JKH ADD

11 July 2013

4QFY13 result review

Institutional Equities
Result update
CMP 12-mth TP (LKR) Market cap (USD m) Bloomberg Sector LKR241.00 251 (4.1%) 1,607 JKH SL Diversified Stock performance
Shares ('000) 100,000 80,000 60,000 40,000 20,000 0

JKH reports in line results

John Keells Holdings (JKH) reported 4QFY13 headline earnings of LKR3.1b, up ~5% YoY. JKHs 4QFY13 revenue was up 2.3% YoY to LKR23.3b, with top-line growth across most segments except transportation which was hit by declining volumes in 4QFY13. The property and financial services segments contributed to 4QFY13 bottom-line growth while leisure earnings remained largely flat. JKHs FY13 headline PAT was ~LKR9.9b broadly in line with our estimate of ~LKR9.7b. Both the leisure and property segment contributed significantly to bottom line growth in FY13. JKHs FY13 Ebitda margins expanded ~140bps YoY, largely due to margin erosion in the transportation and retail segments. Headline FY13 EPS came in at LKR11.7 (cf. our estimate of LKR11.4). ADD Group FY13 earnings bolstered by leisure and property segments: JKHs leisure segment reported PAT of ~LKR2b, up 10.4% YoY driven largely by the City and Maldivian hotel segments. JKHs City hotels occupancy level hovered at ~60-65% with ARR in the ~USD135-145 range (up from ~USD120-130 in FY12). We expect the 2013 commonwealth summit to boost JKHs city hotels performance. Occupancy at the Maldivian hotel segment was ~90-95% with ARRs in the USD300310 range (up from ~USD280-290 in FY12). JKHs property segment reported higher growth due to increased revenue recognition from OnThree20 project. The completion of a mega mall located in the outskirts of Colombo as well as the newly launched 7 th Sense apartment projects should contribute to segment earning over the FY14-15ii period. Retail segments performance should normalise in FY14-15ii: We expect Keells Super, JKHs supermarket operation to normalise by FY1415ii after undergoing a strategic revamp in FY13. Ebitda margins eroded ~1pps YoY on the back of non recurring reorganization costs and one off impact of non recoverable VAT in 4QFY13. We expect margins to improve to ~7-9% in FY14-15ii (cf. ~4% seen in FY13ii). Valuation: We retain our SOTP based 12-month target price of LKR251, given the in line performance and secular growth outlook. Nevertheless, the scale and scope of JKHs proposed mega city centre project should be a trigger for valuation re-rating. We maintain ADD.
Abdul Hafeel | abdul.hafeel@iiflcap.com ( +94 112 147121

Price performance (%)

1M 3M 1Y

JKH Rel. to CSEALL

4.5 1.3

11.9 6.1

35.1 32.3

Shareholding pattern (%) as at 31 Mar 12 FII DII Others 52Wk High/Low (LKR) Shares o/s (m) Daily volume (US$ m) Free float (%) Financial Summary Y/e 31 Mar/(LKR m) Revenue (LKR m) YoY (%) EBITDA (LKR m) EBITDA margin (%) PAT - Reported (LKR m) PAT - Recurring (LKR m) EPS - Recurring (LKR m) PER (x) PBV (x) EV/EBITDA (x) ROE (%) Core ROE (%) 40 15 45 298/177 858 1.37 80

16.0(LHS) Volume 10.3 Price (RHS) 8.0 65.7

(LKR) 400 300 200 100 0

Dec-09

Jun-09

Aug-10

May-12

Oct-08

Oct-11

FY12A 76,700 26.8 9,450 12.3 9,775 9,901 11.6 20.7 2.8 21.9 15.0 15.1

*FY13 85,557 11.5 10,319 12.1 12,201 9,956 11.7 20.6 2.3 20.0 15.2 12.4

FY14ii 95,970 12.2 11,668 12.2 12,642 12,642 14.9 16.2 2.0 17.7 13.3 13.3

FY15ii 105,243 9.7 13,291 12.6 13,720 13,720 16.1 14.9 1.8 15.6 13.0 13.0

Mar-11

Nov-12

FY16ii 108,268 2.9 13,608 12.6 15,724 15,724 18.5 13.0 1.6 15.2 13.4 13.4

Source: Source: Company, IIFL Research. Prices as of close of business on 9 July 2013.* IFRS/LKAS

Jul-13

Institutional Equities

John Keells Holdings - Add Figure 3: Bunker prices have moderated in FY13 in line with stable oil prices
2013

Figure 1: Sri Lanka tourist arrivals are expected to increase to ~2.5b by 2015
2007 2008 2009 2010 2011 2012

