Recommendation : BUY
Analysts : Dhinali Peiris, Raguram Raamakrishnan
Mega scale property development – JKH proposed integrated property development project which will be monetizing its 10 acre land in Colombo 2 includes apartments, office complexes, hotels, shopping areas and entertainment facilities. The company has indicated the
project will require an investment of about USD 820 Mn.
We expect this project to add significant value to JKH in the long run.
Tourist boom to continue – The tourist arrival growth for Sri Lanka for FY13/14 & 1HFY14/15 was 25.5% and 21.0% respectively while for Maldives the growth was 15.9% and 10.3% respectively. The sector earned a revenue growth YoY of 9.5% and 6.7% for the FY13/14 and 1HFY14/15. Sri Lanka expects to achieve a target of 2.5 Mn tourist arrivals by 2016 that requires the country to double fold its current capacity. We expect leisure segment to remain the largest contributor to JKH (excluding waterfront project) performance and continue its revenue growth on a 3 year CAGR of 10.6%, backed by its strong brand.
Consumer Food & Retail segment restructured for superior performance – The retail segment was restructured starting from its inventory management to the presentation in larger stores, under the guidance of professional experts with global experience. Hence, the retail segment increased revenue YoY by 9.1% and 19.5% in FY13/14 and 1HFY14/15 respectively. We expect this sector to further benefit from the anticipated growth in disposable income in the country. Sri Lanka targets to increase its per capita GDP to USD 7,500 by 2020. Hence, we expect revenue CAGR of 21.1% through FY14/15 to FY16/17 for the segment.
Largest private sector investment to date
JKH latest Waterfront development project commenced construction in FY14/15Q1. The integrated property development is the largest private sector investment to date with an estimate cost of USD 820 Mn. The gaming area is expected to be approx. 4% of the total space of the integrated resort (IR). In April 2014, the project received approval under the Strategic Development Project Act No.14. Due to the scale of the project it has received a number of tax concessions (refer annexure for details).
The project will be funded through a mix of equity and debt. According to company sources, debt will be raised through a 7 year syndicated loan of USD 445 Mn.
Considering the recent trend of higher demand for mid and upscale apartments units, we expect a significant portion of IR apartments to be presold.
According to the management the residential units witnessed encouraging buying interest on the blueprint.
Nevertheless in the long run we expect Waterfront to enjoy high occupancy rates based on the projected shortage of grade A office space by 2020.
Furthermore, with the government’s initiative to promote Sri Lanka as a destination for business outsourcing, we expect more foreign companies to rent office space in the country.
If gaming facilities is to be accommodated in the IR project we expect it to be one of the main contributors to the revenue. If planned gaming facilities are to be included, the operations are expected to be carried out by an international operator. The project company, Waterfront Properties (Pvt) Ltd (WPL) is expected to earn a fixed rental income plus a variable component
based on profits. We expect the main target markets to be the growing upper middle class of India and the expatriates in the Middle Eastern, where Waterfront could be a cheaper and close proximity destination compared to the other gaming destinations such as Singapore and Macau.
‘OnThree20’ apartment complex: 99% of the available apartments have already been sold, which has effectively financed the project. In addition, ‘7th Sense’ apartment complex is also currently under construction. Currently, 88% of the available apartments are pre sold. We expect the remaining units of the above to be sold during FY14/15. We estimate, approximately 1,500
mid to up end scale apartments are under construction excluding the Waterfront project.
Myriad of opportunities
With JKH rich land bank and expertise in the property segment business we believe JKH is ideally placed to capitalize on the increasing demand for property in Colombo. However, we do not expect a new venture until the Waterfront project is completed in FY18/19. We expect the segment to post a revenue of LKR 3.5 Bn (Waterfront projection excluded) and Gross Profit of
LKR 874.2 Mn in FY14/15.
City hotel performance to remain steady
JKH’s two city hotels, Cinnamon Grand and Cinnamon Lakeside command a market share of 51% (end March 2014) as per the management. Due to Galle Face Hotel and Hilton refurbishments, we expect JKH city hotels to benefit in the near term. However, the room availability has risen with Kingsbury and Taj Samudra recently completing their refurbishments. Additionally, number
of global hotel chains is expected to begin operations in Colombo over the next couple of years.
Elevated top tier competition is not likely to affect JKH city hotels performance since the global hotel chains are likely to charge a premium in order to maintain their global standards. Therefore, we estimate Cinnamon Grand and Cinnamon Lakeside to increase occupancy YoY by by 3.1% and 2.9% through FY14/15 to FY16/17.
Cinnamon Red, a lean luxury hotel commenced operations in September 2014. The project is a joint venture with Sancity Hotels & Properties Ltd and managed by JKH Group’s Hotel management sector. The room rates are at a discount of ~55% to JKH five-star hotels focusing on the business traveler.
Due to the higher than expected current occupancy rates, we believe the contribution to the segment profit from Cinnamon Red to increase over time.
Resorts to recover due to booming tourism sector Improved political and macro economic conditions in Sri Lanka (SL) are expected to further boost the tourism industry. Tourist arrivals increased YoY by 26.7%, and 20.3% YoY for CY2013 and 2014 Jan – Nov, respectively. Sri
Lanka targets 2.5 Mn and 4.5 Mn tourists by 2016 and 2020 respectively.
Despite the increase in tourist arrivals, the expected occupancy in resorts marginally declined due to the expansion of the informal sector. However, the tourist mix has been shifting. The spending power of Chinese and Indian middle class is expected to increase further, which should benefit JKH.
Currently, JKH resort Average Room Rate (ARR) is USD 110 - 115 with occupancy levels of 75% - 80%. Chaaya Tranz (Hikkaduwa) and Cinnamon Wild (Yala) which recommenced their operations after refurbishments during FY13/14 are expected to contribute to the pickup in occupancy rates.
Therefore we estimate JKH SL resorts average occupancy to be 67% in FY14/15 and 71% in FY15/16 and FY16/17 respectively. The group is considering two additional star class hotels in Nuwara Eliya and Yala.
Maldives resorts operating at full capacity
Maldives is considered one of the most expensive tourist destinations in the world and we expect JKH to benefit from the high pricing. Currently, JKH ARR is USD 305 - 310 allowing the company to enjoy high margins. The political stability also has benefit Maldives tourism. We expect the room rates to increase 10.4% p.a. (in USD terms) over the next three years.
Therefore, the overall medium term outlook for the Maldivian operation is positive.
Tourist arrivals in Maldives recorded a significant increase of 17.4% in CY2013. In addition, JKH Maldivian resorts enjoy an occupancy rate of 86.0%, higher than the Maldivian average occupancy rate of 81.3% (in 2013).
We expect the Maldivian resort to continue to operate above average occupancy rates.
Increased performance in both Sri Lanka and Maldives The leisure sector recorded a YoY revenue growth of 9.5% and 6.7% in FY13/14 and 1HFY14/15 respectively. SL resort contribution to the segment revenue has increased from 32.5% in FY10/11 to 44.5% in FY13/14. We expect the current revenue mix to continue. The sector revenue is expected to grow YoY by 11.0%, 12.0% and 8.8% for FY14/15, FY15/16 and FY16/17. We do not expect significant capex expenditure in the next three years.
Courtesy - NDB Securities