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Sri Lanka Equity Forum » Stock Market Talk » John Keells Miserable Future until 2020

John Keells Miserable Future until 2020

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1 John Keells Miserable Future until 2020 on Fri May 12, 2017 2:50 am

Mark Levin


Stock Analytic
Stock Analytic
A recent Analysis of John Keells done by an International Fund Management Company. Some say Khazanah Nasional Berhad Fund of Malaysia will start shedding the shares.

Sri Lanka's John Keells at a Decisive Moment and at a Miserable Future until 2020


In order to fund the Watefront Project (Cinnamon Life) JKH raised Rs.23.1 billion (approx US$ 178mn) in FY 2013/14 by way of a rights issue attached with two types of warrants. Subsequently by excising the warrants Rs.8 billion was raised in 2015 but however the 2016 warrant was heavily undersubscribed. Only Rs.3.2 billion was raised from it though it was supposed to raise Rs.8.6 billion. This was because investors were doubtful about the success of this project and how wisely JKH has used the cash from the rights issue.

Extraordinary gains and interest income from the recent rights issue have buoyed earnings during the last several years. In 2016, interest income of Rs.8,011mn amounted to the 42% of PBT and far exceeded the best performing leisure sector which posted pre-tax profit of only Rs2,311mn. Going forward, such large amounts of interest income may not recur as rights issue proceeds will get utilized in the Water Front Project in the next two years.  

"Waterfront Project” is now behind schedule and there has been a cost overrun in the piling stage of the project due to unanticipated barriers. Officially there has been an acceptance of an 18 month delay by Hyndai, Keangnam, & Nawaloka (HKN-Joint Venture) that would result in reduction in profitability of the project.

During FY 2015/16 ROCE of all sectors of JKH have improved. However excluding the Food & Retail, Financial Services, and Transportation Sectors all other major sectors’ ROCE is below the 12 month Treasury Bill yield, with some sectors operating at less than half the TB rate.

JKH management sold down their stakes in Union Assurance, Access Engineering and Expo Lanka Holdings and recognized capital gains of Rs2.2 billion in 2014/15. Reasons for this move have not been satisfactorily explained. As JKH has sufficient cash, perhaps these sales demonstrate a pre-occupation with short-term earnings rather than a long-term strategic focus. However investments in hotels which JKH management are eyeing to dispose are rather difficult to be sold immediately.  Hence there won’t be any capital gains realized through sale of investments in the near future.  

Waterfront Project is the largest private sector investment to date in Sri Lanka with an estimated cost of approximately USD 800 Million. The company has entered in to USD 395 Million syndicated loan facility with Standard Charted Bank being the required debt financing for this project. The massive interest cost of this syndicated loan will be capitalized in to fixed assets under the accruals basis of accounting. However after completing the project the interest cost will get charged to the income statement as an expense which will significantly reduce profitability. The income generated from various buildings of the project will take many years to exceed the interest charge.

DS Wijesinghe


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Take the plight of an investor who looked at JKH 2012/2013 Performance

Performance of JKH FROM 2012/13 TO 2017/18 Financial Year

2017/20182012/20135 Year CAGR
Turnover Rs Mn121,21585,408      7%
NP after Tax23,12013,433      11%
EPS-adjusted15.210.7      7%
NAVPS-adjusted14464.7     17%
DPS-adjuted62.149     23%
ROE  11.1%  15%  Not Applicable


Best Investment Scenario of an investor  who had bought JKH @ LOWEST traded price of 243/50 in Apr-June 2013 and SELLS @ HIGHEST Traded price of Rs. 168/- in Apr-June 2018. After Rights & converting warrants and receiving Dividends, the luckiest investor would have earned only a very disappointing 2% Compounded Annual rate of Return over the 5 year period despite BUYING LOWEST & SELLING HIGHEST, which is the best Scenario. 

Those who would have bought at median prices would have earned virtually zero compounded annual interest on their investment

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