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Ratings of John Keells Holdings Ltd. (JKH) have been removed from the rating watch list and SLAAA rating affirmed. The rating reflects the continuing recovery in the core business segments following the difficult operating environment faced by the company and the expectation of a recovery in group's financial metrics to higher levels in the current financial year.

The rating does not take into account possible acquisitions by the group. Fitch Ratings Lanka (FRL) will evaluate the impact of such events on the group's credit risk profile as and when they occur. A more favourable operating climate and measures initiated by the management lead to a recovery in earnings in the fourth quarter 2001/02 and is expected to continue in the current financial year.

The food and beverages segment, sustained its position as the largest contributor to sales accounting for 43% of consolidated revenues in 2001/02. Segment revenues surpassed previous year's levels despite a weak economic condition. Profitability however, was adversely affected primarily in view of a voluntary retirement scheme (VRS) currently being implemented by Ceylon Cold Stores (CCS). In 2001/02 the cost of the VRS scheme was Rs. 150 million. Further cost of approximately Rs. 250-300 million is expected in 2002/03 which would be somewhat mitigated by savings arising from implementation of the scheme. The segment's supermarket operations and ice cream division is however vulnerable to competition from enhanced performance of existing players and new entrants.

The leisure segment, the most adversely affected recorded a lower than expected pre tax loss of RS. 50 million in 2001/02 largely due to the gradual recovery of the Maldives tourist market and rationalisation of operations. The successful completion of the ongoing peace process holds great promise for the domestic tourism industry. Given the high degree of operating leverage in the leisure segment, a recovery in tourist numbers would have a high impact on profitability, which would also have a complementary effect on the food and beverages segment.

The IT segment would no longer be a cash drain on the company. However, the segment is not expected to make a significant contribution to earnings in the medium term.

A strong performance by the transport segment increased pre tax profits of the segment by 35% in 2001/02, contributing 59% to consolidated pre tax profits. South Asia Gateway Terminals (SAGT) will make a significant contribution to profitability in 2002/03 with commissioning of the first berth in Feb. 2002. As of Dec. 2001, total container handling at SAGT increased by 10% to 330,000 TEUs despite the difficulties faced. JKH utilised its bank facilities to fund a further component of its committed investments in SAGT, which contributed to the increase in balance sheet debt in the 2001/02 without a commensurate rise in earnings to maintain creditor protection levels.

The group's EBITDA/Interest cover was 6.5x after adjusting for non-recurrent expenditure for the twelve months ended March 2002 and is reasonable given the extreme operating environment faced by the company. Balance sheet debt increased by Rs. 981 million over the corresponding period in the same year, largely driven by higher short-term debt. Additional debt was mainly for the investment in SAGT and the restructuring of Namunukula Plantations Ltd. It is expected that earnings from these investments would improve creditor protection levels in the future.

Total borrowings are not expected to increase substantially in the future due to the lower than expected investment in SAGT and the rationalisation of the plantation segment. Free cash flow net of operating activities improved to Rs. 323 million in 2001/02 in comparison to Rs. 199 million in the corresponding period due to the curtailment of capital expenditure and the cash generated from the sale of entire 27.21% stake in Richard Pieris and Company Ltd.

The group also divested its holding in Keells Diamonds Limited at a net loss of Rs. 14.15 million. It is expected that in the future JKH would show a greater concentration on its core business segments and divest non-viable business operations. (Press release)

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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