With FY 20e earnings subdued due to losses in leisure, we value JKH on our FY 21e earnings, which we believe represents normalised earnings of the group. We maintain our sum-of-the-parts valuation based target price of LKR 175/share. Including a forecast DPS of LKR 6.00, we expect a total shareholder return of +17.9%. Buy.
JKH reported a Q2 FY 20 recurring net profit to equity holders of cLKR 2.3bn (-37.8% yoy) with revenues up 5.3% yoy and EBIT margins flat yoy at 3.7%. On segments, consumer, retail, property and financial Services reported an earnings growth, offset by leisure, transportation and other. Looking forward at FY 21e, we see earnings recovery coming through mainly from consumer, retail and property. At leisure, recovery will be led mainly by Maldivian Resorts.
Adverse weather impacts consumer; new store sales and footfall aid retail
CCS’s manufacturing segment was affected by adverse weather which offset the double-digit volume growth in July and August. As a result, volumes for the quarter in both beverages and frozen confectionary were up only 1.0-2.0% yoy. At Keells stores, topline was driven by new store sales and strong growth in footfall. Same-store sales were up 5.1%, driven by a 5.7% growth in traffic while basket values were down 0.6%, as expected. Looking forward, we expect strong earnings growth in both key businesses as it heads into a key selling season. However, we remain somewhat cautious of the impact on basket values from high food inflation in October and to some extent in November.
Leisure segment recovery to come through resorts
As expected, the segment recorded a net earnings loss, driven by losses at both city hotels and resorts. While SL resorts were hurt by lower occupancies, Maldivian resorts were affected by refurbishments. At city hotels, occupancies remained weak despite deep discounting. Looking forward, we expect resorts, especially in Maldives to aid in segment recovery, as properties come out of refurbishments and contribute to earnings. While city hotels will see some improvement in FY 21e, with Cinnamon Life coming into operation in FY 22e, we expect management to focus all efforts to draw occupancies to Life whilst downgrading Grand and Lakeside to three-star category pricing by FY 22e. As such, we expect AHPL profitability to be pressured from FY 22e onwards.
Earnings from Tri-Zen improve property earnings during the quarter
the property segment recorded a net profit compared to a loss in the previous year. While topline and operating profits were impacted by renovations carried out at the Rajawella Golf Course and low earnings from the Crescat mall, with JKH beginning to account for earnings from Tri-Zen (at associate level), led to the earnings improvement. We expect Tri-Zen’s contribution to ramp up over the next few quarters. In addition, we note that Cinnamon Life earnings will also enter the books from 1Q FY 21e onwards.
We maintain our LKR 175/share target price and Buy rating
Including changes to our estimates, we maintain our sum-of-the-parts valuation-based target price of LKR 175/share. Including a forecast DPS of LKR 6.00, we expect a total shareholder return of +17.9%. Buy.