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