Earnings Report /
Sri Lanka

John Keells Holdings: Earnings upside in sight; Leisure troubles yet to settle

    Asia Securities
    5 February 2020
    Published byAsia Securities

    We maintain our sum-of-the-parts valuation based target price at LKR 180/share. Including a forecast DPS of LKR 6.00, we expect a total return of +14.9%. HOLD. JKH reported a 3Q FY20 recurring net profit to equity holders of ~LKR 2.4bn (-50.1% YoY) with revenues up 2.5% YoY and EBIT margins up 1.8pp YoY to 6.6%. Earnings from Transportation, Consumer and Retail drove EBIT while higher insurance contract liabilities, lower interest income, and higher interest expenses drove overall earnings down. We expect 4Q to be led by similar pressures while looking forward at FY21E, we see earnings recovery coming through mainly from Consumer, Retail and Property. We remain cautious of the recovery at Leisure from the spread of the coronavirus. As of now we believe impact is limited to 4Q FY20E and 1Q FY21E. Apart from this, should the proposed corporate tax cuts pass through, we expect a LKR 0.35-0.40/share boost to earnings in FY21E.

    Tax revisions and spending recovery drives Consumer and Retail earnings

    CCS’s Manufacturing segment was aided by revisions to VAT and NBT and lower sugar taxes while volumes were up 4.0% YoY. At Keells stores, topline was driven by new store sales and strong growth in footfall. Same-store sales were up 5.4%, the strongest since 3Q FY18. KFP earnings on the other hand, was down YoY due to higher operating and interest expenses as Ezy Rice continues to ramp up. Looking forward, with price reductions post VAT and NBT revisions, better weather conditions, and salary revisions coming into effect, will result in further boost to spending. We remain cautious however of the impact on basket values from high food inflation during the quarter.

    Maldives aids Leisure in 3Q; segment recovery prolonged to mid-FY21E

    Leisure recorded a net loss as expected. Sri Lankan resorts and AHPL took steep discounts in 3Q to improve occupancies, while Maldives saw ARRs improve amidst refurbished properties coming onboard with higher ARRs. With the recent threat of the virus outbreak, we expect an impact on both AHPL and KHL occupancies with Maldives the worst hit. That said, we expect the spillover impact from the virus on FY21E earnings to be largely ARR driven (on discounts) but for occupancies to return to normal by 2Q FY21E.

    Recovery in Property in FY21E as Tri-Zen and Life earnings come through

    Property segment recorded a net profit decline YoY due to low rentals from Crescat and renovations at the golf course, while revenue recognition from Tri-Zen was not sufficient to offset this. Going into FY21E, JKH will begin to recognize revenues from the commercial space sold at Life in early 1Q FY21E and Residential units towards later in the quarter. In addition, we also expect Tri-Zen’s contribution to ramp up over the next few quarters.

    We maintain our LKR 180/share target price and HOLD rating

    Including changes to our estimates, we maintain our sum-of-the-parts valuation-based target price of LKR 180/share. Including a forecast DPS of LKR 6.00, we expect a total return of +14.9%. HOLD. Should the proposed corporate tax cuts pass through, we expect a LKR 0.35-0.40/share boost to earnings in FY21E. However, these estimates are not included as of now.