120,000

(USD/MT) 1200 1000

IFO380

IFO180

MGO

100,000 80,000 60,000 40,000

20,000

800
600

400 200
1Q 2Q 3Q 4Q 1Q 4Q 1Q 2Q 3Q 4Q
3Q

FY11

FY12

FY13

FY14

Jan

Feb Mar Apr May Jun

Jul

Aug Sep

Oct Nov Dec

Source: Bunker Index, IIFL Research

Source: SLTDA, IIFL Research

Figure 2: Maldives tourism arrivals are expected to grow over 10-12% over 2011-16
2007 2008 2009 2010 2011

Figure 4: SAGT throughput has dipped in FY13 on lower imports and soft global growth
TEUs (000's) 520000 500000
480000 460000

100,000 90,000 80,000 70,000

60,000

50,000 40,000 30,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

440000
1Q 2Q 3Q 4Q 1Q 2Q 4Q 1Q 2Q 4Q
4Q 3Q

420000

FY10

FY11

FY12

FY13

Source: Maldives Ministry of Tourism, IIFL Research

Source: CASA, IIFL Research

1Q

2Q

3Q

abdul.hafeel@iiflcap.com

Institutional Equities

John Keells Holdings - Add Property development should be a sweet spot Currently ~70-80% of the On Three 20 project has been pre-sold and the project is expected to be completed by 2015. JKH has also launched construction of the 7th Sense, a 65 room luxury serviced apartment complex. We also expect rental income from the mall complex in Ja-Ela, located in the outskirts of Colombo to contribute to segment bottomline. In our view, a substantial portion of JKHs value lies in its balance sheet and upcoming property development projects should go a long way towards un-locking this value. Mega development project - a game changer JKHs proposed mega integrated development on a ~10 acre site located in the heart of the commercial district of Colombo (at Glennie Street) should be a game changer. With an estimated investment of ~USD600-700m, this project is slated to include two city hotels, two apartment towers, a shopping mall and a convention centre. We have applied a 3x multiple on the land value (USD12.5m/acre) of the adjacent property paid by Shangri La Hotels in 2011 in valuing this site as this proposed project is still in the concept stage. We feel that a high multiple is justified given that the proposed site lies in the commercial district of Colombo, with several key real estate development projects coming up in the surrounding area. Transportation segment reported modest growth JKHs port management unit, South Asia Gateway Terminal (SAGT) saw throughput drop (~11% YoY) in FY13, due to a combination of reduction in domestic imports as well as sluggish global growth. Nevertheless pretax earnings from SAGT were up ~9% YoY in FY13 on higher prices. We also expect SAGTs cargo mix of trans-shipment vs. domestic cargo (80/20) to remain intact. We estimate that JKHs bunkering unit, LMS reported topline growth of ~6% YoY in FY13 with margins hovering in ~6-7% range. Bottom line benefit from softening LKR JKH has a substantial exposure to FX denominated assets and revenue streams. Its Maldivian leisure operations are USD denominated as are its marine bunkering and port operations at the Colombo ports. As such JKH stands to benefit from LKR depreciation (both translation and transaction wise). 3

City hotels prop up leisure segment growth JKHs city hotels operate under Cinnamon Grand (CG) and Cinnamon Lakeside (CLS) brands. CLS reported PBT up ~51% YoY to LKR894.3m while CG reported PBT up ~35% YoY to LKR1.4b. CLS occupancy level was ~60% in FY13 (cf. ~55% in FY13) with ARR of ~USD135 (cf. ~USD130 in FY12); Ebitda margins improved ~3pps YoY to 36% in FY13. CGs FY13 occupancy level was ~72% (cf. ~70% in FY12) with ARR of ~USD145 (cf. ~USD115 in FY12). Ebitda margins improved ~2pps YoY to ~44% in FY13. We expect JKHs city hotels to record sustained growth in 2H2014ii especially with the Commonwealth summit planned to be held in Sri Lanka in November 2013. Weak occupancy has been a margin drag for Sri Lankan resorts; Maldivian resort margins cushioned by healthy occupancy levels Ebitda margin of JKHs resort hotels which operate under Keells Hotels (KHL) eroded ~1.2pps YoY to 33.9% dragged down by lower occupancy at its Sri Lankan operations. Sri Lankan resort hotel revenue increased 34.3% YoY as drop in occupancy (60% in FY13 cf. 71% in FY12) were compensated by higher ARRs; Ebitda margins eroded ~2.4pps YoY to 25.8%. We expect JKHs Sri Lankan resorts to show marginal growth, given unsettled economic climate in Europe. We expect ARRs to remain largely flat in FY14ii with occupancy levels to hover at ~65-70%. Maldivian hotel revenue was up ~22% YoY on higher occupancy and ARRs. Ebitda margins increased marginally (~12bps YoY) to 39.7%. We expect Maldives segment occupancy to hover at ~90% with ARRs of ~USD330 in FY14-15ii. Supermarket segment revamped; growth expected in FY14-15ii Consumer Foods and Retail segment revenue was up 10.5% YoY to ~LKR24.3b with segment Ebitda margins eroding ~3pps YoY to 4.8%. This was largely due to margin contraction in JKHs supermarket operation, where Ebitda margins eroded ~1pps YoY on the back of non recurring reorganization costs and one-off impact of non recoverable VAT in 4QFY13. JKH incurred reorganization costs of ~LKR100m in FY13 on this strategy re-alignment. JKH has transitioned from its early strategy of operating small sized (1000-2000 sq ft) store formats to larger (4000-5000 sq ft) sized department store model.

