Equity Analysis /
Sri Lanka

John Keells Holdings: FY20E growth curtailed; yet LT investments intact

    Asia Securities
    10 June 2019
    Published by

    JKH reported a 4Q FY19 recurring net profit of ~LKR 4.0bn (-17.7% YoY) with revenues up 7.8% YoY and EBIT margins of 7.7% (-4.8pp YoY). Overall results were lacklustre again during the quarter with all of the segments, apart from Transportation and Consumer, recording an earnings decline. Looking forward, we expect the Leisure sector, and to some extent the Consumer and Retail segments to have a negative impact on FY20E earnings of the Group. Including our revisions to these segments, our SOTP valuation-based target price falls LKR 140/share (previously LKR 160/share). Including a forecast DPS of LKR 6.00, we expect a TSR of +5.3%. We maintain our HOLD recommendation.

    City hotels to be hard hit in FY20E; Resorts to be held up by the Maldives. Segment revenues were down 5.9% YoY while operating profits were down 12.5% YoY with margins down 1.5pp to 20.7%, due to low occupancies at City hotels and refurbishment closures at Resorts. Looking forward, Leisure will be the most-hard hit over the next 18 months due to events in April, with the segment accounting for 28.0% of Group EBIT. City hotels will be the worst-off with occupancies running below 30.0% in FY20E. At Resorts we believe the impact will be less and will see a faster recovery with additional capacity coming through from the Maldives. Should the level 3 travel warnings be lifted over the next 6 months, we believe the recovery will take ~15-18 months.

    Cautious spending to delay Consumer Foods and Retail earnings recovery. The Consumer segment was on its way to recovery post-sugar tax reduction and some recovery in consumer spending. Looking forward, the key concern for the two segments is the consumer spending slowdown post the April events. While there was panic buying post-attacks, reordering levels, especially from the general trade, has slowed down. At Keells stores, we expect spending to be mostly on essential foods with prolonged replenishment cycles on non-essential FMCG products. We estimate income levels of 38.0% of the working population across Leisure, Consumer, Agri and Transportation sectors to be pressured leading to a cautious consumer environment in FY20E.

    Tri-Zen construction begins; Cinnamon Life opening dates pushed back.‘Tri-Zen’ construction began in February, with pre-sales at ~22.0% as of end March 2019, which is around 200 units. At Cinnamon Life, completion dates have now been pushed back taking into account staggered opening of some elements of the project. Hence, instead of earlier plans to complete the project by mid-to-late CY2020, now completion dates of the residential and office towers will be March 2020 (end FY20E), whilst operations of the hotel and retail mall are expected to commence in March 2021 (end FY21E).

    We revise our TP to LKR 140/share and maintain our HOLD rating. With revisions mainly to the Leisure segment, and to some extent the Consumer and Retail businesses, our SOTP valuation-based target price goes to LKR 140/share (previously LKR 160/share). Including a forecast DPS of LKR 6.00, we expect a TSR of +5.3%. HOLD. A faster than expected recovery in tourist arrivals and local consumer spending would present an upside risk to our estimates.