John Keells Holdings

JKH - Rs.136.1

Yasas Wijethunga Key Highlights [email protected] 1Q19 Results Update +94 77 053 2059 ❑ 1Q19 NP of Rs.2,361mn (-22% YoY), below our expectations, amid decline in earnings in Leisure, ‘Others’, Consumer Foods and Retail Sectors ❑ JKH’s group NP forecast revised down by -7% to Rs.15,479mn for FY19E (-9% YoY on a recurring basis) and by -6% to Rs.16,627mn for FY20E (+7% YoY), amid continued pressure on earnings expected from Leisure, Consumer Foods and Retail sectors. NP expected to rebound in FY21E to Rs.22,371mn (+35% YoY) amid the profit recognition of Cinnamon Life apartment projects. Subsequently, NP forecast 01 August 2018 at Rs.22,600mn in FY22E (+1% YoY) Sri Lanka ❑ The JKH share underperformed the broader market during last 12 and three Diversified Holdings months declining -21% and -17% respectively (vs. ASI’s decreases of -7% and -6% respectively) – the share was removed from MSCI Frontier Markets 100 Index in Jun 2018 as the company failed to meet the minimum liquidity requirement ❑ The JKH share trades at forward PER multiples of 12.2X for FY19E, 11.4X for FY20E, 8.4X for both FY21E and FY22E ❑ Based on our estimated break up Sum of The Parts (SOTP) valuation of Rs.167, the JKH share is currently trading at a 23% discount ❑ Despite the decrease in earnings, we believe that the extent of the recent share price decline seems unwarranted. Whilst, near term earnings weakness may remain due to expansion and construction related expenses in key sectors, we believe current share price provide a decent entry point to value oriented investors. JKH may also continue to be favored by medium to long term investors, amid its unrivalled share liquidity, and potential for upside in core growth oriented sectors over the long term

Key Trading Information Relative Share Price Movement (%$) Market Capitalization (US$ mn) 1,403.3 JKH ASI Shares in Issue (mn) 1,387.5 108 Estimated Free Float (%) 97.5 100

3M Average Daily Volume 980,851 92 3M Avg Daily Turnover (US$) 929,758 84 12M High / Low (Rs) 164.3 / 137.8 76 12M / 3M Price Change (%) -20.9 / -17.3 1-Aug-17 30-Jan-18 31-Jul-18

Valuation Ratios Financials - Year to 31 March FY17 FY18 FY19E FY20E FY21E FY22E Net Revenue (Rs mn) 106,273 121,215 140,477 155,649 224,725 229,321 Net Profit (Rs mn) 15,792 17,084 15,479 16,627 22,371 22,600 Earnings per Share (Rs) 11.5 12.3 11.2 12.0 16.1 16.3 Earnings per Share Growth (%) 13.2 7.1 -9.4 7.4 34.5 1.0 Price / Earnings Ratio (X) 12.1 13.0 12.2 11.4 8.4 8.4 Price / Earnings Growth (X) 0.9 1.8 N/A 1.5 0.2 8.2 Gross Dividend per Share (Rs) 6.0 6.0 6.0 6.0 8.0 8.0 Gross Dividend Yield (%) 4.3 3.8 4.4 4.4 5.9 5.9 Net Book Value per Share (Rs) 128.7 144.1 149.2 155.2 163.4 171.6 Price / Book Value (X) 1.1 1.1 0.9 0.9 0.8 0.8 Return on Equity (%) 9.5 9.0 7.6 7.9 10.1 9.7 Market Price per Share (Rs) 139.0 160.0 136.1 136.1 136.1 136.1 Note: Valuations are based on recurring EPS, Adj. for Capital Issues (if any); Historic Ratios are based on Y/E MPS *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 John Keells Holdings (JKH) is Sri Lanka’s largest listed conglomerate, with a significant the CSE presence in Leisure, Consumer Foods, Retail, Transportation, Property and Financial Services sectors. The group is also in the process of developing an Integrated Resort, “Cinnamon Life” at an investment of ~US$820mn, slated for completion in 2020. Given its lack of a controlling shareholder and ~98% free float, JKH is the local market’s most liquid share, contributing ~15% of total market turnover in 2018YTD During 1Q19, JKH restructured the reporting sectors within the group. Accordingly, the Consumer Foods & Retail divided into two sectors as ‘Consumer Foods’ and ‘Retail’. The Office Automation business, which was under the Information Technology (IT) sector was added to the Retail sector, whilst the remaining businesses in IT sector were moved to the ‘Others’ sector

Recent Financial Performance

1Q19 NP -22% YoY JKH reported a recurring Net Profit (NP) of Rs.2,361mn for 1Q19 (-22% YoY), below amid weak our expectations, amid decline in earnings in Leisure, ‘Others’, Consumer Foods and performance in key Retail Sectors. Overall decline was partly offset by a stronger contribution from the sectors Financial Services business 1Q19 earnings adjusted for a Rs.202mn impact from impairment loss on assets arising from the closure of “Cinnamon Hakuraa Huraa Maldives”. Meanwhile, 1Q18 earnings adjusted for accelerated depreciation of Rs.203mn relating to closure of “Bentota Beach by Cinnamon” (BBH)

