John Keells Holdings [JKH.

N0000]
JKH HIT CALS FY13 CONCEPT VALUE OF LKR 298 FURTHER UPSIDE DRIVEN BY GOOD OLD HYPE. SELL

CALS FEB 2012 RECOMMENDATION - FY2013E TARGET PRICE

CALS FY2014E TARGET PRICE

LKR 370

LKR 287

Refer p.10 for Important Disclaimer

YEAR END MARCH (LKR mn) Revenue EBIT Profit to Equity Holders Recurring Profit Reported EPS (LKR) EPS Growth (%) Reported PER (x) Recurring EPS (LKR) Recurring PER (x)

FY12 77,700 12,200 9,700 7,400 11.5 18.5 24.9 8.7 32.9

FY13A 85,600 13,900 12,200 11,800 14.3 23.3 20.1 13.9 20.6

FY13E* 85,100 13,700 12,000 11,000 14.1 21.6 21.9 13.1 21.9

FY14E 93,200 16,200 7,000 6,300 9.3 (34.0) 30.8 7.3

Current Price (LKR) 287 Fair Value (LKR) 210 Recommendation

SELL
Date 31-May-13
Market Capitalization (USD): 1.9bn

39.3
1-year avg. Daily T/O (USD): 971k 1-year H/L (LKR): 297/174 Free Float: 88% *CALs estimates. Refer appendix 2 for details

JKHs FY13 EPS of LKR 14.3 was in-line with CALs FY13E*. In FY14E, CAL expects a drastic decline in EPS to LKR 9.3 (-c.34%) as JKH incurs higher costs as a result of escalating operational costs (+ c.21% YoY) and an increase in finance charges as new developments commence. CAL continues to expect EBIT to be supported by JKHs Leisure and Transport segment (c.65% of FY14E EBIT). JKHs NTB stake still stands at c.30%, and a sell-down to 15% may add c.LKR 24/share in FY14E. CALs fair value for JKH is LKR 210 ( -37% from current price). The market has priced in CALs c.LKR 100 for concept value and further upside is only possible on hype. HOLD

Profit driven by FV gain and net finance income JKHs FY13 revenue was LKR 85.6 in-line with our expectations. The marginally higher than expected net profit of LKR 12.2bn was driven by c.LKR 3.7bn in net finance income and a LKR 2bn gain on FV of investment property. In FY14E, CAL expects the use of cash reserves and higher finance charges to result in an EPS of LKR 9.3 (-c.34% YoY). JKH is yet to sell-down a c.15% stake in NTB (as per regulations), which may add a one-time LKR 24/share to FY14E. FY14E Transport and Leisure revenue flat As a result of competition from new sources, CAL expects a marginal 2% YoY growth in revenue for both segments. The SAGT port operations are likely to see volumes decline, although EBIT margins remain stable due to LKR depreciation (LKR 133/USD by FY14) and an increase in USD based pricing (+c.5% YoY). The Leisure segment will continue to be hit with lower occupancies at flagship hotels due to tourists opting for less costly alternatives. CAL expects Leisure EBIT margins to contract to c.19% in FY14E from c.25% in FY12. Considering that these two segments form 50%+ of CALs SOTP value, marginal growth is a concern. JKH trades at a c.37% premium to CALs SOTP JKH hit CALs LKR 298 based on concept value (a c.37% premium to fundamental value). Considering that JKH has yet to announce its major development (more importantly the added sweetener), CAL remains cautious. We recommend investors to take profit while awaiting the news, bearing in mind that the company will require substantial capital to commence the proposed development. On announcement of the news, the 1-year target price for JKH is likely to be LKR 310 (a +8%). SELL

CAL Research
Level 5, Millennium House, No.46/58, Nawam Mawatha, Colombo 2 Tel: +94 11 231 7786 Email: purasisi@capitalalliance.lk

Purasisi Jinadasa

Transport Segement 25% of FY13 Profit (28% in FY12)

(LKR mn) Revenue EBIT

FY12 18,816 3,480

FY13* 19,783 NA

CALs FY13E 19,327 3,795

Deviation 2% -

FY14E 19,799 3,688

* As of publication date, EBIT actuals were not available

JKHs Transport segment continues to be driven by its container terminal operations (c.75% of EBIT). CAL expects FY14 EBIT to be c.LKR 3.7bn, resulting in a flat EBIT margin of c.18%.

