Hefty finance cost bites into JKH’s 3Q earnings despite solid top line

• Revenue grows 27% to Rs.68.2bn; EBITDA grows 9% to Rs.10.4bn 

John Keells Holdings PLC reported solid top line growth for the December 2022 quarter (3Q23),  but profitability came under severe pressure from a one-off deferred tax charge at South Asia Gateway Terminals (SAGT), escalating costs across its business lines, and sharp increase in interest cost as the group raised heavy working capital facilities. 

The diversified conglomerate reported revenues of Rs.68.2 billion for the quarter under review, up 27 percent YoY. 
The group saw revenues growing across its businesses except in its property business which was beset only because the comparable period had revenues and profits recognised from the sale of its residential apartments and commercial units at its flagship mixed development project, ‘Cinnamon Life’.

After the government made an about turn on gaming through a gazette issued in August, the company is now engaged in discussions to court international gaming expertise to run gaming at the facility. “Based on preliminary discussions, it is estimated that the overall fitout of the gaming space will take a period of approximately 12 months once the design aspects are finalised,” JKH Chairman Krishan Balendra said.
With re-sequencing of overall finishing work of the project along with the finalising of the gaming arrangements, the company expects Cinnamon Life to become operational from the first quarter of 2024/25. 

The project faced several delays and cost overruns due to the pandemic and the economic crisis last year. The group estimates the project to cost roughly 10 percent more than the US$ 900 million it estimated in the financial year 2018/19. The property segment reported a negative EBITDA of Rs.312.4 million in the December 2022 quarter compared to a positive Rs.707.5 million in the comparable period a year ago. 
The group reported a consolidated EBITDA of Rs.10.41 billion for the period, up 9 percent from a year ago. 
JKH share ended 50 cents or 0.36 percent lower yesterday at Rs.139.50. 

JKH said its EBITDA would have been higher at Rs.11.17 billion, translating into a 17 percent increase, if not for the one-off impact came from the deferred tax charge at SAGT on account of the significant change in income tax rates. 

SAGT generated EBITDA of Rs.1.50 billion in the quarter, up 7 percent. But, the EBITDA increases by 62 percent to Rs.2.26 billion when the one-off deferred tax charge is stripped off. 
Meanwhile, the group’s retail and leisure businesses did well with EBITDA of Rs.2.32 billion and Rs.1.89 billion, respectively, logging increases of 2 percent and 54 percent. 

JKH said its retail business EBITDA was undermined by the substantial decline in the EBITDA of its office automation business, which is captured under the retail vertical. But, its supermarket operation taken separately generated an EBITDA growth of 26 percent to Rs.1.99 billion supported by the same store sales driven by a combination of higher footfall and basket values due to inflation. 

However, the margins came under pressure due to significant increase in operational costs primarily in electricity tariffs and staff costs, the company said. 
JKH opened only one new outlet during the quarter bringing its total supermarket count to 130. 

The group’s tourism segment was buttressed by the strong occupancy in its Maldivian resort segment, which reached 90 percent and the Colombo hotels on the back of restaurant and banqueting operations.
Meanwhile, the group’s consumer foods business saw its EBITDA falling by 60 percent to Rs.402 million due to decline in volumes in beverages, frozen confectionery and convenience food. 
The group’s financial services segment led by Union Assurance PLC and Nations Trust Bank PLC delivered an EBITDA of Rs.2.85 billion, up 35 percent.

Overall, John Keells Holdings reported earnings of Rs.1.43 a share or Rs.1.98 billion for the October – December 2022 quarter compared to earnings of Rs.3.72 a share or Rs.4.91 billion a year ago. 
The earnings were weighed significantly by the hefty finance cost which soared by 207 percent to Rs.5.30 billion as the group raised significant working capital facilities, particularly in retail, leisure and consumer foods industry groups when the rates were extremely high. 

The group’s bank overdraft had risen to Rs.32.9 billion from Rs.20.3 billion nine months earlier. 
Balendra remains optimistic of the fiscal fourth quarter operations and the period ahead premised on the easing of inflation, other reforms made in the economy by way of increase in taxes to help the fiscal situation, the gradual improvement seen in the foreign currency liquidity and the prospects of an IMF deal within the first quarter.