Key Figures & Ratios (Rs mn) 1Q18 1Q19 % YoY FY17 FY18 % YoY Net Revenue (Rs mn) 26,822 30,163 12.5 106,273 121,215 14.1 Gross Profit (Rs mn) 6,706 5,591 -16.6 31,115 29,283 -5.9 Net Finance Income (Rs mn) 3,325 2,321 -30.2 9,597 10,747 12.0 Profit Before Tax (Rs mn) 4,088 2,909 -28.8 22,888 27,634 20.7 Reported Net Profit (Rs mn) 2,833 2,186 -22.8 16,275 21,021 29.2 Recurring Net Profit (Rs mn) 3,009 2,361 -21.5 15,792 17,084 8.2 Earnings per Share (Rs) 2.2 1.7 -21.5 11.5 12.3 7.1 Net Cash Position (Rs mn) 60,818 38,619 -36.5 61,528 45,547 -26.0 Net Cash Per Share (Rs) 43.8 27.8 -36.5 44.3 32.8 -26.0 Capex (Rs mn) 1,354 2,594 91.6 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 losses amounting to –Rs.203mn in 1Q19 and –Rs.202mn in 1Q18 Sectoral Analysis 1Q18 1Q19 %YoY FY17 FY18 %YoY Composition % 1Q18 1Q19 Net Revenue 27,292 30,929 13.3 106,273 121,215 14.1 100.0 100.0 Transportation 3,665 5,610 53.1 11,110 17,169 54.5 13.4 18.1 Leisure 4,899 4,385 -10.5 25,874 25,040 -3.2 18.0 14.2 Consumer Foods 3,859 3,702 -4.1 N/A N/A N/A 14.1 12.0 Retail 10,889 13,118 20.5 N/A N/A N/A 39.9 42.4 Financial Services 2,244 2,523 12.4 8,296 10,056 21.2 8.2 8.2 Property 224 227 1.3 1,121 1,231 9.8 0.8 0.7 Others 882 880 -0.2 N/A N/A N/A 5.5 4.4 Profit After Tax 3,219 2,518 -21.8 17,633 18,941 8.3 100.0 100.0 Transportation 773 826 6.8 2,979 3,084 3.5 24.0 32.8 Leisure 309 -74 >-100.0 5,008 3,471 -30.7 9.6 -3.0 Consumer Foods 446 231 -48.1 N/A N/A N/A 13.9 9.2 Retail 340 170 -49.9 N/A N/A N/A 10.6 6.8 Financial Services 235 550 >+100.0 2,042 5,187 >+100.0 7.3 21.8 Property 49 -6 >-100.0 333 438 31.6 1.5 -0.2 .Others 1,065 729 -31.6 N/A N/A N/A 33.1 30.0 PAT adjusted for non recurring items as follows Source: Company Interims Non recurring losses amounting to -Rs.202mn in 1Q19 and -Rs.203mn in 1Q18 in Leisure sector Non recurring adjustments totaled Rs.3,381mn in FY18 and Rs.1,374mn in FY17 Note: Comparative data not available for Consumer Foods, Retail and ‘Others’ sectors for FY17 and FY18

A CT HOLDINGS GROUP AND CLSA GROUP COMPANY John Keells Holdings

Transportation Sector Transportation Sector : PAT (Rs mn) 1Q19 PAT of Rs.826mn (+7% YoY, 33% of group PAT); broadly in line with our expectations. Growth driven by increased earnings from 42% owned associate, 1,200 South Asia Gateway Terminal (SAGT) and fully owned oil bunkering subsidiary, Lanka Marine Services (LMS) 900 ❑ SAGT earnings were driven by the +25% YoY growth in, whilst overall volume growth in the Colombo port was recorded at +15% YoY during the quarter 600 ▪ Accordingly, SAGT’s market share is estimated to have increased to ~30% in 1Q19 (vs. ~28% in 1Q18) 300 ▪ Utilisation levels at overall Colombo port is expected to be over 75%, indicating a 1Q17 3Q17 1Q18 3Q18 1Q19 need for further capacity additions; SAGT estimated to be running at a capacity utilization of ~80%

Colombo Port Volumes (TEUs mn) & ❑ According to JKH interims, LMS witnessed an increase in profitability due to a SAGT Mkt Share (%) growth in volumes (+20% YoY) and improved margins. LMS commissioned “MT Others Amelia” in 1Q19 after commissioning “MT Mahaweli” in 2Q18, further enhancing SAGT LMS’s overall storage capacity. Meanwhile, revenue growth is likely to have been SAGT Market Share - RHS 8.0 50 also supported by increased oil prices – crude oil prices increased +8% QoQ and

