conditions plantation holders to operate its 8 tea factories. With the down turn of global tea prices and increase in cost of Source: Annual Reports production coupled with wage increases of plantation sector workers, we expect plantation sector margins to decline by 5% in FY16 and17.
Graph 34: Tea price movement
400 20% 350 15% 10% US 300 cents/kg 5% 250 0% 200 -5% 150 -10% -15% 100 -20% 50 -25% 0 -30% 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 Source: Department of Census & Statistics and Forbes & Walkers
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 and other Sector Valuation 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.
13 | LOLC Securities Limited 14 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Financial snapshot of JKH performance
Graph 35: Quarterly Revenue and Profit Graph 36: Quarterly EBITDA margin
30,000 30 28 26 25,000 24 22 20,000 20 18 16 15,000 % 14
LKR Mn 12 10,000 10 8 6 5,000 4 2 - - 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4
Revenue Profit EBITDA Margin
Source: Bloomberg Source: Bloomberg
Graph 37: ROA and ROE Graph 38: Gearing
16.00 35
14.00 30 12.00
10.00 25 %
% 8.00 20 6.00
4.00 15 2.00
0.00 10 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015
ROA ROE Gearing: Total Debt/Equity Source: Bloomberg Source: Bloomberg
Graph 39: Segmental Revenue Breakdown Graph 40: Segmental Operating Margins
30,000 55% 50% 25,000 45% 20,000 40% 35% 15,000 30% Source: Department of Census & Statistics and Forbes & Walkers
LKR Mn 25% 10,000 20% 15% 5,000 10% 0 5% 2009 2010 2011 2012 2013 2014 0% 2012 2013 2014 Consumer Foods & Retail Leisure Transportation Consumer Foods & Retail Leisure Financial Services Information Technology Property Transportation Financial Services Others Information Technology Property Source: Annual reports Source: Annual reports
14 | LOLC Securities Limited 15 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Valuation
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.
Table 6: Valuation Sensitivity Matrix
Risk Free Rate Share price in LKR 6.34% 6.84% 7.34% 7.84% 8.34% 3% 440 334 387 336 305 4% 387 336 305 281 262 5% 305 281 262 246 233 Risk 6% 262 246 233 221 211 Premium 7% 233 221 211 202 194
Source:CSE, Bloomberg, LOSEC Research Table 7: Contribution by segment to JKH's value per share
Equity Value (LKR Mn) 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 Comparison Name Market Cap (USD Mn) PE (x) PBV (X) Dividend ROE %
John Keells Holdings Plc (Sri Lanka) 1441 13.50 1.41 1.80 11.01 Aitken Spence Plc (Sri Lanka) 301 11.33 1.16 2.00 10.64 Hemas Holdings Plc (Sri Lanka) 341 17.95 2.81 1.37 15.01 Hayleys Plc (Sri Lanka) 197 10.31 0.91 1.69 9.77 Beijing Enterprises Hldgs (Hong Kong) 11258 17.98 1.53 1.32 8.69 Yakult Honsha Co Ltd (Japan) 9707 45.13 3.48 n.a 8.35
Source:CSE, Bloomberg, LOSEC Research
Table 9: Valuation of JKH warrants in 2015 and 2016 (using Black Scholes Pricing Model) Warrant022 Warrant023 LOSEC Valuation - LKR 16.70 22.20
Current Trading Price - LKR 20.00 37.10
Expiration Date 12-Nov-15 12-Nov-16
Underlining parameters: - 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 Source: Annual reports - Compounded risk free interest rate: 7.34% - Standard Deviation (annualised): 10%
15 | LOLC Securities Limited 16 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Impact of share subdivision
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.
