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JKSB Corporate Update_John Keells Holdings PLC (JKH)_September 2016

Executive Summary

Strong medium term growth prospects for leisure and consumer foods & retail businesses

Plans to remove the current minimum room rate regulation for star-class Colombo city hotels w.e.f. March 2017 should, in our view, have a positive impact for JKH’s two existing city properties
and planned new 800 room hotel over the medium term, by supporting price flexibility and thereby improving competitiveness vs. 1) lower priced regional hotel properties (particularly in the MICE segment); 2) newly opened and lower priced three and four star hotels in Colombo city, which have rapidly captured a share of the corporate/business traveller segment; 3) the informal hotel segment, which is not governed by the minimum room rate regulation; and 4) internationally branded hotels (Shangri La, ITC, Movenpick, Hyatt, etc) which are set to open in the city over the next 2-3 years. While tightening economic conditions could result in relatively moderate growth in consumer demand during the rest of FY17, we expect double digit YoY growth in ice cream and soft drink volumes over the next 5 years, as per capita consumption in SL (at 2 litres for ice cream and 10 litres for soft drinks) is below that of regional peers. The Group’s retail business should also continue to post healthy growth on the back of its urbanfocused, large format store expansion strategy, with a medium term target of ~120 outlets. 

Prime land bank coupled with robust balance sheet

Apart from funds raised in a rights issue in October 2013 - with attached warrants - for its ongoing Cinnamon Life project, the group retains the balance sheet flexibility to grow its interests in existing core sectors and take advantage of potential new investment opportunities. While JKH has not announced any new property development projects in its pipeline, the Group retains one of the largest privately held prime land banks in Colombo and its suburbs for development, including 1) 2 acres of land available for a fourth high rise at the Cinnamon Grand Hotel; 2) 2.5 acres of land at the Cinnamon Lakeside property site; and 3) 3.1 acres at Vauxhall Street; as well as an extensive land bank outside Colombo city to expand its leisure sector footprint.

Currently trades at a discount to its historical valuation range

We project recurring earnings of Rs. 15.6bn at the Group level for full year FY17 (+11% YoY), with improved profit contribution from the leisure and consumer foods & retail sectors expected
to offset a projected decline in property and financial services sector contributions. JKH currently trades at a FY17E P/E of 13.4x, at a premium to the market. The stock has seen a multiple re-rating
over the last two years, and now trades at the lower end of its historical P/E valuation range. Key downside risks: 1) loss of city hotel market share and skilled staff on opening of internationally branded hotels; 2) a higher-than expected volume decline at SAGT; 3) intensified price competition in the local bunkering market.