June 07, 2010 (LBO) – Sri Lanka’s John Keells Holdings has retained its ‘AAA(lka)’ rating with a ‘stable’ outlook with strong cashflows from dividends of its container terminal in Colombo port, Fitch Ratings said. “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,” Fitch Ratings Lanka said.
“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, which is 42 percent owned by JKH, brought in 46 percent of the parent’s dividends over the financial years 2008 to 2010.
Fitch said that although SAGT has improved its market share, expected additional container handling capacity in Colombo and at several Indian ports can be a risk due to its dependence Indian transhipments.
“It expects SAGT’s strong dividend to continue at current levels, at least till the medium-term, providing support to the rating,” Fitch said.
JKH’s bunkering unit, Lanka Marine Services (Pvt) Ltd, which is 99 percent owned, had lost market share and seen lower gross margins during in 2010 due to competition.
It has ceased to be a significant dividend contributor to the parent. JKH has managed to mitigate this loss of dividend with dividends from other sectors and there was potential for higher dividends from leisure.
Total dividend to parent in 2010 was 3.5 billion against 3.1 billion in 2008.
JKH’s leisure unit, Keells Hotels (KHL) has raised 3.6 billion rupees in equity to invest in new hotels after the end of a 30-year war. Minority investors had put in 2.5 billion with JKH selling a part of its rights entitlement.
JKH is still controlling its cashflow with 82 percent ownership. Fitch said the raised cash helps KHL’s high leverage and low-debt service coverage over the short-term, which it says are “concerns” that weighs on JKH at 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,” Fitch said.
“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 the end of the 2010 financial year JKH had 10.2 rupees in cash reserves and 10 billion rupees of debt, indicating a strong net-debt position.
Although 57 percent 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 SAGT, Fitch said.
JKH’s interest coverage, measured as funds from operations to gross interest, was strong at 6.4 times at the end of the 2010 financial year and its debt maturities are comfortable, Ftich said.
JKH is expected to repay 3.1 billion rupees in 2011 but its high cash assets and about 5.0 billion rupees in unutilised debt facilitates has strengthened 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 percent of most of them,” Fitch said.
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, Fitch said.
Fitch said 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.