Buyback offer lifts John Keells (JKH) stock out of the doldrums

December 8, 2018 (LBO) – Sri Lanka’s stock market bellwether John Keells Holdings (JKH) has seen its stock price rise sharply since the start of Sri Lanka’s constitutional crisis.

JKH stock touched multiyear lows of Rs126/share weeks before the October 26th start of Sri Lanka’s political turmoil. Trading significantly below net asset value of over Rs150/share, the stock was being sold by foreign institutions who were exiting emerging markets as a whole. The foreign selling was met by heavy local buying by Sri Lanka’s largest high net worth investors the Captains and Harry Jayawardena. There are already unconfirmed reports that the two parties have together accumulated over a 25% stake, giving them veto power over board proposals that require a shareholder vote in excess of 75% of total shares outstanding.

Shares now trade at Rs161/share, up close to 30% from the lows reached just a few months ago. With its stock price flagging, management of JKH made a buyback offer to all shareholders. The open offer aims to buyback close to 5% of all outstanding shares at a price of Rs160/share.  Since the stock has moved up over the 160/share price, it its likely that JKH will be able to save much of the Rs10bn in cash that would have been expended to buyback the shares.  The shareholder friendly proposal has thus so far succeeded to get the stock price up without any large use of cash reserves. The offer is open till January 10, 2019.

The increase in the price of JKH shares has reduced the possibility of a hostile takeover, however, many market watchers believe that more needs to be done to prevent the company from falling into the hands of a controlling group of shareholders. One of the aspects of JKH that makes it appealing to foreign investors is that there is no local controlling shareholder and generally high standards of corporate governance. This has allowed to the company to use its balance sheet to fund large projects such as its billion dollar waterfront property development.

Other companies in Sri Lanka with controlling shareholders have not been able to raise significant amounts of capital, and suffer from a myriad of corporate governance issues making them unattractive to foreign institutional investors.

John Keells Holdings is the looked at by market participants as the most important stock on the Colombo Stock Exchange. The billion dollar company touches almost every sector of the Sri Lankan economy. Going into 2019, the company will have a new Chairman/CEO Krishan Balendra (45) and Deputy Chairman/CFO Gihan Cooray (42). The management transition is viewed as a changing of the guard in corporate Sri Lanka.