We value the stock at LKR152/share (previously LKR145/share) and maintain our Hold recommendation. Including a forecast DPS of LKR6.00, we expect a TSR of +7.5%. JKH reported a Q1 FY 20 recurring net profit to equity holders of cLKR994mn (-57.4% yoy) with revenues up 5.2%yoy and EBIT margins of 1.4% (-1.5ppts yoy). The leisure segment reported an earnings loss as expected, while consumer foods and retail showed strong growth in demand. Looking ahead, we expect the leisure sector to recover faster than expected, led by resorts while we expect consumer and retail recovery to continue, albeit slower than in Q1.
Faster-than-expected leisure sector recovery to come from resorts
As expected, the segment recorded a net earnings loss of LKR1.0bn. Looking ahead, December 2019 will see Maldives return to full operations with refurbishments securing at least a 10.0% yoy increase in ARRs. This will result in a robust margin expansion, sufficient to offset both Sri Lanka’s short-term weakness and SLFRS 16 impact from Q4 FY 20 onwards. City hotels will continue to remain under pressure with the upcoming election cycle that will discourage city stays, and higher inventory expected in the market.
Consumer and retail show stronger-than-expected demand growth
CCS’s Manufacturing segment saw double-digit growth in volumes driven by at-home consumption as consumers lowered dining out during Q1 amid security concerns, while schools were also closed for nearly half the quarter. At Keells, the average basket value (ABV) was up for the first time since Q3 FY 18. We also believe Keells’ exposure concentrated on the Western Province also helped the retail stores benefit from additional spending. While we expect ABV growth to remain positive for the remainder of FY 20 and the manufacturing segment volume growth to be in the (at least) low-to-mid teen levels – a slower pace compared with Q1 FY 20, as the specific circumstances that drove high growth in Q1 are not present in Q2.
Property earnings hurt by renovations at Rajawella and slowdown at Crescat
The property segment recorded a net earnings loss amid renovations carried out at the Rajawella Golf Course while the Crescat mall operations were impacted by Easter Sunday attacks, as consumers kept away from public places due to security concerns. The fully renovated golf course is expected to be operational by Q4 FY 20, and we believe segment earnings will be impacted for the remainder of FY 20. At Tri-Zen, piling was completed in June 2019, while Cinnamon Life completed topping-off of all six buildings, including the hotel.
We revise our TP to LKR 152/share and maintain our Hold rating
With better-than-expected earnings in consumer and leisure for FY 20, our SOTP valuation-based target price goes to LKR 152/share (previously LKR 145/share). Including a forecast DPS of LKR 6.00, we expect a TSR of +7.5%. We reiterate Hold. The approval of a moratorium for loans and interest payments in the leisure segment, and changes to revenue recognition method in the Tri-Zen, will likely result in revisiting our estimates.