FIGURE 1: SAGT PERFORMANCE

520,000 510,000 500,000 490,000 480,000 470,000 460,000 450,000 440,000 430,000 420,000

1.40 1.20 1.00 0.80 0.60 0.40

0.20
0.00

SAGT Revenue (LKR bn)-RHS

SAGT Volumes-LHS

CAL assumes a 5% increase in USD charges/container over the current year and expects a LKR 130/USD by FY14E, which are likely to hold margins stable. However, due to the anticipated opening of the new container terminal, CAL expects TEUs handled to continue to drop over the course of the year.

Source: Company Reports and CAL Estimates

LKR bn

TEUs

Leisure Segement 35% of Profit in FY13 (32% in FY12)

(LKR mn) Revenue EBIT FY12 17,469 4,348 FY13* 20,671 NA CALs FY13E 20,525 6,010 Deviation 0.7% FY14E 21,644 6,926

* As of publication date, EBIT actuals were not available

CALs outlook on JKHs Sri Lanka hotels has taken a downturn due to over -pricing. Although we expect c.1.1mn (+c.10%) increase in tourist arrivals to Sri Lanka, hotel occupancy levels are falling. Particularly, Cinnamon Lakeside and properties in the south are likely to continue taking a hit. JKH currently has c.1840 rooms in Sri Lanka and may find it challenging to fill 1100 rooms on a daily basis as the number of ungraded value-for-money alternatives increase. In FY14E, CAL expects JKH group-wide occupancy rates to average 70%.

Consumer Foods and Retail 15% of Profit in FY13 (22% in FY12)

(LKR mn) Revenue EBIT FY12 22,046 1,720 FY13* 24,370 NA CALs FY13E 25,004 1,576 Deviation 2.5% FY14E 26,188 1,351

* As of publication date, EBIT actuals were not available

CAL expects this segment to be hit by higher import costs (due to a weaker LKR), the imposition of a 12% VAT on items sold in supermarkets and the recent hike in electricity tariffs (+c.20%). The increase in revenue of (c.7.5% is less than CALs 2013 inflation estimate of 10%).

Source: Company Reports and CAL Estimates

Property 8.8% of Profit in FY13 (8.5% in FY12)

(LKR mn) Revenue EBIT FY12 4,033 807 FY13* 3,441 NA CALs FY13E 2,485 778 Deviation 38.4% FY14E 2,965 903

* As of publication date, EBIT actuals were not available

JKHs new development on Gregorys road is priced in USD. As a result, both revenue and EBIT are likely to see improvement in FY14E.

Financial Services 10% of Profit in FY13 (11% in FY12)

(LKR mn) Revenue EBIT FY12 8,015 1,424 FY13* 8,700 NA CALs FY13E 8,463 1,605 Deviation 2.8% FY14E 11,261 2,943

* As of publication date, EBIT actuals were not available

CAL expects FY14E revenue to be driven primarily by Union Assurance (+30% YoY growth). For the purpose of CALs SOTP, we have included JKHs NTB stake as part of EBIT. If JKH sells down its stake to 15%, EBIT may reduce by LKR 354mn. Other financial services are likely to contribute c.2% to EBIT.

IT and Others 6% of Profit in FY13 (loss in FY12)

(LKR mn) Revenue EBIT FY12 8,989 379 FY13* 10,382 NA CALs FY13E 9,294 412 Deviation 11.7% FY14E 11,374 445

* As of publication date, EBIT actuals were not available

The better than expected performance was primarily driven by higher than expected revenue and stronger margins from the other segment (primarily plantations). CAL expects FY14 EBIT to be hit by the increase in COP at the plantations.

Source: Company Reports and CAL Estimates

Appendix 1 CALs Sum-of-Parts Valuation

LKR
JKH Share Price
Transport Leisure CF&R Property Financial Services Others Land Bank
80 31 12 19 51 15 10

2014E

- Net Debt/Share + Tax Shield Price/Share SOTP

TRANSPORTATION Target Capital Structure (D/E) Cost of Equity Cost of Debt Growth Rate WACC LEISURE Target Capital Structure (D/E) Cost of Equity Cost of Debt Growth Rate WACC CF&R Target Capital Structure (D/E) Cost of Equity Cost of Debt Growth Rate WACC VALUE 75/25 12.0% 9.0% 2.0% 9.1% VALUE 40/60 22.0% 10.0% 2.0% 17.0% VALUE 30/70 20.0% 10.0% 1.0% 18.0%

9 1 210
LKR mn EBIT Total FCF Terminal Value EV Price/Share LKR mn EBIT Total FCF Terminal Value EV Price/Share LKR mn EBIT Total FCF Terminal Value EV Price/Share 2014E 3,566 6,881 60,179 67,060 80 2014E 3,955 2,199 23,597 25,796 31 2014E 1,351 1,226 9,011 10,237 12