6.0 +41% YoY in 1Q19 40 4.0 ❑ Sectoral PAT forecasts broadly maintained at Rs.3,848mn for FY19E (+25% YoY, 30 2.0 22% of total PAT) and at Rs.3,977mn for FY20E (+3% YoY, 21% of total PAT),

0.0 20 expected to be driven by the continued growth in port activity. We also forecast NP of Rs.4,164mn for FY21E (+5% YoY) and Rs.4,360mn for FY22E (+5% YoY) ❑ FY19E YoY growth is off a relatively low base, as FY18 earnings were impacted by one off adjustments in 4Q18, relating to some impairments for doubtful debts and deferred tax adjustments as per the new Inland Revenue Act at SAGT. Sector earnings growth is expected to be moderate going forward amid the overall capacity constraints, especially at the SAGT facility. Whilst SAGT management is expected to increase 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 ▪ JKH was also in the process of evaluating oil bunkering opportunities within the Port of Hambantota (Southern SL). This is however expected to be on hold with China Merchant the GoSL transferring the ownership of the port to China Merchants Ports may act as a Holding Company on 29 July 2017. Accordingly, China Merchant would start the competitor to the port developments in Hambantota and it may act as a competitor to the Colombo port 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 levels

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

Leisure Sector : PAT (Rs mn) Leisure Sector

FY17 FY18 FY19E 1Q19 Loss after Tax of of -Rs.74mn (vs. a PAT Of Rs.309mn in 1Q18), below our 2,500 expectations, due to declines in both city and resort hotel segments. City hotels were 2,000 impacted by increased competitive pressure, whilst Resorts segment earnings are anticipated to have been impacted by closure of hotels 1,500

1,000 ❑ City hotels : Comprises of five star city hotels Cinnamon Grand (CG : 501 rooms) and Cinnamon Lakeside (CL : 346 room Trans Asia Hotels - TRAN) through 79% 500 owned, listed subsidiary, Asian Hotels & Properties (AHPL). AHPL reported a 1Q19 0 NP of Rs.65mn (-77% YoY) -500 1Q 2Q 3Q 4Q ▪ Segment results were impacted by lower occupancy levels amid an increase in room inventory within Colombo, despite the increase in tourist arrivals during the quarter - 219 room 5-star Movenpick hotel was opened in Jan 2017, Jetwing SL: Tourist Arrivals (000’s) was opened in Feb 2017 and 500 room Shangri La was opened in Nov 2017 2015 2016 • As per JKH, segmental occupancy levels decreased to 43% (vs. 58% in 2017 2018 1Q18), whilst ARRs rose to US$128 in 1Q19 (vs. US$125 in 1Q18). Tourist 280 arrivals to Sri Lanka rose +12% YoY to 454,723 persons during 1Q19 230 ❑ Resort hotels : Exposure through 80% owned listed subsidiary, John Keells Hotels 180 (KHL), which owns hotel properties in Sri Lanka (863 rooms excluding BBH) and Maldives (260 rooms excluding Cinnamon Hakuraa Huraa). KHL reported a 1Q19 130 recurring Net Loss of -Rs.109mn (vs. a recurring net loss of –Rs.28mn in 1Q18) 80 ▪ Sri Lanka resorts : As per JKH, 1Q19 occupancy levels picked up slightly to 74% Jan Mar May Jul Sep Nov (vs. 73% in 1Q18) whilst ARRs decreased to US$69 (vs. US$74 in 1Q18), with competitive pressure anticipated to have stiffened further in the resort space. Quarterly earnings lacked contribution from 133 room BBH, which was closed Maldives Tourist Arrivals (000’s) for reconstruction in May 2017. According to KHL, construction cost would 2015 2016 amount to ~Rs.4.8bn and construction would last for two years 2017 2018 150 ▪ Maldives resorts : JKH management indicated that Maldivian occupancy levels decreased to 73% in 1Q19 (vs. 76% in 1Q18), whilst ARRs increased to US$298 130 (vs. US$266 in 1Q18). Meanwhile ‘Cinnamon Hakuraa Huraa Maldives’ was 110 closed for refurbishments from 01 May 2018 whilst ‘Ellaidhoo Maldives’ was partly closed from June 2018 – Tourist arrivals to Maldives increased +3% YoY 90 to 306,412 during the quarter 70 ❑ The Sri Lankan Hotel and Destination Management businesses are assumed to have Jan Mar May Jul Sep Nov been impacted by increased competitive pressures ❑ Sectoral PAT forecasts revised down by -4% to Rs.3,907mn for FY19E (+13% YoY Upcoming 5-star class Hotels in off a low base, 24% of total PAT) and by -5% to Rs.4,417mn (+13% YoY, 24% of Colombo total PAT) amid the City hotel segment in particular facing increased challenges No. of Opening from the growing competition. Indirect competition is also seen from increasing Hotels Rooms Timeline apartment properties within city limits. Meanwhile, growth is to be driven by the Sheraton 306 2H2019 expected pickup in the Resorts segment. JKH also expressed plans to expand its local presence, via the construction of Cinnamon Red in Kandy with a room Cinnamon 800 2020 Life – JKH inventory of 210 (structure similar to , where JKH will only own a minority portion and would be responsible for management of the hotel) ITC 305 2021 Colombo ❑ We forecast sector PAT to decrease -15% YoY in FY21E to Rs.3,775mn in FY21E Ritz Carlton 450 2022 with the launch of Cinnamon Life project. Remaining city hotels of JKH is anticipated to witness a drop in occupancies during the period whilst Cinnamon Life Grand Hyatt 475 N/A project is projected to generate losses in the initial year of operation. A turnaround is expected in FY22E with a PAT of Rs.6,286mn (+67% YoY), where Cinnamon Life project is expected to generate profits from the hotel

