JOHN KEELLS HOLDINGS (JKH.N : LKR179.0; JKH.W0023 : LKR35.70)------Softlogic Equity Research

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Net earnings rose 31.1% YoY to c.LKR3.5 bn in 2QFY16 which is broadly in line with our forecasts. The profitability was backed by the healthy performance in Consumer Foods & retail (+111.9% YoY) and Transportation (+48.9% YoY) sectors. Moreover 2QFY16 revenue grew 5.4% YoY to LKR22.7 bn driven by Consumer Foods & retail (+23.8% YoY), Transportation (+14.6%), Information Technology (+12.5% YoY) and Leisure (+4.3% YoY) sectors.

Consumer, Leisure and Transportation sectors have been the largest contributors to the group’s net earnings whilst the Consumer foods & retail sector is continuing its growth trajectory. Thus acting as the main growth driver in the group given the expected rise in disposable incomes. Meanwhile the “Waterfront Project” in the heart of Colombo, which commenced construction and due to be completed within 4-5 years (phase I by FY19) would further strengthen JKH’s presence as a leading property developer. Ceylon Cold Stores (CCS:LKR397.0), John Keells PLC (JKL:LKR179.5), John Keells Properties and Waterfront Properties at a total estimated investment of USD820 mn. JKH together with CCS, JKL and JKP would hold 96% ownership in the project, which would add 800 hotel rooms, residential, commercial, convention and entertainment facilities. Transportation segment growth would be challenged by margin pressure on the bunkering business and SAGT losing business volumes to the new CICT terminal. The local resorts segment would face stiff competition in the future from informal mid to lower grade establishments (especially in the southern coast) through online bookings whilst city properties would be challenged due to increased room inventory. Nevertheless, we believe the Maldivian resorts would continue to strengthen JKH’s leisure segment.

The interim budget of the new government was presented to parliament on 29th January 2015 and as a revenue collection measure, all companies who earned profits in excess of LKR2.0 bn in 2013/14 were ordered to make a one off tax payment amounting to 25% of their FY14 earnings. Therefore according to the latest legislation on 30th of October 2015, JKH would see c.LKR1.34 bn been paid in FY16E as an additional one off tax payment in three equal installments. Also during the latter weeks of October 2015, the Sri Lankan parliament passed six bills including the one off special levy of LKR1.0 bn on existing casino operators, where we believe it implied a green light for JKH’s waterfront project to operate a casino inside their premises by allowing an existing casino operator to function. Thus, it would positively impact the project’s earnings streams in the future. However, on a recurring basis, we maintain our forecasts for FY16E with net profits at LKR13,581.0 mn (+11.3% YoY) taking into account the lagging Leisure sector with marginally growing City hotel arm, divestment of the General insurance sub-segment and the absence of revenues from “OnThree20”. Meanwhile we forecast FY17E earnings at LKR15,911.1 mn (up 17.2% YoY on a recurrent basis). Further considered for FY16/7E is the possible utilization of the rights issue cash reserves which would lead to lower interest income and the current low interest rate regime. Given the recent slide in the share, the stock currently trades on a valuation plane of 15.7x estimated FY16E recurrent net profit and 13.9x forecast FY17E recurrent net profit and derives PBV multiples of 1.4x and 1.2x for FY16E and FY17E. Therefore given the 7.5% upside potential on the stock to the SOTP value of LKR192.5, we maintain our recommendation on the stock as a Trading BUY.

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