John Keells expects “material” impact on its biz from COVID-19

• Says impact will be seen in the first and second quarters of FY2020/21 specially on group tourism biz
• Records higher earnings for March 2020 helped by higher interest income, fair value gains
• Operating profit of the group down in both March 2020 quarter and FY2019/20
• JKH Chairman says encouraging recovery in consumer demand seen with resumption of activities 

Premier blue chip John Keells Holdings (JKH) expects the impact of COVID-19 pandemic on its businesses to be “material” in the first and the second quarters of the financial year 2020/21, particularly on the group’s tourism focused businesses.

The group, which has interests in consumer foods, retail, property, transportation, leisure and financial services, recorded 36 percent year-on-year (YoY) dip in operating profits for the quarter ended March 31, 2020 (4Q20) to Rs.2.6 billion amid higher cost of sales and administrative expenses, the interim accounts released yesterday showed.

The group’s turnover during the quarter under review increased only 3 percent YoY to Rs.37.1 billion, possibly impacted by the business slowdown due to curfew imposed to constrain the spread of coronavirus in the last two week of March.

However, the group earnings for the quarter rose 18 percent YoY to Rs.3.7 billion, buttressed by a healthy increase in finance income by 50 percent YoY to Rs.2.8 billion and fair value gains coming from the group’s insurance subsidiary. 

The earnings per share improved to Rs.2.83 from Rs.2.41 in the previous year.

JKH Group Chairman Krishan Balendra said the impact of COVID-19 cannot be ascertained at this point of time given the uncertain and evolving situation.

However, Balendra said with the resumption of activities in the economy after almost two months of curfew, an encouraging recovery in consumer activities can be witnessed, which could be positive for their consumer-focused businesses such as consumer foods, retail, logistics and insurance.   

“The priority will be to ensure a smooth transition while maintaining our agility considering the uncertainty of the environment post the easing of restrictions,” Balendra told the shareholders in the group’s annual report for the financial year 2019/20.

For the full financial year 2019/20, JKH recorded earnings of Rs.7.14 a share or Rs.9.4 billion compared to earnings of Rs.11.13 a share or Rs.15.2 billion a year ago.

The total revenue rose 3 percent YoY to Rs.140 billion while operating profits fell 11 percent YoY to Rs.6.7 billion.
In 4Q20, the group’s consumer food, retail and property industry groups recorded growth in profits.

While the performance of the group had initially witnessed strong momentum in the fourth quarter of the financial year 2019/20, the outbreak of the COVID-19 pandemic, globally, and then locally in March 2020 onwards, had varying levels of impact on the performance of the businesses. ´

The group’s bunkering business recorded a strong growth in profits driven by improved margins. South Asia Gateway Terminal (SAGT), the group’s ports and shipping business, became liable for corporate income tax from October 2019 onwards, which, therefore, had a negative impact on performance as the group recognises its share of profit after tax, as SAGT is an equity accounted investee. 

The group’s beverages and frozen confectionery businesses had recorded an improvement in performance driven by an expansion of margins due to a better sales mix. 

Both businesses recorded encouraging volume growth in the months of January and February, where volumes grew approximately 20-30 percent, on average. 

However, the imposition of island-wide curfew due to the COVID-19 pandemic caused disruptions in sales in the last 2 weeks of March 2020, which is a peak sales month, resulting in a steep decline in volumes, thereby impacting overall volumes for the quarter. 

The group’s supermarket business recorded a strong performance driven by a notable contribution from new outlets and growth in same store sales. Same store sales recorded an encouraging growth of 5.7 percent in January and February 2020. 

However, similar to the impacts in the consumer foods businesses, a steep decline in same store sales was recorded in March due to the imposition of curfew which resulted in outlets being closed during the latter half of March 2020. Consequently, same store sales for the quarter was 1.7 percent. 

According to Balendra, the Group’s Sri Lankan Leisure business displayed a faster than expected recovery post the Easter Sunday attacks, with occupancy in the peak season in line with the previous year, albeit at a moderately lower room rate. 

“However, the momentum of this recovery was derailed by the developments surrounding the global spread of COVID-19 where arrivals to Sri Lanka were impacted gradually from February 2020 onwards,” he said.

“From mid-March 2020 onwards there were no tourist arrivals with the closure of the international airport. In addition, the quarter under review included the start-up costs relating to the newly launched premium resort in Sri Lanka, ‘Cinnamon Bentota Beach’ which affected the performance of the Sri Lankan resorts segment,” he added.
Meanwhile, JKH’s ‘Tri-Zen’ residential development project had continued its encouraging sales momentum, recording sales of 19 units during the months of January and February, although sales in March was impacted by pandemic effects. 

Whilst the construction of both ‘Tri-Zen’ and ‘Cinnamon Life’ was suspended with the imposition of curfew, both sites have now gradually commenced work as permitted under the relevant government directives. 

The EBITDA of the group property industry for the quarter included fair value gains on investment property. 

The group’s banking arm, Nations Trust Bank PLC (NTB) recorded a strong improvement in profits driven by the removal of the Debt Repayment Levy and Nation Building Tax on financial services. 

Profitability of Union Assurance PLC, the group’s insurance arm, during the quarter was impacted by a notional tax credit reversal under investment income.