Source:LOSEC Estimates
Source:CSE, Bloomberg, LOSEC Research
16 | LOLC Securities Limited 17 | LOLC Securities Limited 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
LKR LKR 272 290 286.15 269.43 285 270 280 268 +3% +9% 275 266 270 262.24 264 265 262.24 260 262 -1% 255 -6% 260 258.5 250 245.57 258 245 256 240 235 254 230 252 4.5% 6.5% 8.5% 5.00% 7.00% 9.00% Tourist arrival growth at current rate Consumer sector GDP growth rate
Source: LOSEC Research Source: LOSEC Research
Graph 43: Selling price sensitivity of residential apartments: Medium Graph 44: Retail space rental price sensitivity: Medium
LKR LKR 266 265.27 275 269.4 264 +1% 270 262.24 +3% 265 262.24 262 -1% 260 -3% 260 259.22 255.09 255
258 250
256 245 325 375 425 3 5 7 Average selling price - USD per sq.ft per month Rental price-USD per sq.ft per month
Source: LOSEC Research Source: LOSEC Research
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.
17 | LOLC Securities Limited 18 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Appendices
Table 10: Return comparison S&P SL 20 JKH ASI Index SPEN % Index 3 months -6.78 -1.13 -3.60 -3.94 6 months -24.21 -1.63 -2.86 -0.60 YTD -23.60 -2.44 -3.51 -3.38 1 year -18.72 13.39 13.59 -0.99 Source:CSE, Bloomberg Graph 45: Share Price Movement
40,000,000 Volume Price 350 SMAVG (50) SMAVG (100) 300 30,000,000 250 Source: LOSEC Research
20,000,000 200 Rs
Volume 150 10,000,000 100 - 50
100 RSI (14) 75 50 25 0 6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14 Source:CSE, Bloomberg
Graph 46: PE Chart Graph 47: PBV Chart
25 3 2.5 20 2 15 1.5 10 Source: LOSEC Research 1 5 0.5
0 0 6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14 06/05/12 12/05/12 06/05/13 12/05/13 06/05/14 12/05/14 PE ratio Highest Average Lowest PBV ratio Highest Average Lowest
Source:CSE, Bloomberg Source:CSE, Bloomberg
Graph 48: Price per Sales Graph 49: Dividend Yield
3.5 2.5 3 2 2.5 1.5 2 1 1.5 0.5 1 0.5 0 6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14 0 6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14 JKH dividend yield Highest Average Lowest Price to Sales ratio Highest Average Lowest
Source:CSE, Bloomberg Source:CSE, Bloomberg
Graph 50: CSE PE Chart Graph 51: CSE PBV Chart
22 2.2 20 2 18 1.8 16 1.6 14 1.4 12 10 1.2 8 1 06/05/12 12/05/12 06/05/13 12/05/13 06/05/14 12/05/14 6/5/12 12/5/12 6/5/13 12/5/13 6/5/14 12/5/14
ASI PE ratio Highest Average Lowest ASI PBV ratio Highest Average Lowest
Source:CSE, Bloomberg Source:CSE, Bloomberg
18 | LOLC Securities Limited 19 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Table 11: Financial Summary Forecast Figures in LKR Mn (31st March) FY 12 FY 13 FY 14 FY 15 FY 16 (F) FY 17 (F) Income Statement Revenue 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
Figures in LKR Mn 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 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
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.
SWOT analysis
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 Initiation Coverage: John Keells Holdings PLC | 01 June 15
Waterfront Integrated Development Project
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.
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).
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. Exercise Project funding date LKR Mn USD Mn Land value 7,860 60 Rights Nov-13 23,098 176 Warrant - W0022 Nov-15 8,139 62 Warrant - W0023 Nov-16 8,579 65 Debt 59,744 456 Total 107,420 820
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.
