John Keells Holdings (JKH), a prominent conglomerate with interests across key sectors of the economy and ranked second in market capitalization as of mid-February 2024, demonstrated a robust recovery in its latest earnings report, according to a First Capital Research earnings report, with a message (perhaps for the greater economy?) in its title ‘Promising Recovery Delivered’.
During the third quarter of the 2023/24 financial year (December quarter), JKH’s net profit surged by an impressive 50.7% year-over-year to Rs2,989.8 million. This remarkable performance was underpinned by across-the-board improvements across all business units, resulting in a significant 32% year-over-year growth in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to Rs13.7 billion. Key contributors to profitability included the Transportation, Consumer Foods, Retail, and Leisure sectors. Additionally, reduced finance expenses, attributed to a decrease in the Average Weighted Prime Lending Rate (AWPLR) of banks, positively impacted profitability. Moreover, there was a notable enhancement in business margins, with the gross profit margin expanding by 303 basis points year-over-year to 20.7% and the EBIT (Earnings Before Interest and Tax) margin improving by 79 basis points year-over-year to 5.2% in the December quarter.
The Transportation sector witnessed a substantial improvement in profitability, primarily driven by enhanced margins from Lanka Marine Services (LMS). EBITDA in this sector surged by 55.2% year-over-year to Rs2.3 billion during the third quarter, largely due to increased volumes resulting from changes in global shipping routes following the Red Sea crisis. Despite a slowdown in bunkering volumes earlier in the financial year, the decline lessened to under 9% year-over-year in the third quarter. Meanwhile, container handling volumes at the Colombo port and SAGT (South Asia Gateway Terminals) saw year-over-year increases, albeit domestic transshipment volumes remained sluggish. Looking ahead, First Capital Research anticipates continued benefits for LMS operations in the near term, while domestic handling volumes are expected to gradually recover from April 2024 onwards.
In the Consumer Foods segment, JKH witnessed a remarkable recovery, with EBITDA growth of 123.1% year-over-year, reaching Rs897 million. This notable increase in profits can be attributed to improved volumes in key segments such as Frozen Confectionary, Beverages, and Convenience Foods. Despite challenges posed by the imposition of a Special Commodity Levy on imported sugar, strategic price adjustments and normalization of input costs led to a significant rise in EBITDA margins from 6% to 13% year-over-year. Looking ahead, while First Capital Research foresees further margin improvement supported by a lower base, recent increases in VAT rates and removal of exemptions may temporarily restrain volume growth.
The Retail sector reported a stagnant performance due to escalating costs, which constrained margins. JKH’s Retail segment saw a slight improvement in EBITDA to Rs2.4 billion, driven by a 10.7% year-over-year growth in same-store sales. However, declining average basket values amid rising food inflation contributed to margin pressure, with EBITDA margins declining by 80 basis points year-over-year to 6.9%. While challenging conditions are expected to persist, proposed wage hikes and reductions in electricity tariffs may offer some relief.
In the Leisure sector, JKH witnessed a significant increase in EBITDA by 34.9% year-over-year, reaching Rs2.6 billion in the third quarter of FY24. This growth was primarily driven by the Sri Lankan Hotels (Colombo Hotels) and Resorts segments, benefiting from a surge in tourist arrivals and improved room rates. However, challenges persist in the Maldivian Resorts segment due to increased competition and currency fluctuations.
The Property sector saw a notable turnaround in performance, with JKH’s Property segment recording a significant improvement in EBITDA. Despite subdued sales of new apartments at Cinnamon Life, projects like TRI-ZEN and Viman, Ja-Ela garnered interest. However, challenges remain due to economic factors affecting disposable incomes.
Lastly, the Financial Services segment demonstrated robust performance, with a notable 42% year-over-year growth in EBITDA to Rs4 billion. This was primarily driven by Union Assurance and National Trust Bank (NTB), which showcased resilience despite economic headwinds.
While JKH’s diverse business units exhibited promising signs of recovery, challenges persist amid economic uncertainties. However, strategic initiatives and market dynamics are expected to position the conglomerate for sustained growth in the long term, First Capital Research notes.
The Big Picture:
The robust recovery demonstrated by JKH in its latest earnings report, as analyzed by First Capital Research, carries significant implications for investors and the broader economy.
First and foremost, JKH’s financial performance reflects a buoyant business environment across key sectors of the economy. The substantial increase in net profit by 50.7% year-over-year, coupled with a significant 32% growth in EBITDA, underscores the resilience and adaptability of JKH’s business model. This not only instils confidence in investors but also serves as a positive indicator for the overall economic landscape.
The notable improvements witnessed in sectors such as Transportation, Consumer Foods, Retail, Leisure, and Property signify broader sectoral strength and potential opportunities for growth and investment. For instance, the surge in profitability within the Transportation sector, driven by enhanced margins from Lanka Marine Services (LMS), suggests robust demand and operational efficiency, which could be indicative of improving trade and logistics dynamics within the economy.
Similarly, the recovery in the Consumer Foods segment, despite challenges such as the imposition of a Special Commodity Levy on imported sugar, highlights the resilience and innovation of businesses in navigating adverse market conditions. This bodes well for consumer confidence and expenditure patterns, which are pivotal drivers of economic growth.
Furthermore, the positive performance of the Financial Services segment, driven by Union Assurance and National Trust Bank (NTB), underscores the stability and resilience of the financial sector amidst economic headwinds. This is crucial for maintaining investor confidence and ensuring the smooth functioning of capital markets.
However, amidst the promising recovery, it is important to acknowledge the persisting challenges and uncertainties within the economy. Factors such as escalating costs, changes in regulatory frameworks such as taxation, and global economic dynamics and currency fluctuations continue to pose risks to businesses and investors alike. However, while companies like JKH face numerous challenges out of their control, they are successful because they are driven by hard-working people and have a vision for themselves, their companies and their country.