Equity Analysis /
Sri Lanka

John Keells Holdings: Raise TP on higher resort earnings forecasts

    Asia Securities
    23 July 2019
    Published byAsia Securities

    JKH estimates revised on better than expected recovery at Resorts

    While we still expect KHL earnings to remain pressured over the first six months of FY20E, with 1) Sri Lanka’s tourism recovery expected to accelerate from 4Q FY20E onwards, 2) Maldives airport expansion coming onboard, and 3) entry of refurbished properties in 3Q FY20E, KHL is positioned for a strong bounceback in 4Q FY20E. Also, we expect that reduction in airfares to Sri Lanka aided by cut-backs to jet fuel and handling charges in Colombo, should also drive further momentum in bookings. As such, with revisions to our Resort earnings, we also make revisions to our JKH estimates. As a result, our SOTP valuation-based target price goes to LKR 145/share (previously LKR 140/share). Including a forecast DPS of LKR 6.00, we expect a TSR of +0.7%. HOLD.

    Deep discounting, airfare cuts to see faster recovery in SL bookings

    Management confirms that booking momentum for November and beyond is recovering faster than expected driven by deep discounts and gradual restoration of airline capacity. Momentum should further improve once a reduction in airfares supported by cutbacks to jet fuel and handling charges in Colombo. With this, we expect a pick up in bargain hunting group travellers, thereby partially offsetting the impact from cancelled bookings post 21/4. As such, while maintaining an FY20E ARR decline of 20.4% YoY, we revise our SL occupancy to ~60.0% (prev. ~52.0%) although still below that of FY19 (78.0%).

    KHL primed to leverage on the growth phase with refurbishments

    FY20E will see KHL return to its full strength in operations, last seen in FY17, as 159 rooms in Sri Lanka and 100 rooms in Maldives re-enter operations in December 2019 after refurbishments. On top of continued improvement in MV occupancies (following airport expansion), Sri Lanka recovery post FY21E, and the depreciation of the LKR, KHL is well-positioned to report robust revenue growth in FY21E and beyond. Not factoring in the new property in Maldives (as details are yet to be disclosed), we still expect KHL to report strong earnings. This is in comparison to AHUN who will be entering a period of extensive refurbishments FY20E/FY21E.

    Increased exposure in MV to see stronger pickup in margins

    With the eventual addition of new and refurbished properties in MV, at higher ARRs, KHL should begin to benefit from a favourable shift in revenue mix. As is, KHL saw a 2.0ppt YoY improvement in EBIT margins in FY19 amidst heavy online travel agency commissions. Not factoring in the new property and assuming ongoing OTA commissions, we still forecast EBIT margins to reach pre-attack levels by FY21E.

    We raise our TP to LKR 145/share and maintain our HOLD rating

    JKH has dropped 6.0% YTD and flat YoY and is trading at 17.9x our FY20E earnings. KHL operations account for ~48.0% of Leisure sector revenues and operating profits. As a result of the revisions to our JKH estimates, our SOTP valuation-based target price goes to LKR 145/share (previously LKR 140/share). Including a forecast DPS of LKR 6.00, we expect a TSR of +0.7% and maintain our HOLD rating.