Wednesday, 21 August 2013 00:00
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Fitch Ratings has affirmed John Keells Holdings PLC’s (JKH) ‘AAA(lka)’ National Long-Term rating. The Outlook is Stable.
JKH is an investment holding company (holdco) with interests in transport, leisure, consumer food manufacturing and retail, property development, financial services and IT.
Key rating drivers
Strong, diversified dividend income: JKH earns strong recurring dividends from core investments, particularly from its 42%-owned associate South Asia Gateway Terminals (SAGT) which operates one of three container terminals at the Port of Colombo (POC), and from its leisure segment. Fitch considers the structural subordination of holdco creditors to be low, because JKH’s key subsidiaries are either majority owned or have low leverage. The latter is the case because these subsidiaries are in a mature stage of operation and are therefore well placed to pay significant dividends.
Demonstrated shareholder access/support: JKH is one of a handful of domestic corporates who have in the past demonstrated that its shareholders have the ability and willingness to inject fresh capital, usually ahead of major projects and expansion. Consequently, JKH has maintained a strong and liquid balance sheet, which is a key credit strength, with cash reserves exceeding debt at the holdco. Leverage (defined as lease-adjusted net debt/operating EBITDAR) has remained low even at a consolidated level at below 1x, between FY11 and FY13 (financial year end-March).
Benefits outweigh port risks: Existing stevedoring capacity at POC increased about 20% in August 2013 with the first phase completion of the new terminal, Colombo International Container Terminals Ltd. (CICT). The terminal, which is majority-owned and operated by China Merchants Holdings (International) Company Ltd. of Hong Kong, will increase container throughput to around seven million TEUs (20 foot equivalent units) from about 4.8 million TEUs, once completed in April 2014. Fitch notes that a sharp increase in spare capacity can intensify competition between terminals at least in the short- to medium-term, before the new terminal achieves profitability.
However, Fitch believes benefits to SAGT outweigh the medium-term risks. For example, CICT is the only deep-water terminal in South Asia which is able to accommodate the largest vessels in operation today, and is also closer in proximity to key East-West trade routes than other deep-water ports such as those in Singapore and the Middle East. This, combined with POC’s proximity to India, provides a distinct advantage for transhipment business to and from the subcontinent. Also, Fitch believes that it is in the State’s interest to discourage a price war among terminal operators, particularly as it wholly owns the third terminal at POC and has minority shareholdings in SAGT and CICT.
Project risks outside rating horizon: Fitch believes JKH is likely to take its usual conservative approach towards funding and managing its proposed investment of over US$ 650 million in a luxury multi/mixed use integrated resort (IR). It will manage, operate, sell, lease and rent the resort, subject to receiving approvals from relevant regulators and its shareholders. Fitch will continue to monitor developments and look to take appropriate rating action if actual performance deviates materially from the agency’s expectations.
Strong rupee and dollar liquidity: JKH has strong liquidity at both holdco and consolidated levels, supported by large cash balances, low debt and strong access to domestic banks. At FYE13, cash balances at the holdco exceeded debt by almost Rs. 7 billion. A majority of holdco debt consists of a US$ 40 million facility (approximately Rs. 5.28 billion) of which US$ 10 million is due in FY14. Comparatively, a majority of dividend income to the holdco is from US dollar sources, resulting in an estimated US dollar debt/EBITDAR ratio of 1.03x at FYE13, which Fitch views as satisfactory. Holdco also has dollar cash reserves of US$ 35 million, which further supports repayments.
Rating sensitivities
Negative: Future developments that may individually, or collectively, lead to a further negative rating action include:
Leverage being sustained above 1.5x at holdco or consolidated level (FYE13 holdco: surplus cash; consolidated leverage: 0.29x)
Gross debt/EBITDA at holdco being sustained above 4.0x (FYE13: 0.86x)
Introduction of significant refinancing risk at holdco or group over the medium-term
Impaired business risk profile of SAGT due to higher competition at POC that would result in a material reduction in dividend payouts to JKH
Positive: There is no scope for an upgrade as the company is at the highest end of the Sri Lankan National rating scale.