22 | LOLC Securities Limited 23 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Business Segments
Table 13: Details of business segments Consumer LKR Mn 2013/14 2012/13 Chg% 2011/12 Consumer foods Retail segment Revenue 25,414 24,042 6% 21,969 Businesses CCS and KFP are the subsidiaries Retail segment comprises of EBIT 1,480 2,479 -40% 2,822 within the operate under this segment. "Keells super chain of modern PAT 1,005 1,987 -49% 2,370 sector retail outlets which are Total Assets 12,171 17,305 -30% 12,670 CCS produces a portfolio of operated by JayKay Marketing Total Equity 5,977 10,804 -45% 7,868 carbonated soft drinks, ice creams Services (JMSL) which is a 100% Total Debt 1,699 1,704 0% 1,167 and related confectionary products owned subsidiary of CCS. under the “Elephant House” brand Contribution to JKH group and an energy drink under the “Wild Revenue EBIT Elephant brand. The Nexus network operates the Nexus loyalty 14 KFP produces a range of processed programme in collaboration 28 % meat items under the brand name of with Nations % "Keells","Krest" and " Elephant Trust Bank. House"
Leisure City Hotels Sri Lankan Resorts and Destination Mgt. LKR Mn 2013/14 2012/13 Chg% 2011/12 Maldivian Resorts
Revenue 22,548 20,593 9.49% 17,415 Cinnamon Grand During the year ending 2005, Destination EBIT 5,912 5,706 3.61% 4,442 Businesses Colombo KHL was created as a holding managemement PAT 4,824 4,746 1.64% 3,707 within the Cinnamon Lakeside company for all group resorts business Total Assets 52,662 49,795 5.76% 41,275 sector Colombo which owns and operates comprises of Total Equity 41,570 37,606 10.54% 28,642 Cinnamon Red resort hotels in Sri Lanka and Walkers Tours Total Debt 6,697 7,435 -9.93% 8,077 Maldives. Holding of JKH in and Travels ( AHPL owns and John Keells Hotels PLC is Ceylon) which Contribution to the JKH group operates cinnamon 80.32%. was acquired in Revenue EBIT Grand in Colombo 1973 and Whittall while it also acts as Boustead the holding (Travel) Limited. 25 company (43.41%) 43 % of Trans Asia Hotels % PLC which operates Cinnamon Lakeside.
Cinnamon Red is an associate business which JKH owna 27.8%. Tranportation LKR Mn 2013/14 2012/13 Chg% 2011/12 Ports and Shipping Transportation Revenue 21,796 25,113 -13% 23,651 Businesses Operation of a private container Bunkering services under Lanka EBIT 2,774 3,680 -25% 3,329 within the terminal in the Port of Colombo on a Marine Services (LMS); PAT 2,510 3,388 -26% 3,120 sector BOT basis under South Asia Gateway Logistics services which include Total Assets 19,367 19,233 1% 20,179 Terminals (SAGT) operations of DHL Express in Sri Total Equity 14,669 15,139 -3% 15,149 Lanka; Total Debt 2,250 1,953 15% 1,491 Third party logistics and freight forwarding solutions under the Contribution to JKH group John Keells Logistics brand; and Revenue EBIT JV with Norbert Dentressangle Overseas (NDO) Associate stake in Maersk Lanka Representation of airlines as 19 26 % 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 23 | LOLC Securities Limited 24 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Property Property Development Real Estate LKR Mn 2013/14 2012/13 Chg% 2011/12 Businesses Development and sale of residential and Renting of commercial office spaces Revenue 4,138 3,170 31% 3,790 within the commercial properties and the management of the Group's EBIT 1,364 1,264 8% 1,016 sector real estate within the city 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 Commenced work of the premium Maintained over 90 per cent Total Debt 10,767 2,142 403% 990 residential development project, “7th occupancy Sense” at Gregory’s Road across the sites Revenue EBIT The superstructure of the “OnThree20” 5% 13% residential project was completed
