Gambling on JKH’s Next Move

JKH Share Price Rs210 (1st November 2012)

If it ain’t broke, don’t fix it, is a maxim investors seem to have applied to John Keells Holdings (JKH) the largest and most liquid company listed on the Colombo stock exchange. JKH’s ability to reinvent itself over the last two decades has been remarkable. One of its two most profitable businesses, a container terminal at the Colombo port did not exist fifteen years ago and hotels another significant contributor was ailing. Selling fuel to ships, banking and supermarkets, all relatively new ventures for the over century old group, has helped it grow profits faster than most companies.

However equity analysts think JKH has taken too long to unveil its next big venture to deserve the premium its stock now commands. JKH has a trailing price to earnings ratio of 16 times compared to 14 times for both listed conglomerates and the overall market.

Equity analysts from CAL Securities and TKS Securities offer their views on JKH.

Sell JKH

Purasisi Jinadasa

Senior Analyst, CAL Securities

Fair value for JKH Rs170

Regardless of the valuation methodology employed, I think it is important to step back and assess whether the valuation encompasses the fundamental value of the company as objectively as possible. JKH is the largest and most liquid company on the CSE, but I don’t think this is reason enough to cut it any slack.

Liquidity premium

Given that there are other companies now on the CSE that are fairly liquid, applying a modest premium to JKH should suffice (e.g. 10% to fair value if need be)

Balance sheet

Yes, the company does boast an impressive cash position. However, the flipside is that it is sitting on it! There is definitely potential for that cash, but as long as it remains under-utilized and on the books, there is no gain for an investor. Especially since the company holds back dividends investors might as well put money in a fixed deposit.

Casino development

A mixed development without a game changer (i.e. casino jv) is not going to translate into tangible value on a per share basis. You can expect Rs68 share addition to our fair value of Rs170 if a casino is included and with a strong possibility of a steep rally in the short-run, if such an announcement is made.  There is speculation about the mixed development and the trump card of that is the casino. If the casino does not come there is no reason for the speculation and for investors to buy the stock at such a premium.


Hold JKH

Chamithri Ratnapala

Investment Analyst, TKS Securities

Neutral at stock price of Rs214

JKH’s transportation and Leisure sectors have both benefited from the Rupee’s weakness and on top of that their core operational growth remains visible. JKH is recapturing market share in its bunkering business, maintaining container throughput at SAGT despite a challenging transshipment environment, occupancy at its Maldivian resorts are rising and room additions in the Sri Lankan resorts ahead of the main tourist season (i.e 2H of each financial year) have been done.

Liquidity premium

JKH remains the most liquid share with daily turnover averaging Rs174 million this year and market capitalization exceeding $1.4 billion and it commands a liquidity premium.

Balance Sheet

JKH has a strong balance sheet with Rs3.5 billion cash in hand and a debt to equity of 18.5%. They will be able to easily leverage the balance sheet for the massive real estate project planned in 10 acres of freehold land it has in Colombo.

Casino development

Provided JKH moves on with the proposed mega mixed development project of 1,000 hotel rooms, a shopping complex, a commercial complex, a serviced apartment complex and possibly a Casino JV in the current head office premises the company would continue to be value accretive. With a casino JV this will be unmatched.

Given the upward revision in forecast profit, with the share trading on 15.9x forecast FY13E net profit and 13.3x expected FY14E earnings we UPGRADE our recommendation from “Take Profit” to “NEUTRAL”.