abdul.hafeel@iiflcap.com

Institutional Equities

John Keells Holdings - Add

Outlook and valuations

We maintain for our SOTP valuation based 12-month Target Price of LKR251/share which is also our base valuation. It is noteworthy that a large portion of this upside is attributable to the value assigned to JKHs proposed mega integrated development project. As this project is still in its concept stage, should the scale and scope of this project change significantly, we would re-rate our Target Price and outlook. We maintain ADD. Figure 5: Sum Of The Parts (SOTP) valuation Segment Valuation Basis Transportation (Excl. SAGT) DCF (Wacc 14%, TG 6%) SAGT Dividend valuation (CoE 13%, Finite Cash Flows) Leisure DCF (Wacc 16%, D/D+E 20%, TG 6%) CFR DCF (Wacc 17%, D/D+E 20%, TG 6%) IT DCF (Wacc 25%, D/D+E 10%, TG 6%) other EV/EBIT (8x) NTB P/BV (1.2x) UAL P/BV (2x) On-going property projects DCF (CoE 17%) Investment Property Market Value/Multiple on acquisition other adjustments (adj. for net debt and minority interest) Equity Value Share Count (m) Target price
Source: Bloomberg, IIFL Research

Value (LKR m) 25,911 20,955 65,412 11,186 618 1,935 4,369 6,925 2,530 52,421 23,227 215,488 858 251

abdul.hafeel@iiflcap.com

Institutional Equities

John Keells Holdings - Add

Group Financial summary

Income statement summary (LKR m) Y/e 31 Mar Revenue YoY (%) Gross Profit GP margin (%) EBITDA EBITDA margin (%) EBIT EBIT margin (%) Profit Before Tax Net Profit - reported Net Profit - recurring YoY (%) EPS - recurring Cash flow summary (LKR m) Y/e 31 Mar Profit Before Tax Changes in working capital Other operating cash flow Cash From Operating Activities Cash From Investing Activities Cash from Financing Activities Net Changes in Cash Free Cash Flow Free Cash Flow per Share Cash Flow per Share
Source: Company, IIFL Research * IFRS/LKAS

FY12 76,700 26.8 18,163 23.7 9,450 12.3 6,538 8.5 12,910 9,775 9,901 41.3 11.6

*FY13 85,557 11.5 20,456 23.9 10,319 12.1 6,705 7.8 15,775 12,201 9,956 0.6 11.7

FY14ii 95,970 12.2 22,534 23.5 11,668 12.2 8,223 8.6 16,525 12,642 12,642 27.0 14.9

FY15ii 105,243 9.7 24,711 23.5 13,291 12.6 9,749 9.3 17,935 13,720 13,720 8.5 16.1

FY16ii 108,268 2.9 25,421 23.5 13,608 12.6 9,933 9.2 20,554 15,724 15,724 14.6 18.5

Balance sheet summary (LKR m) Y/e 31 Mar Property, plant and equipment Other non-current assets Inventories Receivables and prepayments Cash and Cash Equivalents Total Assets Borrowings Payables Other liabilities Total Liabilities Minority Interest Shareholders' Equity Book value per share Ratio analysis (%) Y/e 31 Mar Revenue growth (%) EBITDA growth (%) EBIT growth (%) Net profit growth (%) Gross margin (%) EBITDA margin (%) EBIT margin (%) Return on equity (%) Return on assets (pre tax) %

