Fitch affirms JKH at ‘AAA(lka)’; Outlook stable

Fitch Ratings has affirmed the National Long-term rating of Sri Lanka’s John Keells Holdings PLC (JKH) at ‘AAA(lka)’. Fitch has also affirmed the National Long-term rating on JKH’s senior unsecured notes at ‘AAA(lka)’. The Outlook remains stable.

JKH’s rating reflects the diversified nature of its businesses, the currently strong financial profile driven in part by its high cash position (estimated at Rs 10b as of March 3, 2009 at the holding company), continued strong operating cash generating ability, and the dominant market share of some subsidiaries.

However, Fitch notes that JKH has yet to announce plans with regard to the deployment of its cash assets. Should these deployments be in long-term projects with aggressive investment schedules, as well as protracted projected dividend flows, JKH’s credit metrics can be expected to weaken over the medium term.

As such, Fitch notes that there remains some probability of event risk with regard to JKH’s ratings which the agency will continue to monitor and take rating action as warranted.

Fitch expects JKH’s bunkering business (post 08 margin erosion) and the Maldivian hotels segment to overcome operational restrictions faced in 09 and provide more standard returns in FYE 10.

The agency also takes comfort from the expected contributions to JKH’s cash flows in the near term from the property sector (in FYE10) as well as the customary dividend flow from South Asian Gateway Terminal (SAGT) - the container handling associate of JKH group (increased ownership from 34 per cent to 42 per cent during 09).

JKH has maintained its financial structure relatively well with significant equity issues (Rs 13bn in 07) leading to a strong balance sheet. In April 2008, JKH drew down on an USD75m debt facility from International Finance Corporation (IFC) with the option to use the funds for investments into new ventures.

Part of these cash balances have been used to increase the group’s ownership stake in existing ventures (such as SAGT, Ceylon Cold Stores, Union Assurance and John Keells PLC) and to repurchase 4 percent of the shares outstanding in November 2008.

Key industry level challenges over the short term remain the expected slowdown in transshipment volumes impacting its transport segment, as well as the slowdown in tourism in the Maldives.

Fitch also notes that the ability of the remaining property project to recognise its planned revenue and profits according to schedule may be somewhat pressured in the current environment.