Equity Analysis /
Sri Lanka

John Keells Holdings: Looking for key segment recovery in mid-FY 20

    Asia Securities
    21 February 2019
    Published by

    JKH reported a Q3 FY 19 recurring net profit of ~LKR 4.8bn (up 6.9% yoy) with revenues up 17.1% yoy and EBIT margins of 4.8% (-1.8pp yoy). Overall results were lackluster again during the quarter, with all of the segments, apart from transportation, recording an earnings decline. However, we see a recovery in the key segments only towards mid-FY 20e. The three main segments account for ~80.0% of group EBIT. With FY 19e coming to an end, we roll forward our valuations to FY 20e. With lower-than-expected results, we revise our SOTP valuation-based TP to LKR160/sh (previously LKR166). Including a DPS of LKR6.00, we expect a TSR of +6.4%. Maintain Hold. 

    Low beverage volumes and higher opex at KFP hurt Consumer earnings. Revenues for the quarter were up 7.5% yoy while operating profits were down ~16.0% yoy. Profitability was down mainly due to a 23.0% beverage volume decline at CCS, new plant expenses and higher opex at KFP. Despite a key selling season, spending on non-essentials remained low. 

    Higher new store expenses and low  same store sales drag down retail earnings. Segment revenues were up 15.9% yoy, driven by growth in new store sales at Keells, while Office Automation results remained subdued due to low demand. However, due to higher store expansion costs and low same store sales, EBIT was down 42.0% yoy, with EBIT margins down 2.1pp yoy to 2.2%. 

    Travel warnings hurt City; refurbishments to impact resorts till mid-FY 20e. Leisure revenues were up 2.1% yoy while reporting an operating profit of LKR 651mn, down 23.0% yoy. This was mainly driven by lower profitability at the City hotels due to low occupancy from travel warnings in October, and due to partial closure of two resorts in Maldives for refurbishment and reconstruction. 

    Transportation earnings boosted by SAGT; bunkering hurt by lower oil prices. Segment revenues were up 56.2% yoy while EBIT was down 13.8% yoy. While bunkering volume growth was up 9.0%, margins declined due to lower oil prices. Segment earnings were boosted by performance of SAGT where volumes were up 8.5% yoy with the terminal operating at near 85.0% capacity levels. 

    Projects at property on track; Tri-Zen construction begins. Segment revenues were up 10.2% yoy for the quarter while EBIT was down 26.2% yoy. Construction of Cinnamon Life progresses steadily while pre-sales at Tri-Zen is now at 16.0% of available of units. Tri-Zen construction began in February while JKH now expects to recognise revenues from the project on a quarterly basis from June 2019 onwards. 

    We revise our TP to LKR160/sh and maintain our Hold rating. With FY 19e coming to an end, we roll forward our valuations to FY 20e. With lower-than-expected results, we revise our SOTP valuation-based TP to LKR160/sh (previously LKR166/sh). Including a forecast DPS of LKR 6.00, we expect a TSR of +6.4%. Maintain Hold. Changes to the revenue recognition method at Tri-Zen and any positive catalyst to consumer spending and sugar taxes through the 2019 budget, will result in changes to our TP and rating.