JKH 2Q impacted by higher costs, subdued macro conditions

Susantha Ratnayake

The subdued macro environment and higher costs relating to expansions and refurbishments affected the performance of the premier blue chip John Keells Holdings PLC’s (JKH) September quarter (2Q19), although the higher interest income and a tax reversal at the group’s insurance subsidiary boosted the bottom line.

The JKH group saw its revenue for the quarter under review increasing 10 percent year-on-year (YoY) to Rs.32.6 billion. The cost of sales however rose at a faster pace of 16 percent YoY to Rs.26.4 billion, resulting in a gross profit of Rs.6.1 billion, down 13 percent YoY.

The group’s operating profit also plunged 60 percent YoY to 1.09 billion.

However, a finance income of Rs.3.5 billion, up 39 percent YoY and a tax reversal of Rs.632.5 million on account of deferred tax asset at the JKH subsidiary, Union Assurance PLC, boosted the net profit of the group by 37 percent YoY to Rs.5.09 billion. 

Accordingly, the earnings per share for the period rose to Rs.3.67, from Rs.2.69. 

With the interim financial accounts, the JKH director board also announced the first interim dividend of Rs.2 per share to be paid on November 19, 2018.

The group’s key transportation sector, which includes bunkering, container handling and warehousing, reported a flat after-tax profit of little over Rs.1 billion for the quarter under review, despite a significant increase in the segment revenue almost by Rs.2 billion from the previous year.

JKH Chairman Susantha Ratnayake in an earnings review said a decline in the volume of domestic TEUs impacted the segment’s profitability.

He also said the design work and obtaining building approvals for the new 200,000 square feet warehouse in Muthurajawela is ongoing and construction is expected to commence in the fourth quarter of 2018/19.

The group’s leisure sector performance was impacted by the full and partial closure of three resort hotels—two in the Maldives and one in Sri Lanka—for refurbishment. The group’s two city hotels also contributed significantly to the depressed performance.

The segment saw its after-tax profit falling 45 percent YoY to Rs.332 million, on revenue of Rs.5.5 billion, down from Rs.5.8 billion YoY.

The group’s property segment turned in a loss of Rs.20 million for the quarter under review, against a profit of Rs.43 million YoY, despite an increase in revenue to Rs.23.4. 7 million, from Rs.219.6 million.

“The decline in profitability is mainly attributable to the Rajawella golf course, which is currently undergoing a relaying of the fairways,” Ratnayake said.

Meanwhile, he said the group’s flagship ‘Cinnamon Life’ project is progressing steadily and is slated for completion in the calendar year 2020 with the residential apartments and office complex ready for hand over and occupation by early 2020.

He also said the evaluation of the tender submissions for the ‘Tri-Zen’ residential development in Union Place is currently in progress and the construction of the project is expected to commence in the ensuing quarter.

In addition, the master planning of an 18-acre suburban site North of Colombo is also currently underway, he said. 

The subdued consumer demand, a sugar tax and higher costs relating to expansions had a negative effect on the group’s consumer foods business, as the segment’s after-tax profit fell 48 percent YoY to Rs.226 million.

Ratnayake said the sugar tax introduced from November 2017, which led to a sharp price increase, had resulted in a 31 percent volume decline in the carbonated drink range.  However, he said the monthly volumes during the quarter under review have picked up.  

The group recently commissioned an ice cream factory, which they called one of the most modern ice cream manufacturing facilities in Asia, giving a boost to its frozen confectionary product portfolio.

Meanwhile, the group’s supermarket business recorded an after-tax loss of Rs.91 million for the quarter under review, against an after-tax profit of Rs.305 million YoY, on revenue of Rs.13.5 billion, against Rs.11.8 billion YoY.

The group said in addition to the impact of the subdued consumer sentiment, the profits were impacted by the one-off rebranding and refitting costs of a majority of stores, which amounted to Rs.115 million during the quarter under review. 

The profit was further impacted by the store expansion-related costs, which included a significantly higher interest expense based on the planned funding strategy and higher depreciation as a result of the higher store count, both of which collectively accounted for Rs.152 million.

Ratnayake said all existing Keells outlets are expected to be refitted and rebranded by November 2018. 

During the quarter under review, six new outlets were opened, bringing the total store count to 88 as at September 30, 2018. The group expects to open 80 new retail outlets during FY19 and FY20.

Meanwhile, the after-tax profit of the group’s financial services sector, which includes Nations Trust Bank PLC (NTB), Union Assurance PLC and John Keells Stockbrokers, rose sharply to Rs.1.75 billion, primarily helped by a tax reversal on account of deferred tax asset at Union Assurance PLC and higher loan growth at NTB. The Captain family as the largest shareholders had a 17.5 percent stake in JKH, up from 16.6 percent three months ago, while Broga Hill Investments Limited, a special-purpose investment vehicle of Malaysia’s sovereign wealth fund Khazanah Nasional Berhad, held a 10.2 percent stake.

Schoroder International Selection Fund had reduced its holding in JKH during the quarter under review to 5.3 percent, from 6.2 percent three months ago, while Harry Jayawardena’s Melstacorp PLC has increased its stake to 4 percent, from 3.5 percent.

Norway’s central bank, Norges Bank also has upped its stake in JKH slightly to 1.5 percent, from 1.4 percent.

The Employees’ Provident Fund also has a 1.4 stake in JKH being the 12th largest shareholder.

JKH Deputy Chairman Krishan Balendra, who will take reins from Ratnayake as Chairman from January 1, 2019, also has a 1.4 percent stake in the company.