Financial Services Insurance Banking and Leasing Stock Brokering LKR Mn 2013/14 2012/13 Chg% 2011/12 Businesses Union Assurance (UA) offers Nations Trust Bank (NTB) John Keells Stock Revenue 12,568 11,108 13% 9,874 within comprehensive insurance offers complete banking Brokers (JKSB) is one EBIT 1,995 1,776 12% 1,934 the sector solutions in the life and non- solutions of the leading stock PAT 1,636 1,399 17% 1,171 life insurance segments through its network of broking companies in Total Assets 35,586 31,507 13% 26,921 branches for corporate, Sri Lanka and has a Total Equity 9,248 8,157 13% 6,857 retail and SME clients and is number of trading tie Total Debt 175 147 19% 328 the franchise holder for ups with leading Contribution to the JKH group American Express credit foreign securities Revenue EBIT cards in Sri Lanka. Nations houses Leasing is the leasing arm of 10% 1 NTB
Information Technology IT Services Office Automation IT Enabled Services LKR Mn 2013/14 2012/13 Chg% 2011/12 Businesses John Keells Computer John Keells Office Business Process Revenue 7,502 6,797 10% 6,723 within Services (JKCS) offeres Automation Outsourcing (BPO) EBIT 394 380 4% 183 the sector software products and (JKOA) are authorised operations, primarily PAT 245 231 6% 66 services to a wide range of distributors for some of the in the voice vertical Total Assets 3,445 3,717 -7% 3,368 clients in Sri Lanka and leading office automation through JK BPO, Total Equity 2,104 2,166 -3% 1,901 overseas brands in the world operating approx. Total Debt 468 434 8% 560 1,000 seats with operations in India, US Contribution to the JKH group and Canada Sole distributor for Toshiba Provider of shared Revenue EBIT copiers. National distributor service solutions in the 4 for finance, accounting and 9% % Samsung mobile phones, payroll verticals to the Asus, and Toshiba Group and external notebooks and other office clients automation products such under InfoMate as Samsung printers, RISO duplication solutions
Other Including Plantation Services Plantation Services Other LKR Mn 2013/14 2012/13 Chg% 2011/12 Businesses John Keells PLC (JK PLC) – leading tea and JKH and other businesses Revenue 4,037 3,629 11% 2,684 within the rubber broker EBIT 2,734 1,463 87% 509 sector PAT 1,500 540 178% (388) Total Assets 46,783 24,870 88% 19,691 John Keells Warehousing – operating a John Keells Capital, a division of JKH, Total Equity 41,519 16,842 147% 10,823 state-of-the-art warehouse for pre-auction is the Total Debt 4,199 6,302 -33% 7,440 produce private equity arm of the Group
Contribution to the JKH group Tea Smallholder Factories PLC (TSF PLC) – The Strategic Group Information operates 8 tea factories and is a leading Technology (SGIT) supports the manufacturer of low grown teas in the Group’s IT requirements Revenue EBIT country, specially the CTC variety and also provides consulting services 4% and SAP implementation services to 26 % external companies
24 | LOLC Securities Limited 25 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
JKH Shareholding Distribution (as at 31.03.2015)
Shareholder Number of shares %stake Mr S E Captain 110,775,563 11.10% Broga Hill Investments Limited 104,084,164 10.40% Paints & General Industries Limited 66,913,811 6.70% Melstacorp (Private) Limited 36,498,341 3.70% Aberdeen Global-Asian Smaller Companies Fund 35,822,854 3.60% Schroder International Selection Fund 34,504,417 3.50% Deutsche Bank AG – London 30,065,961 3.00% Aberdeen Global Asia Pacific Equity Fund 21,978,158 2.20% Aberdeen Institutional Commingled Funds, LLC 15,569,620 1.60% Aberdeen Global-Emerging Markets Smaller companies fund 15,342,272 1.50% Mr K Balendra 15,227,172 1.50% London- Edinburgh Dragon Trust PLC 12,619,227 1.30% All Country Fund 11,362,207 1.10% Aberdeen Asia Pacific Equity Fund 10,470,264 1.00% Mrs C S De Fonseka 10,051,585 1.00% Mrs S A J De Fonseka 9,868,701 1.00% Employees Trust Fund 8,817,681 0.90% Aberdeen Global Frontier Markets Equity Fund 8,636,653 0.90% CF Ruffer Total Return Fund 8,540,000 0.90% Employees Provident Fund 8,435,708 0.80% Others 420,780,063 Total 996,364,422
Graph 52: Shareholder structure 01 Graph 53: Shareholder structure 02
21.93% 46% 9.09% 54% 68.98%
Foreign Local Individual Corporation Other
Employee Share Option Plan (ESOP)
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.
