JKH hits post war valuation lows as second Balendra era beckons

Jul 04, 2018 (LBO) – The Colombo Stock Exchange has had a tough 2018, and there is no stock where this is more apparent than John Keells Holdings (JKH).  JKH has been referred to as Sri Lanka’s bluest of blue chips.

To many foreign institutional investors, JKH is the only stock in Sri Lanka that meets their investment criteria.  Along with Ceylon Tobacco (CTC), JKH is only one of two listed companies that have market capitalisations over US$1bn. However unlike CTC, JKH’s entire float is free, with no controlling or even dominant shareholder.

JKH, whose footprint spans many industries, is seen by foreign investors as an equity proxy for the entire Sri Lankan economy.  It is also the only stock where foreign investors can effectively enter and exit position sizes in excess of US$10mn.

The emergence of JKH as Sri Lanka’s premier listed company took place under the stewardship of Ken Balendra, perhaps the most pre-eminent corporate figure in the history of Sri Lanka. Ken took over from Mark Bostock and was the first Sri Lankan head of JKH.  For the last decade the company has been led by Chairman Susantha Ratnayake, and recently retired Deputy Chairman Ajit Gunawardene.

For the next decade, JKH will be led by Krishan Balendra, the scion of the legendary Ken Balendra. Upon the retirement of Ajit Gunawardene, Krishan Balendra was recently appointed Deputy Chairman and will officially take over as Chairman/CEO on January 1st.

Krishan Balendra is already one of the most well known corporate figures in Sri Lanka.  He has chaired the Colombo Stock Exchange, Nations Trust Bank, and led several JKH subsidiaries.  He is a proven commodity and for some time has been the front runner for the JKH CEO position.

The next generation Balendra will take over a company that is in a significant transition.  The immediate complex issue to be executed is a billion dollar bet on their Cinnamon Life property development.  Although one would think that the post war boom would be in full force, enabling Cinnamon Life to be a smashing success, this is not the case.  GDP growth in the Sri Lankan economy has sputtered, and political prospects are uncertain.  Their property development has also faced significant delays, in addition to uncertainty over the ROI of the project which was previously planned with casino license. Some time after the project started, the casino licence became politically unpalatable, forcing JKH to continue the project with a focus on conference and banqueting facilities instead.

Shareholders have also become less enthusiastic. The Malaysian sovereign fund Khazanah, JKH’s largest shareholder with a 10.2% stake, is sitting on a significant loss in dollar terms. Sources say that they are likely to be a seller of the stock at the right price.

The company’s city hotels, the Cinnamon Grand and Cinnamon Lakeside, have been in decline since the opening of the far superior Shangri La.  Both these city hotels are rumoured to be for sale, with a possible deal already in the works.

Most importantly for investors, the stock is in the dumps.  JKH is now hitting valuation levels not seen in the post war period.  The company trades at Rs138, below its net asset value of Rs144.  It also trades at less than 10 times trailing earnings.  Analysts say that these valuations are almost unheard of, and are below the market price to earnings (PE) and price to book (PBV) ratios.  JKH has almost always traded at a premium to the market.

Many in Sri Lanka are excited about the change of leadership at JKH.  Senior staff have indicated that they are looking forward to a new generation of leaders and a relatively young CEO.  With the stock in the dumps, incoming CEO Krishan Balendra has a lot on his plate.