A CT HOLDINGS GROUP AND CLSA GROUP COMPANY John Keells Holdings

Consumer Food Sector 1Q19 PAT declined -48% YoY to Rs.231mn (9% of group PAT), below our expectations due to weak performance of the consumer segment of 81% owned listed subsdiary, Ceylon Cold Stores (CCS) Sugar tax ❑ Sector contains carbonated soft drinks (CSD), ice cream, fruit juices , flavored milk impacted sales and drinking water manufactured/ marketed under CCS and processed meat volumes manufactured by 90% owned Keells Food Products (KFP) ❑ Earnings came under pressure subsequent to the introduction of a tax on carbonated soft drinks based on the sugar content via the National Budget in Nov 2017. As a result, average prices of carbonated beverages increased +40%, which led to a drop in beverage volumes of -37% YoY during 1Q19 ▪ Zero sugar products, which did not witness price changes were aggressively marketed by competitor Coca-Cola, further dampening sales volumes. CCS had EGB Lite as a zero sugar offering initially, and introduced zero sugar variants under “go sugar free” during Apr 2018 (23% of beverage volumes in 1Q19). CCS has however been using natural sweetener stevia to reduce the sugar content in its regular soft drink portfolio. In Apr 2018, CCS entered the dairy market, introducing flavored milk in 190ml Rs.50 tetra packs (with vanilla, chocolate and strawberry flavors) ▪ Ice cream volumes grew +3% YoY during 1Q19, after witnessing a -4% YoY decline in FY18 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 ❑ KFP reported a PAT of Rs.56mn (+34% off a low base) in 1Q19 due to the growth in volumes ❑ Sectoral PAT forecast at Rs.1,762mn for FY19E (comparative figures for FY18 yet to be disclosed, 10% of total PAT). Sector earnings expected to be under pressure due to the volume impact from sugar tax and costs relating to newly opened ice cream manufacturing plant. Sectoral PAT forecast to recover to Rs.2,440mn for FY20E (+38% YoY, 13% of total PAT), Rs.3,045mn for FY21E (+25% YoY) and Rs.3,775mn for FY22E (+24% YoY), largely due to the higher contribution expected from the new ice cream plant, growth from new products launched and turnaround in soft drink volumes. We also anticipate a rebound in local consumer sentiment in FY20E, amid the improving local macro conditions New ice cream ▪ Colombo Ice Company Limited (CICL), the newly constructed frozen plant opened in confectionery plant (built at a cost of ~Rs.4.2bn) commenced operations in Jun June 2018 2018 and CCS is expected to aggressively look at improving network and distribution. The new facility is expected to focus on impulse production, mitigating the need for importation that would improve margins at the business. 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 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 consumer food items

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

Retail Sector 1Q19 PAT declined -50% YoY to Rs.170mn (7% of group PAT), below our expectations due to the weak performance in the retail segment of CCS ❑ Sector contains supermarket business of CCS and John Keells Office Automation (JKOA), distributor for a number of office automation brands – which was previously under IT sector ❑ Earnings from Keells supermarkets were impacted by the erosion in margins despite the rise in revenue, amid higher costs incurred as part of the outlet expansion and rebranding exercise coupled with weaker consumer sentiment Retail expansion ▪ Retail network was expanded by 16 net stores during FY18 bringing the total and rebranding outlets to 80. Further, two new outlets was added during 1Q19. Meanwhile, exercise underway remaining stores are being rebranded with a new identity, under ‘Keells’ branded outlet structure, which incorporates added features such as a Hot Kitchen. The new features are likely launched to increase the frequency of customer visits. According to JKH, 32 stores are currently conforming to the new branding and all remaining stores are expected to be converted by Nov 2018 ▪ Meanwhile, JKH indicated that the average basket values were under pressure due to weak market sentiment coupled with cannibalisation effect of new outlets ❑ According to JKH interims, JKOA earnings were maintained, despite the exchange losses recorded during the period

Outlet distribution of major ❑ Sectoral PAT forecast at Rs.1,229mn for FY19E (comparative figures for FY18 yet supermarket chains to be disclosed, 7% of total PAT) and forecast at Rs.1,410mn for FY20E (+15%