FY12 34,290 52,259 4,372 13,983 29,034 133,938 14,711 15,400 23,787 53,898 8,865 71,176 84.6

*FY13 49,273 59,827 3,999 12,983 33,037 159,118 16,542 14,624 26,767 57,933 11,366 89,819 105.6

FY14ii 50,312 64,568 4,486 17,172 34,629 171,167 16,542 15,155 26,767 58,464 12,771 99,933 118.8

FY15ii FY16ii 51,337 52,556 70,160 76,284 4,940 5,374 18,035 18,822 40,031 46,623 184,504 199,659 16,542 16,542 15,991 16,821 26,766 26,766 59,299 60,128 14,296 16,043 110,909 123,488 131.9 146.8

FY12 12,910 358 16,118 16,476 -9,003 496 7,970 11,890 14.1 9.5

*FY13 15,775 -2,511 17,234 14,723 -16,354 -1,320 -2,950 8,424 9.9 -3.5

FY14ii 16,525 -4,146 11,594 7,449 -3,328 -2,528 1,592 4,693 5.6 1.9

FY15ii 17,935 -481 12,023 11,543 -3,397 -2,744 5,402 9,758 11.6 6.4

FY16ii 20,554 -391 13,819 13,428 -3,691 -3,145 6,593 9,740 11.6 7.8

FY11 26.8 146.5 17.4 18.5 23.7 12.3 8.5 15.0 5.4

*FY12 11.5 191.9 2.6 24.8 23.9 12.1 7.8 15.2 4.6

FY13ii 12.2 303.5 22.6 3.6 23.5 12.2 8.6 13.3 5.0

FY14ii 9.7 13.9 18.6 8.5 23.5 12.6 9.3 13.0 5.5

FY15ii 2.9 2.4 1.9 14.6 23.5 12.6 9.2 13.4 5.2

Source: Company, IIFL Research * IFRS/LKAS

abdul.hafeel@iiflcap.com

Institutional Equities

John Keells Holdings - Add

Segment Financial summary

Segment Revenue summary (LKR m) Y/e 31 Mar Transportation YoY (%) Leisure YoY (%) Property Development YoY (%) Con. Foods & Retail YoY (%) Financial Services YoY (%) Information Technology YoY (%) Other YoY (%)
Source: Company, IIFL Research * IFRS/LKAS

FY12 17,378 29.4 17,422 26.2 3,790 52.0 22,022 20.0 7,932 22.3 5,926 90.8 2,229 -21.0

*FY13 19,438 11.9 20,593 18.2 3,170 -16.4 24,267 10.2 8,599 8.4 6,514 9.9 2,978 33.6

FY14ii 20,240 4.1 21,943 6.6 6,396 101.8 28,213 16.3 9,734 13.2 7,171 10.1 2,274 -23.6

FY15ii 21,268 5.1 23,844 8.7 6,806 6.4 31,856 12.9 11,261 15.7 7,888 10.0 2,319 2.0

FY16ii 21,666 1.9 25,647 7.6 1,456 -78.6 35,436 11.2 13,021 15.6 8,677 10.0 2,366 2.0

Segment Operating Profit (LKR m) and margin Y/e 31 Mar FY12 1,211 Transportation 7.0 Margin (%) 4,348 Leisure 25.0 Margin (%) 807 Property Development 21.3 Margin (%) 1,720 Con. Foods & Retail 7.8 Margin (%) 772 Financial Services 9.7 Margin (%) 208 Information Technology 3.5 Margin (%) 242 Other 10.8 Margin (%)
Source: Company, IIFL Research * IFRS/LKAS

*FY13 972 5.0 5,107 24.8 703 22.2 1,157 4.8 869 10.1 379 5.8 284 9.5

FY14ii 1,414 7.0 5,704 26.0 1,301 20.3 1,358 4.8 662 6.8 379 5.3 284 12.5

FY15ii 1,486 7.0 5,911 24.8 1,346 19.8 2,415 7.6 1,085 9.6 379 4.8 284 12.2

FY16ii 1,514 7.0 6,289 24.5 280 19.2 3,156 8.9 1,278 9.8 379 4.4 284 12.0

abdul.hafeel@iiflcap.com

Institutional Equities

John Keells Holdings - Add

Key to our recommendation structure BUY - Absolute - Stock expected to give a positive return of over 20% over a 1-year horizon. SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon. In addition, Add and Reduce recommendations are based on expected returns relative to a hurdle rate. Investment horizon for Add and Reduce recommendations is up to a year. We assume the current hurdle rate at 10%. Add - Stock expected to give a return of 0-10% over the hurdle rate, i.e. a positive return of 10%+. Reduce - Stock expected to return less than the hurdle rate, i.e. return of less than 10%.

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abdul.hafeel@iiflcap.com