Source: Company Reports and CAL Estimates

PROPERTY Target Capital Structure (D/E) Cost of Equity Cost of Debt Growth Rate WACC FINANCIAL SERVICES Target Capital Structure (D/E) Cost of Equity Cost of Debt Growth Rate WACC OTHERS Target Capital Structure (D/E) Cost of Equity Cost of Debt Growth Rate WACC

VALUE 50/50 21.0% 10.0% 1.0% 15.1% VALUE 30/70 20.0% 9.0% 2.0% 15.8% VALUE 30/70 20.0% 10.0% 2.0% 16.3%

LKR mn EBIT Total FCF Terminal Value EV Price/Share LKR mn EBIT Total FCF Terminal Value EV Price/Share LKR mn EBIT Total FCF Terminal Value EV Price/Share

2014E 903 1,855 13,916 15,771 19 2014E 2,943 8,110 35,052 43,163 51 2014E 445 3,267 9,655 12,922 15

Source: Company Reports and CAL Estimates

Appendix 2 Financial Statements

INCOME STATEMENT (FY12 not restated as per SLFRS)
YEAR END MAR (LKR mn) Revenue Transport Leisure Property CF&R Financial Services Other Cost of Sales Gross Profit Profit Before Tax Profit for the Group Profit to Equity Holders EPS (Basic) PER (x) Recurrent Profit Recurrent EPS (Basic) Recurrent PER (x) FY10 47,980 9,495 11,500 1,620 15,843 5,262 4,260 (36,914) 11,066 6,538 5,552 5,201 6.2 30 5,087 6.0 30 FY11 60,500 13,426 13,810 2,494 18,358 6,484 5,929 (46,857) 13,643 10,629 9,063 8,246 9.8 29 5,983 7.1 40 FY12 76,700 17,378 17,422 3,790 22,022 7,932 8,156 (58,537) 18,163 12,910 11,069 9,775 11.6 18 7,351 8.7 24 FY13 85,557 19,784 20,672 3,441 24,370 8,701 10,382 (65,102) 20,456 15,775 13,591 12,201 14.3 20 11,836 13.9 21 CAL's FY13E 85,099 19,327 20,525 2,485 25,004 8,464 9,294 (65,101) 19,998 14,116 12,140 12,026 14.1 20 11,047 13.1 22 FY14E 93,232 19,799 21,644 2,965 26,188 11,261 11,374 (71,789) 21,443 9,066 7,797 7,000 9.3 31 6,261 7.3 39

BALANCE SHEET (FY12 not restated as per SLFRS)

YEAR END MAR (LKR mn) Assets Property Plant & Equipment Short-term Investments Other Assets TOTAL ASSETS Equity and Liabilities Stated Capital Reserves Minority Interest Total Equity Total Interest Bearing Debt Other Liabilities TOTAL LIABILITIES AND EQUITY
23,322 26,510 6,430 56,262 14,708 27,688 98,658 24,612 34,975 7,608 67,195 10,487 32,610 110,292 25,111 46,065 8,865 80,040 14,693 39,205 133,938 26,480 63,339 11,366 101,185 14,907 43,026 159,118 26,480 54,707 12,163 93,350 12,289 45,632 151,271 29,989 19,301 49 98,658 28,628 16,881 65 110,292 34,290 24,767 75 133,938 49,273 26,586 83 159,118 52,412 17,361 81 151,271

FY10

FY11

FY12

FY13

FY14E

Source: Company Reports and CAL Estimates

Appendix 3 JKH Price Chart

PERFORMANCE AGAINST THE ALL SHARE PRICE INDEX (ASPI)

Index Base = 100

170 160 150 140 130 120 110 100 90 80 70 May-12

Nov-12 JKH ASI

May-13

DISCLAIMER

This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its directors, officers, consultants, employees, outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.

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Contacts
Research Team
Tel No: +94 11 231 7777 (General) Email: teamresearch@capitalalliance.lk
Head of Research

Purasisi Jinadasa Tel No: +94 11 231 7786 Email: purasisi@capitalalliance.lk Udeeshan Jonas Tel No: +94 11 231 7746 Email: udeeshan@capitalalliance.lk Reshan Wediwardana Email: reshan@capitalalliance.lk Dushan de Silva Email: dushan@capitalalliance.lk Thushani de Silva Email: thushani@capitalalliance.lk Ananya Udeshi Email: ananya@capitalliance.lk

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