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| Monday, 13 September 2004 |
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John Keells Holdings upgraded to AAA (sri) Fitch Ratings Lanka Ltd (FRL) has upgraded the national rating for Implied Unsecured Senior Long-term debt of John Keells Holdings Limited (JKH) to AAA (sri). The Rating Outlook is Stable. AAA (sri) credit ratings denote the lowest expectation of credit risk. This rating is assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. The rating takes into account JKH's strong financial profile, improved credit protection measures and the group's dominant market position in a number of business segments protected by reasonably high barriers to entry. JKH's credit profile has improved significantly since the last rating action. The key credit metrics for JKH has improved due to the substantial increase in equity by way of a share issue in 2003 and enhanced earnings, partially aided by acquisitions made in the recent past. Total Debt/ EBITDA at March 2004 was 0.9x, down from 1.4x in the preceding financial year (Debt/ Cash Flow From Operations before Interest: FY04-1.0x, FY03-1.5x), while EBITDA/ Gross Interest improved to 8.8x from 8.0x. Leverage, measured by Total Debt/ Equity improved to 18.3% as at March 2004 from 34.7% a year ago, chiefly due to the aforesaid share issue. The group is expected to generate strong earnings from the Leisure and Transportation segments. The latter provides cash-generative income due to healthy margins and low capital expenditure in the short- to medium-term. Nevertheless, FRL's primary concern is the potential impact of changes in the general security and political environment on the groups operations. In particular, a marked deterioration of the security situation is likely to significantly impact earnings from the Leisure segment operations in Sri Lanka, which account for approximately a fifth of operating profits of the group. The Food and Beverage sector will continue to be the largest contributor to the group in terms of revenue, but will face intense competition pressuring margins. The sector may also see increased debt with the expansion of the supermarket operations and downward pressure on profitability during expansion. However, the sector will benefit to some extent from staff related cost savings as a result of head-count reductions. The group is expected to enhance its revenue and earnings in the current year, with full year consolidation of the recently acquired businesses and growth in sales in a number of key operating segments. A significant increase in debt is not envisaged on any of the existing operations, with the impending capital expenditure being largely funded through internally generated funds. However, given the group's low leverage, it is likely that future investments would be largely funded through debt in order to arrive at a more efficient capital structure. |
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