400 YoY, 8% of total PAT) 350 ▪ The ongoing expansion program is expected to impact sector bottom-line in the 300 near term with newer outlets taking few months to break even. Further cost 250 pressure is anticipated from increased depreciation and interest charges. JKH 200 150 management mentioned that 40 more outlets would be added during both 100 FY19E and FY20E, likely doubling the network. We conservatively forecast net 50 additions of 30 outlets each for both FY19E and FY20E 0 Keells Cargills Arpico Laugfs ▪ Meanwhile, main competitor Cargills (Ceylon) (CARG) is also expected to be expanding its network (currently at ~360). In Apr 2018, international retail chain SPAR, opened its first outlet in Sri Lanka, in a JV partnership with local food Keells – Number of Retail Outlets manufacturer Ceylon Biscuits Ltd (CBL) and announced plans to open 20 outlets 90 within five years. Further, local conglomerate Softlogic Holdings (SHL) indicated 80 their plans to enter the sector. Whilst, new entrants would likely find it difficult 70 to enter the supermarkets business amid the high capex requirements, this 60 would increase competition within the sector. Meanwhile, the new retail 50 40 distribution center at a cost of Rs.3.2bn, which would consolidate the 30 distribution of both dry and fresh produce is under construction and expected to 20 be completed during 2H20E 10 0 ▪ Whilst initial challenges remain, modern retail industry would benefit in the FY14 FY15 FY16 FY17 FY18 longer term, amid current low penetration levels (modern retail penetration Source: Respective company reports levels expected to be at ~16% in Sri Lanka) and an anticipated rise in disposable income levels ❑ Consequently, sectoral PAT forecast at Rs.2,037mn for FY21E (+45% YoY) and forecast at Rs.2,920mn for FY22E (+43% YoY)

A CT HOLDINGS GROUP AND CLSA GROUP COMPANY John Keells Holdings

Financial Services Sector Financial Services Sector Reported 1Q19 PAT of Rs.550mn (vs. Rs.235mn in 1Q18; 22% of group PAT), above our PAT (Rs mn) expectations, largely driven by 96% owned Union Assurance (UAL) FY17 FY18 FY19E ❑ Sector comprises of UAL, 30% owned banking associate Nations Trust Bank (NTB) 2,000 and 90% owned stock brokering subsidiary John Keells Stock Brokers (JKSB) 1,500 ❑ The higher earnings for the Insurance business was driven by higher finance income; UAL is yet to release 1Q19/ 2Q2018 results 1,000 ❑ JKH interims mentioned that UAL also benefited from the growth in gross written 500 premiums during the quarter (+13% YoY), further boosting its bottom-line

0 ▪ UAL continues to hold a 22% stake in Fairfirst Insurance, of which UAL sold a 1Q 2Q 3Q 4Q 78% stake to Fairfax Asia on Jan 2015 ▪ The life insurance industry is expected to be 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. However JKH mentioned that UAL will not be liable for taxes for few years due to the accumulated losses that will be carried forward ❑ Meanwhile, 32% owned banking associate Nations Trust Bank (NTB) is expected to have recorded strong earnings; NTB is yet to release 1Q19/ 2Q2018 results ▪ Private credit growth remained strong during the quarter; +15% YoY in May 2018 ▪ 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 ▪ 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.2,919mn for FY19E (-44% YoY off a high base, 15% of total PAT), due to life fund transfers normalising from the levels witnessed in FY18. Meanwhile, FY20E PAT forecast at Rs.3,324mn for FY20E (+14% YoY, 16% of total PAT), driven by growth in both NTB and UAL; Life Insurance Industry FY21E PAT forecast at Rs.3,729mn (+12% YoY) and FY22E PAT forecast at Market Share (%) Rs.4,353mn (+17% YoY) 2016 AIA ▪ NTB is expected to increase its presence in SMEs to whilst also looking to focus 16% 29% Ceylinco more on digitalization to cut costs. UAL’s life segment is expected to be a 20% 17% beneficiary of potential increase in local insurance penetration in the longer 14% 2012 SLIC 29%24% term, although there may be a slowdown in the near term in industry profitability 13%20% UAL with the potential increase in taxes. Sri Lanka’s total industry GWP as a % of 19% Other GDP was 1.2% in 2016, which is relatively low compared to regional peers. Source: IBSL Meanwhile, short term benefits are expected to be minimal with lack of Note: as per last reported data CINS – Ceylinco Insurance, SLIC - Sri Lanka awareness of insurance, especially in rural areas as per the Insurance Board of Insurance Corporation, AIA – subsidiary of AIA Sri Lanka (IBSL). Further opportunities are expected to arise in the life insurance Group Limited, JINS – Janashakthi Insurance space in the medium to long term with possible consolidation in the insurance industry. Meanwhile, contribution from the stock brokering arm JKSB would continue to be relatively immaterial

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

Property Sector 1Q19 Loss after Tax of -Rs.6mn (vs. a PAT of Rs.49mn in 1Q18; 8% of group PAT), below our expectations amid higher costs incurred at 80% owned Rajawella Holdings, a development project in Nuwara-Eliya which includes a golf-course