Table 14: ESOP Details Date of Share Granted Expiry Date Option Grant Price Outstanding End Current Grant Price Plan 6 09.12.2010 4,672,823 08.12.2015 292 6,298,054 213.13
Plan 7 07.12.2011 6,306,182 06.12.2016 172.1 6,058,329 172.49
Plan 8 01.07.2013 6,426,719 30.06.2018 265.18 7,273,616 253.16
Total 23,532,684 26,230,780
** Adjusted for Bonus Issues/Right Issues/Sub-divisions
25 | LOLC Securities Limited 26 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Key Management of JKH
Name of the person Description 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.
Diagram 2: Colombo Land bank of JKH Table 15: Location and size of lands Location Acres Slave Island Complex, 4.49 Colombo 02 130, Glennie Street, 1.71 Colombo 02 Kirulapone Avenue, 0.08 Colombo 05 125, Glennie Street, 0.53 Colombo 02 Ferguson Road, Colombo 1.22 15 York Street, Colombo 0.45 No 20, St. Michael’s Rd, 0.58 Colombo 03 Union Place, Colombo 02 0.50 148, Vauxhall street, 3.06 Colombo 02 100, Glennie Street, 0.37 Colombo 02 Cinnamon Grand 7.91 premises, Colombo 02 Lands Outside Colombo 267.04
26 | LOLC Securities Limited 27 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
Diversified Sector in Sri Lanka
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 Ticker Mkt Cap Total Assets PE PBV Div Yield ROE(%) (%) JKH 201,393 202,474 14.50 1.54 1.73 11.06 SPEN 40,600 61,145 11.40 1.21 2.00 11.21 CTHR 23,803 49,126 33.41 1.41 0.62 7.07 CARS 81,501 159,388 14.97 1.75 0.24 14.20 CSEC 4,034 17,366 5.05 2.16 3.05 48.92 EXPO 16,421 22,164 21.54 1.57 N/A 7.29 JFIN 10,500 7,034 43.44 1.80 1.00 4.31 HAYL 26,243 93,358 10.17 0.90 1.71 9.77 HEMS 47,407 34,379 18.78 2.89 1.33 15.01 RICH 16,891 32,576 10.00 1.76 3.01 18.20 SHL 11,919 65,863 31.88 1.62 1.63 5.10 SUN 6,946 13,500 12.39 1.34 1.85 11.60
Table 17: Business Sector Comparison of Peers Sector JKH SPEN CARS EXPO FLCH HAYL HHL RICH SHL Tranportation/Logistic √ √ √ √ √ √ Land and Property/ Real √ √ √ Bank, Finance & Insurance √ √ √ √ √ Hotels and Travels √ √ √ √ √ √ √ √ FMCG/Retail/Beverage √ √ √ √ √ √ √ IT/BPO √ √ √ √ √ Plantation/Agriculture √ √ √ √ √ Palm oil √ Manufacturing √ √ √ √ Chemicals & phama √ Construction √ Health care √ √ Footware and texttile √ Motor √ Power and Energy √ √ √ Trading √ √ Services √ √ √ √ √ √ √
Table 18: Selected Diversified sector indicators Graph 54: Earnings comparison of peers 14,000 Indicator Value 12,000 PE 22.40 10,000 PBV 2.00 8,000 Div . Yield 1.50 6,000 4,000 2,000 0 JKH SPEN CTHR CARS CSEC EXPO JFIN HAYL HEMS RICH SHL SUN -2,000
2013 2014
*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. 27 | LOLC Securities Limited 28 | LOLC Securities Limited 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
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 [email protected]. 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.
28 | LOLC Securities Limited 29 | LOLC Securities Limited Initiation Coverage: John Keells Holdings PLC | 01 June 15
LOLC Securities Limited
LOLC Securities Limited, a trading member of the Colombo Stock Exchange (CSE), is engaged in facilitating stock trading transactions at Colombo Stock Exchange, providing investment research on Sri Lankan equity, providing investment planning advices with services such as portfolio construction & formulation of IPS (Investment Policy Statement) and facilitating other investment opportunities in the country including private equity.
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