Construction of massive US$820m mixed development project groundbreaks next month
The construction of the proposed Waterfront Integrated Resort (IR) project of Sri Lanka’s largest listed conglomerate in the Colombo Bourse, John Keells Holdings (JKH), is due to begin in November 2013 where the land is presently in the process of being cleared up, a recent equity research report said. According to a recent company update published by TKS Securities (Pvt) Ltd, with plans afoot to develop its approximately 10 acre prime land block at its previous headquarters in the heart of Colombo, construction of the project would generate large cash flows in the future given the scale of the project with the property arm of the group seeing higher levels of Return on Equity (ROE) generated in the long term.
Investment Analyst at TKS Securities Chamithri Ratnapala who prepared the report said the project is valued as generating Rs.14.50 per share on a discounted cash flow valuation at post-dilution of shareholding (adjusted for rights) for FY15E. He noted that moreover as JKH has finally grabbed the opportunity to uncover its valuable land bank by plans to become the dominator in the city hotel segment, TKS believes that possible floating of the Waterfront project could be expected in the long term.
“The most lucrative business in the IR being the casino space would be a rental model at a rental of LKR 2,552 per sq ft in FY19E. No earnings are assumed for the gaming facility on a Gross Gaming Revenue basis,” Ratnapala said in his analysis.
He further noted that with steps undertaken to monetize the idling land bank, JKH would have an effective ownership of 96.7% in the project as the majority of land of around seven acres is jointly owned by its subsidiaries, Ceylon Cold Stores (CCS), John Keells PLC (JKL), John Keells Properties and the project company, Waterfront Properties whilst the remaining three acres are to be leased out (99 years) from the government.
The group which currently yields 13%-14% levels of ROE would see its returns being boosted in the long term (FY19E onwards) with the commencement of the integrated resort (IR) project.
The project which would be of a total investment of around US$ 820m in two phases (operations expected to commence in FY19E and FY22E respectively) would see the current headquarter land being converted to a 4.5 million square foot IR consisting of a luxury hotel, high-end retail space, luxury residential apartments, a lucrative casino facility on par with international standards and office space in phase II.
“Thus the IR would add nearly Rs.100 billion to JKH’s asset base in FY19E when phase I is completed. Meanwhile, based on a DCF valuation, around Rs.14.50 per share would be generated from the entire project (in FY15E). However in the short to medium term ROEs would be diluted with the equity infusion for the project seen by way of a 2 for 13 rights issue attached with a warrants issue raising around Rs.40 billion (USD300m) in total during FY14, FY16 and FY17,” the report highlighted.
It further pointed out the remaining requirement would be funded by way of debt raised at project company level of around US$ 450m and pre-selling of apartments and land infusion by JKH which in total would give JKH an ownership of 96.7% in the project.
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