John Keells Holdings PLC- Initiation Coverage

Sri Lanka is poised for robust economic expansion from the revival of the economy after the end of civil conflict in 2009 and ensued progression made by the country with more stable macro-economic fundamentals. Country's GDP has grown by 7.5% in real terms since 2009 and is expected to continue similar growth momentum. JKH has been able to establish strong presence in key growth segments of the economy with market leadership in most of its businesses.

JKH historically has been able to make strategic entries into growth sectors. The latest entry is into mixed development projects via its flagship investment “Waterfront Integrated Resort Development Project (IR)” which is expected to drive the next growth phase of the group. We estimate the project to account for 26% of the valuation of the group and coupled with existing portfolio of businesses JKH presents a unique opportunity for an investor to get exposure to Sri Lankan economy.

Well established portfolio of businesses to drive the financials in medium term: JKH current operation includes well diversified portfolio of businesses with strong foothold on their respective sectors. It has market leadership in key growth segments, tourism (largest hotel operator in the country) and consumer food (market leader in beverage and ice cream). The transportation sector serves as the cash cow for the group with its container handling and bunkering businesses. JKH's presence in financial services through insurance and banking further strengthens its business portfolio. Accordingly we forecast JKH to show 13% CAGR in bottom line for next two years.

Strong Corporate Governance gives flexibility in strategy as well as funding: JKH does not have single entity or group entity controlling shareholder and the Board of directors consist of majority independent directors. Thereby the Board has the flexibility to drive the company's strategy to optimize stakeholder expectations including minority shareholders. JKH has 100% free float which consists of majority foreign shareholders gives the group flexibility to raise equity capital with fair degree of ease.

Strong Balance Sheet provides aggressive funding options: The group is fairly low geared and hence can conveniently leverage up to take up the investment opportunities without putting significant burden to the balance sheet.

Water Front Project to drive the next growth phase of the Group: USD 820 million project will drive the next growth phase of JKH. We has estimated a value of LKR 68.5 billion (USD 515 million) for the project on our future projections and hence the group's overall value will be significantly depend on the project's feasibility in the future.

We assume a cost of equity of 12.34% taking the nature of investor composition in to account. We believe JKH to be the strongest listed player in the Sri Lankan economy. We have valued the company using a combined DCF/SOTP approach. Our valuation model values the share price at LKR 262.24 and accordingly counter is trading at a discount to our valuation. We give BUY recommendation for JKH.