Pricing for Tri-Zen apartments ❑ Shopping mall in Colombo, , is anticipated to have contributed Rate positively with steady rental income. Crescat currently operates at ~100% Room Range Price (USD type (sqft) (Rs.mn) occupancy. Property sector earnings also include rental income from the K-Zone /sqft) malls, franchise outlets in key suburbs, Moratuwa and Ja-Ela, both of which are One bed 471- 21-27 ~345 expected to be enjoying ~90% occupancy levels room 520 Two bed 716- 30.8-39.2 ~335 ❑ In late 2017, JKH initiated a 891-apartment 50% joint venture residential room 764 development project, “Tri-Zen”, in Union Place, Colombo at an investment of Three 989- bed 43.8-51.8 ~323 Rs.1.8bn, and pre sales have commenced. Construction will commence in 2H19E 1,041 room and would be completed in FY22/23E Source: Tri-Zen ❑ JKH has commenced master plan for an 18-acre suburban site North of Colombo during the quarter (24km from Colombo and 2km from nearest Colombo- JKH : Unused and Under-utilised Land Katunayaka expressway entrance). Further, Vauxhall Land Developments (Pvt) Ltd, Area Owning company (acres) a subsidiary of JKH, purchased land worth Rs.4.4bn in Colombo 2 during 3Q18. This Ahungalla Holiday Resort was added with an existing land plot of 3.6 acres, and 3.7 acres of land owned by 6.5 Ahungalla Finlays Colombo Ltd through a JV agreement signed in March 2018, bringing total Facets (Pvt) Ltd 6.3 land area to 9.4 acres. The group would likely look to further develop property Ahungalla John Keells PLC development projects utilising the land. Development at Rajawella Holdings is also 3.8 Ja-Ela expected, with the refurbishment of the course commencing in Feb 2018 John Keells PLC 0.1 Kirulapone ❑ Sectoral PAT forecast revised down by -13% to Rs.572mn for FY19E (+31% YoY) Nuwara Eliya Holiday and by -11% to Rs.868mn for FY20E (+52% YoY), amid lower income during 1Q19 3.4 Resort coupled with more spread-out earnings expected at “Tri-Zen”, which is expected to Trinco Walk Inn Ltd 14.6 recognize revenue and profits from 2H19E Trincomalee Wirawila Walk Inn Ltd 25.2 ❑ Meanwhile, FY21E earnings expected to be significantly boosted by the profit Wirawila Vauxhall Land recognition from Cinnamon Life properties after the project completion with PAT 9.4 Developments (Pvt) Ltd forecast expected at Rs.6,292mn. Over 80% of revenue and profits at two residential towers at Cinnamon Life are expected to be recognized in FY21. Source: JKH Subsequently, FY22E PAT anticipated to decline to Rs.2,727mn (-57% YoY)

Others Sector 1Q19 PAT of Rs.729mn (-32% YoY; 30% of group PAT); YoY decline due to lower finance income. Meanwhile, John Keells computer services and shared services businsesses, which were previously classified under IT sector were added to the ‘Others’ sector ❑ Net finance income for the sector decreased to Rs.1,427mn (-19% YoY) amid 1Q18 earnings benefiting from exchange gains ❑ Meanwhile, JKH mentioned that plantations services segment was impacted by a decrease in tea prices during the quarter, whilst IT segment results were impacted by lack of earnings from BPO business which was divested in Sep 2017 ❑ Sectoral PAT forecasts broadly maintained at Rs.2,998mn for FY19E Continuous (comparative figures for FY18 yet to be disclosed, 16% of PAT) and forecast at reduction in finance Rs.2,151mn for FY20E (-28% YoY; 11% of group PAT), Rs.1,502mn for FY21E (- income expected 30% YoY) and Rs.748mn for FY22E (-50% YoY). Income largely consists of interest income, which is expected to diminish in the near term as cash will be utilised for the Cinnamon Life project construction ▪ Contribution from plantation services segment and newly added IT businesses are expected to be negligible

A CT HOLDINGS GROUP AND CLSA GROUP COMPANY John Keells Holdings

Integrated Resorts – Cinnamon Life “Cinnamon Life” at an ❑ JKH’s luxury IR, “Cinnamon Life” Project, at an investment of ~US$820mn investment of comprising an 800 room five star+ hotel, convention center, entertainment US$820mn facilities, shopping complex, apartments, luxury condominiums and office space, is proceeding with its construction. The project is located at the former JKH head office premises of ~11 acres. Construction commenced in Mar 2014 and JKH is currently expected to have incurred ~40% of the total project cost with super structure expected to be completed in 2H19E ❑ The project is anticipated to be completed in 2019E and operations would start from 2020 - returns on the project are likely expected to commence from FY21E Project continuing at ❑ The change in the local political landscape in Jan 2015 prevented large-scale gaming the same scale 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 to be significantly lower ❑ 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 Plans to tap into that would allow conversion into any operation, should there be a change in stance MICE market, by the GoSL. JKH would likely tap into the growing MICE market, primarily from primarily from India India. Supply for MICE market is currently limited in Sri Lanka and Cinnamon Life will be a potential beneficiary of the increase of the same. Meanwhile, other hoteliers which have entered and are expecting to enter Colombo are also expected to compete for the MICE market space ❑ As per JKH, 239 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 believed ❑ to be receiving positive interest (four out of ten floors that are up for sale are 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 and on the level of support from and engagement with the GoSL

