Fitch Affirms John Keells Holdings at 'AAA(lka)'; Outlook Stable

Fitch Ratings has today affirmed Sri Lanka's John Keells Holdings PLC's (JKH) National Long-term rating at 'AAA(lka)', as well as its senior unsecured notes at 'AAA(lka)'. The Outlook remains Stable.

JKH's ratings reflect its strong financial profile as a result of strong dividend inflows to its parent, significantly low net-debt level and its strong liquidity at the holding company level. JKH has a track record of maintaining a strong balance sheet and credit metrics and has raised substantial equity ahead of major investments.

Dividends from South Asia Gateway Terminals (Pvt) Ltd (SAGT; 42%-owned associate investment) contribute significantly to group cash flows, as well as to the parent's dividend receipts (an average of 46% over FY08-FY10). Fitch notes that although SAGT has improved its market share, expected additional container handling capacity in Colombo and at several Indian ports beyond the medium-term can become a risk factor due to its dependence on high transhipments destined to India. It expects SAGT's strong dividend to continue at current levels, at least till the medium-term, providing support to the rating. Also, Lanka Marine Services (Pvt) Ltd (LMS; 99% owned by JKH) has lost market share and seen lower gross margins during FY10, driven by highly competitive pricing; it has ceased to be a significant dividend contributor to the parent as of FY10. JKH however has managed to mitigate this loss of dividend with dividends from other sectors; also potential higher dividends from the leisure sector are likely. Total dividend to parent in FY10 was LKR3.5bn (FY08: LKR3.1bn).

Capex of JKH's leisure segment is set to increase with new investments made following the end of terrorist activities in 2009. Its hotel resort owning subsidiary, John Keells Hotels PLC (KHL), has recently raised equity funding of LKR3.6bn for identified investments; LKR2.5bn of this was provided by KHL's minority investors and through part sale of JKH's share rights, which reduced JKH's net cash outlay. The holding company now owns 82% of KHL, and hence still controls its cash flows. Raised cash helps KHL's high leverage and low-debt service coverage over the short-term, which Fitch notes are concerns and weighs on JKH at the group level.

Despite JKH's current dependence on one sector for majority of dividend income, its industry diversification does improve its overall risk profile to some degree. Improving earnings from its hotels and leisure operations in Sri Lanka and Maldives have offset significantly lower profits from the marine fuel business and reduced earnings in the property division.

At FYE10, JKH had LKR10.2bn of cash reserves against LKR10bn of debt at the holding company indicating its strong net-debt position. Although 57% of total group debt is raised at the holding company, structural subordination is not a concern given its majority ownership of subsidiaries, and strong annuity-like dividend from its key associate investment-SAGT. JKH's interest coverage, measured as funds from operations/ gross interest, was strong 6.4x at FYE10 and its debt maturities are comfortable. Even though, JKH is expected to repay LKR3.1bn within FY11, its high cash assets and approximately LKR5.0bn in unutilised debt facilitates underscores its strong liquidity. Furthermore, should ever the need arise, JKH can raise cash by monetising its holdings in its subsidiaries, many of which are listed on the Colombo Stock Exchange, and without loss of control as JKH owns well in excess of 50% of most of them.

The Stable Outlook is based on the expectation that JKH, at the holding company level, will maintain a financial profile appropriate for its rating over the medium-term. A negative rating action can be taken if any large investments are undertaken by JKH, which results in weakening of its credit metrics and/or increases the risk of structural subordination of cash flows through reduced control of the new investments.