JKH expects economic fallout from COVID-19 to overshadow first half

• Says has enough cash reserves and bank facilities to sustain operations 
• Group’s flagship project Cinnamon Life expects slowdown in sales momentum
• Retail business to bolster online operations to tackle new normal in consumer behaviour

Sri Lanka’s largest listed firm, John Keells Holdings PLC (JKH) expects the COVID-19 pandemic to overshadow its first and second quarter performances of FY21, but assured that the diversified conglomerate has sufficient cash reserves and banking facilities in place to sustain all its operations even under extreme conditions over next 12 months.

“Whilst the impact on the financial year 2020/21 cannot be ascertained at this point of time given the uncertain and evolving situation, the group expects the impact on performance in the first and second quarters to be material, particularly for tourism focused businesses,” JKH Chairman Krishan Balendra said making a disclosure regarding the impact of COVID- 19 to the Colombo Stock Exchange.

The conglomerate acknowledged that the economic impacts of COVID- 19 pandemic have been felt across nearly all group sectors including transportation, consumer foods, retail, property and to a lesser extent on financial services, with tourism focused businesses being the hardest-hit. 

Commenting on the impact on property sector, which includes US$1 billion Cinnamon Life mixed development project, JKH noted that sales momentum would slow down due to current developments. 

“The business is working closely with the contractor to understand the impact on the overall project to manage resources and deliverables. The group expects sales momentum to be impacted by subdued consumer sentiment and discretionary spending,” Balendra said.

JKH has decided to suspend operations of its city hotels and resorts with no tourist arrivals to both Sri Lanka and Maldives in order to cut down certain fixed overheads and other expenses.

“Depending on government directives to ease restrictions, the hotels can re-commence operations within a week although business is not expected to pick up sharply in the short term due to stringent social distancing guidelines which are likely to be in place,” Balendra said. 

The group noted that the degree of impact to overall port operations in the transport sector would largely depend on how regional trade will evolve post recovery, given the higher reliance on transhipment volumes, particular in South Asian region led by India. 

However, on a positive note, the recovery of trade in China has led to a pickup in Chinese vessel movement. 
JKH expects its volumes to improve in consumer foods sector with the lifting of the curfew, while the outlook beyond that would depend on the impact on the overall economy and resultant impacts on consumer expenditure.
With regard to the retail sector, the group revealed that revenue is negatively impacted in immediate term as most of its outlets, which are located in high-risk districts, remain closed, and are largely limited to delivery.

“While outlets will be opened once restrictions are eased, we expect to continuously ramp up our capability in serving our customers through online delivery platforms. Outlets which are open to customers will adhere to the new safety guidelines issued by the government and health authorities,” Balendra added.

In order to evaluate the financial position of each business, the diversified conglomerate has stress-tested each of its businesses under multiple operating scenarios, and subsequently at a group consolidated level to ascertain the impact on the ability to sustain its operations with its cash reserves and banking facilities in place.

“Whilst the assumptions vary across the businesses, the group is satisfied of the ability of the businesses to manage its operations even under an extreme stress-tested scenario,” Balendra affirmed. 

In addition, with a view to focusing on cash management and liquidity, the group has adopted weekly dashboards, which cover financial and non-financial KPIs and revised targets, including monitoring of weekly cash targets and spend control initiatives including a freeze on all non-essential capital expenditure and stringent expense control measures, including a reduction in executive staff remuneration ranging from 5 to 60 percent across the group till June 2020, subject to further review depending on the macro and operating environment.

Furthermore, certain companies under the group have also sought relief measures announced by the government including a moratorium on repayment of loans and concessionary working capital facilities for eligible industries.
The group expects that such relief measures would help ease its financial position further. 

“At this moment, the focus is on transitioning to back-to-work arrangements ensuring all health and safety protocols are in place. While the group has a strong cash position and availability of banking facilities, we will continue to focus on ensuring we preserve this position and obtain further banking lines ahead of any future requirements,” Balendra said.