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

Source: Jones Lang LaSalle Lanka, CT CLSA

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

Group Financial Performance Net cash position at ❑ JKH posted a net cash position of Rs.38.6bn as at 30 Jun 2018 (vs. Rs.45.5bn as at Rs.38.6bn 31 Mar 2018 and Rs.60.8bn as at 30 Jun 2017) ▪ Group gross finance income decreased -15% YoY Rs.1,754mn in 1Q19 – excluding interest income from life policyholders ▪ 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 ❑ Total group capex increased to Rs.2,594mn (+92% YoY) in 1Q19; Retail and at Retail and Consumer Foods sectors were the key beneficiaries accounting for 45% and 34% of Consumer Foods spending respectively sectors ▪ Further capex expected for new supermarket openings, whilst the Leisure sector would incur expenses relating to reconstruction of existing hotel properties

Recurring Quarterly EPS (Rs) Sectoral PAT (Rs mn) FY17 FY18 FY19 1Q18 1Q19 5 2,500 2,000 4 1,500 1,000 3 500

2 0

Tran. Leis. Prop. Foods C. Retail Fin.Serv. Others 1 1Q 2Q 3Q 4Q

Source: JKH Interims

Sectoral Contribution to PAT (%) Annual Capex (Rs bn)

3Q18 Transportation 6 28% 32% Leisure Rs.18.9bn 24% 5 35% Consumer Foods 3Q1710% 4 Retail 7% 7% 10% -3% 3 21% 9% Financial Services 7% Others* 2 * Also includes Property Sector FY13 FY14 FY15 FY16 FY17 FY18

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

Net Cash - RHS Finance Income (Rs mn) - RHS* 35 65 64 2,200

30 48 55 1,700 25 32 45 1,200 20 16

15 35 0 700 1Q17 3Q17 1Q18 3Q18 1Q19 1Q17 3Q17 1Q18 3Q18 1Q19 * Excluding capital gains

A CT HOLDINGS GROUP AND CLSA GROUP COMPANY John Keells Holdings

Outlook & Valuations ❑ JKH’s group NP forecast revised down by -7% to Rs.15,479mn for FY19E (-9% YoY on a recurring basis) and by -6% to Rs.16,627mn for FY20E (+7% YoY), amid continued pressure on earnings expected from Leisure, Consumer Foods and Retail sectors. NP expected to rebound in FY21E to Rs.22,371mn (+35% YoY) amid the profit recognition of Cinnamon Life apartment projects. Subsequently, NP forecast at Rs.22,600mn in FY22E (+1% YoY) ❑ The JKH share underperformed the broader market during last 12 months and three months declining -21% and -17% respectively (vs. ASI’s decrease of -7% and -6% respectively) – JKH share was removed from MSCI Frontier Markets 100 in June 2018 Index as the company failed to meet the minimum liquidity requirement ❑ The JKH share trades at forward PER multiples of 12.2X for FY19E, 11.4X for FY20E, 8.4X for both FY21E and FY22E Estimated break- ❑ Based on our estimated break up Sum of The Parts (SOTP) valuation of Rs.167, the up NAV of Rs.167 JKH share is currently trading at a 23% discount ❑ Despite the decrease in earnings, we believe that the extent of the recent share price decline seems unwarranted. Whilst, near term earnings weakness may remain due to expansion and construction related expenses in key sectors, we believe the current share price provides a decent entry point to value oriented investors. Further, JKH earnings expected to be boosted post the completion of ‘Cinnamon Life’ project in FY21E. JKH may also continue to be favored by medium to long term investors, amid its unrivalled share liquidity, and potential for upside in core growth oriented sectors over the longer term ❑ A potential further 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: Sum-of-the-parts (SOTP) Valuation JKH Share Price – Premium / Sector Fair Value (Rs mn) Main Valuation Basis (Discount) to SOTP Date % Transportation 33,255 12x FY19E NP 29 May 2015 +1 Leisure 46,187 12x FY19E NP* Combined Consumer Foods & MV for KFP, DCF for CCS, 10x FY19E NP for 52,926 30 Jul 2015 +14 Retail JKOA 05 Nov 2015 +3 Property 15,203 DCF at a cost of equity of 18%* 29 Jan 2016 -7 Finance 21,549 MV for stakes in UAL and NTB 27 May 2016 -9 Others (excluding interest income) 198 5x FY19E NP Unutilised Land 1,663 JKH FY18 Annual Report 29 Jul 2016 -6 Net cash position 49,202 Company net cash as at 31 Mar 2018 04 Nov 2016 -5 IR Project 11,820 DCF with cost of capital of 18% 27 Jan 2017 -15 Total Value 232,004 27 May 2017 0 No of Shares (mn) 1,388 28 July 2017 +3 Value per share (Rs) 167 02 Nov 2018 -2 * Excluding Cinnamon Life Source: CT CLSA 02 Feb 2018 +4 28 May 2018 -5 01 Aug 2018 -23

Note: Based on valuations on report release dates Source: CT CLSA

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange National Development Bank

Outlook & Valuations..

