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by Ravi Ladduwahetty

Commodities broker John Keells Limited (JKL) is expected to post record profits this year following subsidiary John Keells Stock Brokers Ltd achieving a record income of Rs. 70 million from the parent company John Keells Holdings Ltd's purchase of Asian Hotels for Rs. 4.1 billion last month.

While tea broking is expected to provide a steady income flow to JKL, it is the stock broking subsidiary JKSB which is expected to provide the real growth momentum this year. JKSB showed a modest profit before tax (PBT) of only Rs 28 million in FY03, but according to JKL as 1Q-FY04 interim results it has already reported a PBT of Rs 19 million in 1Q-FY04.

Analysts anticipate a greatly improved performance from JKSB during the rest of the year. JKSB acted as the broker in parent company John Keells Holdings' recent Rs 4 billion acquisition of Asian Hotels (AHOT) and it is estimated to have earned over Rs 70 million on that deal alone.

This transaction has apparently helped JKSB to be the top broker (until now) in terms of commission income in 2003. However, JKSB is subject to corporate tax at 35%, and market analysts believe that tax management may possibly be used to bring down JKSB's reported profits, to reduce JKSB's tax liability.

Despite this, they forecast JKSB to report a PBT of at least Rs 150 million in FY04, which is clearly significant when compared to JKL's net profit of only Rs 44 million in FY03.

Analysts said that its strong performance will however not be due to its market leadership position in tea broking, but rather from the exceptional performance of its stock broking subsidiary, John Keells Stock Brokers (JKSB), in which it holds a 76% stake.

John Keells Limited (JKL) is the commodities broking division of conglomerate John Keells Holdings (JKH). It is the country's leading tea broker, holding an estimated 25% market share. The JKH group controls 76% of JKL and other major shareholders include the Carsons group investment trusts, Ceylon Investment Company (6%) and Ceylon Guardian Investment Trust (5%).

JKL also has a 20.5% associate holding in International Tourists Hoteliers (ITH) owners and operators of Hotel Bayroo in Beruwela).

ITH reported a net profit of only Rs 7.9 million in FY03, but is expected to do much better with the forecast record tourist arrivals this year. For the three months ended June 30, the company reported a lower net loss of Rs 1.6 million (from a loss of Rs 5.3 million the previous year). Analysts believe that ITH has the potential to double its profits this year, which would naturally benefit JKL's bottom-line.

JKL's 1Q-FY04 results were affected by a Rs 12 million Voluntary Retirement Scheme (VRS) package and higher finance charges associated with its new warehouse complex at Muthurajawela. Analysts however expect the new 100% owned warehousing subsidiary, John Keells Warehousing, to contribute positively to JKL's bottom line once fully operational.

JKL are large land owners, with the JKH group's head office premises at Glennie Street, Colombo 2, being owned by JKL. This 1.9 acre property is valued at Rs 345 million.

Through its associate company Keells Realtors, it owns other prime properties in Navam Mawatha, Colombo 2 and Ferguson Road, Colombo 15. Although these properties have been revalued during FY03, market sources believe that the values may have gone up even further this year following the boom in property prices.

Supported by record profits at JKSB, analysts believe that JKL is likely to report an all-time high net profit of over Rs 100 million in FY04.

Despite the share having risen sharply over the past month, they believe the share has further upside, especially given the company's high dividend pay out track record. It paid a dividend of Rs 4.9 per share in FY03 and analysts expect JKL's dividends to double this year.

Market sources further point out that JKL has sufficient reserves to give a bonus share issue, with its last bonus being a 1 for 1 bonus in FY99. Meanwhile, John Keells Holdings Limited ("JKH") announced the successful placement of 24 million ordinary shares at Rs.134 each, raising approximately 34 million (Rs.3.2 billion).

There was unprecedented demand for the placement from institutional investors in Asia, Europe and the United States.

As a result, the company has several new foreign institutional shareholders. A number of these institutions are investing in Sri Lanka for the first time.

Proceeds of the placement will be employed to fund the recent acquisition of Asian Hotels and other investments.

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