Fitch Ratings-Colombo/Mumbai/Singapore-20 August 2012: Fitch Ratings Lanka has affirmed Sri Lanka-based John Keells Holdings PLC's (JKH) 'AAA(lka)' National Long-Term rating at a Stable Outlook. JKH is a holding company with ownership of diverse operating assets; key sectors within which its investments operate include transport, leisure, consumer foods manufacturing and retail, financial services, and information technology.
The affirmation reflects the continued strong dividend income from JKH's core investments and its subsequent low financial leverage (adjusted debt net of cash/operating EBITDAR). At FYE12 cash reserves at JKH's holding company-level exceeded its debt, resulting in a leverage ratio of negative 0.94x.
The rating also continues to reflect the low structural subordination of JKH's creditors due to low debt at most key dividend paying assets, the company's track record of maintaining a conservative capital structure due to its shareholders' ability and willingness to inject cash into new projects and expansions in a timely manner, and its strong liquidity.
JKH continued to report strong earnings growth across its core subsidiaries in FY12 (year end March). Consolidated EBITDAR margin improved to 13.85% at FYE12 (FYE11: 11.55%) on the back of 27% annual growth in revenue. Leisure and consumer foods (including retail) sectors contributed the most to this increase, helped by refurbishments across many of its hotels and resorts as well as capacity additions in both segments. The revenue increase was also supported by a conducive domestic macroeconomic environment throughout most of the year.
The performance of the transport and leisure sectors in particular also benefited from the sharp depreciation in the local currency during the latter part of the FY. Fitch expects JKH's group performance to moderate to an extent in FY13 compared with FY12, in part due to higher domestic inflationary pressures.
Key among JKH's medium-term risks is the introduction of a new deep-water container terminal at the Port of Colombo (POC) - according to industry estimates the first phase of this project is expected to be commissioned by end-2013 or early 2014. The consequent increase in container handling capacity is likely to result in profit-margin pressures and the market share erosion of existing companies, including JKH's 42%-owned associate South Asia Gateway Terminals (SAGT).
Mitigating factors include SAGT's higher operational efficiency compared with other existing terminal operators and POC's closer proximity to key regional shipping routes compared with peer Indian ports. Fitch also estimates that so long as JKH maintains a conservative capital structure at the holding company level, its credit metrics should remain fairly resilient, even to a sharp deterioration in SAGT's profits over the medium-term. SAGT accounted for nearly 50% of JKH's recurring dividend income in FY12 (FY11: 59%). Over the medium-term, JKH expects that dividends from its other key sectors will improve and account for a higher share of its dividend income.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- JKH's holding company-level leverage increasing above 1.5x on a sustained basis
- holding company-level gross debt increasing above 4.0x the aggregate dividend income excluding one-off dividend inflows (FYE12: 1.56x)
- weaker liquidity due to un-even debt-maturities that may introduce refinancing risks
- an increase in shareholder concentrations that could result in an adverse change in the management's conservative approach to funding expansions and new investments
JKH was listed on the Colombo Stock Exchange in 1986 and has the largest market capitalisation.