JKH: Recurring Sectoral PAT (Rs mn) Var FY18 FY19E Var % YoY FY20E Var % YoY FY21E Var % YoY FY22E Var % YoY % YoY Transportation 3,084 3.5 3,848 24.8 3,977 3.3 4,164 4.7 4,360 4.7 Leisure 3,471 -30.7 3,907 12.5 4,417 13.0 3,775 -14.5 6,286 66.5 Consumer Foods N/A N/A 1,762 N/A 2,440 38.4 3,045 24.8 3,775 24.0 Retail N/A N/A 1,229 N/A 1,410 14.7 2,037 44.5 2,920 43.3 Financial Services 5,187 >+100.0 2,919 -43.7 3,324 13.9 3,729 12.2 4,353 16.7 Property 438 -88.5 572 30.6 868 51.6 6,292 >+100.0 2,727 -56.7 Others N/A N/A 2,998 N/A 2,151 -28.2 1,502 -30.2 748 -50.2 Group PAT 18,941 7.4 17,235 -9.0 18,587 7.8 24,544 32.0 25,168 2.5 Minority Interest -1,857 0.8 -1,756 -5.4 -1,960 11.6 -2,172 10.8 -2,568 18.2 Group Net Profit* 17,084 8.2 15,479 -9.4 16,627 7.4 22,371 34.5 22,600 1.0

Peer Conglomerate Analysis – FY19E Relative Valuations JKH SPEN MELS HHL MPS (Rs) 136.1 48.6 48.5 99.3 Earnings per Share (Rs) 11.2 9.5 6.7 8.0 EPS Growth (%) -9.4 15.3 17.7 70.7 Price / Earnings Ratio (X) 12.2 5.1 7.2 12.4 Price / Earnings Growth (X) N/A 0.3 0.4 0.2 Return on Equity (%) 7.6 8.3 9.6 16.3 Key Sector Contr. to Group PAT (%) 22.7 44.2 66.9 53.0 3M Avg Daily Turnover (US$) 929,758 57,283 123,523 160,021

SPEN: Aitken Spence, MELS: Melstacorp Limited, HHL: Hemas Holdings ~Key Sector Contribution to Group PBT

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

23

19

15

11 6-Jan-2015 6-Mar-2016 6-May-2017 6-Jul-2018

A CT HOLDINGS GROUP AND CLSA GROUP COMPANY John Keells Holdings

Major Shareholder Movements Major Shareholder Movements as at 30 June 2018

No. Name No. of Shares % Change (Shares)* Comment

1. Mr S E Captain 142,386,573 10.3 1,709,678 Part of Malaysia’s Khazanah 2. Broga Hill Investment Ltd 141,854,717 10.2 - National Bhd 3. Paints & General Industries Ltd 87,439,613 6.3 3,840,862 Related Party of Mr. S E Captain

4. Schroder International Selection Fund 86,515,872 6.2 919,756 5. Melstacorp PLC 48,519,886 3.5 - 6. HWIC Asia Fund 36,000,982 2.6 - 7. Northen Trust Co S/A Edgbaston Asian Equity 27,756,598 2.0 2,944,063

8. Aberdeen Global Asia Pacific Equity Fund 26,257,908 1.9 -

9. Aberdeen Global-Asian Smaller Companies 23,432,162 1.7 -

10. Aberdeen Institutional Commingled Funds 20,599,011 1.5 -5,984,802 11. Norges Bank Account 20,070,675 1.4 - New Entrant to Top 20 12. Mr K Balendra 20,006,476 1.4 400,000 13. Employees Trust Fund 19,475,463 1.4 -884,248 GoSL Related Party 14. BBH Luxfidelity Fund-Pacific 18,911,322 1.4 - 15. First State Investments ICVC 15,486,461 1.1 -

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

17. Aberdeen Global - Emerging Markets Smaller 14,529,881 1.0 -6,510,700 18. Deutsche Bank AG-London 13,651,280 1.0 -1,861,291

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

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

Sub Total 804,174,359 57.8 -

*Change since 31 March 2018; Exited top 20 (Name & Number of shares): T Rowe New Asia Fund - 12,831,617 ^ Also a shareholder of associate companies NTB and Union Assurance General

CT CLSA SECURITIES (PVT) LIMITED | A Member of the Colombo Stock Exchange Contact Information

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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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A CT HOLDINGS GROUP AND CLSA GROUP COMPANY