Fitch Ratings said yesterday it has affirmed Sri Lanka’s John Keells Holdings PLC’s (JKH) National Long-Term rating at ‘AAA (lka)’. The Outlook is Stable.
The affirmation reflects JKH’s resilience of dividend inflows to, and resultant low financial leverage (net debt/EBITDA excluding non-recurring items) at the holding company (HoldCo). This is in turn driven by the strong competitive positions of most of its key operating companies. Fitch also notes that the risk of structural subordination of HoldCo creditors is low as JKH’s key dividend-paying companies have minimal debt on their balance sheets.
“JKH’s track record of maintaining a conservative capital structure at HoldCo by funding acquisitions and expansions largely via a combination of pre-issued equity and retained earnings provides added comfort to its rating,” said Hasira De Silva, Assistant Vice President at Fitch Ratings Lanka Ltd.
“The rating also reflects JKH’s strong liquidity position, well-spread-out debt maturities, and its exceptionally strong access to local banks and capital markets” adds De Silva. Its capital structure is also supported by its broad ownership profile, where the single-largest shareholder owned 21% at end-March 2011 (FYE11).
In FY11, JKH’s group revenue grew by 26% yoy to Rs. 60.5 b, while EBITDA (excluding non-recurring items) grew by 51% yoy to Rs. 7.7 b, as most operating segments benefited from resurgence in regional and local economic activities.
At HoldCo, South Asia Gateway Terminals (SAGT) – JKH’s 42%-owned terminal operator at the Port of Colombo (POC) – accounted for 59% of total dividends, while its leisure and property segment and financial services contributed 20% and 10%, respectively. Over the medium-term, JKH expects dividends from its leisure sector to increase and account for a greater proportion of earnings at HoldCo.
Key among the medium-term risks is a new deep-water terminal at POC, which will increase container-handling capacity and could dampen SAGT’s profitability and its capacity to upstream dividends. However, Fitch expects this threat to be mitigated by the strong growth in regional transshipment demand. Also, key regional shipping routes are closer to POC than to Indian ports, mitigating the threat posed by regional competition to an extent. Further, if JKH maintains its conservative capital structure, its credit metrics should remain fairly resilient to even a sharp deterioration in SAGT’s profits over the medium-term.
Capital expenditure for the group is expected to rise in FY12, driven mainly by expansions in the leisure and food/retail segments locally. At FY11, cash reserves at HoldCo stood at over LKR10bn, which could be deployed into new ventures over the medium-term. The management indicates that any deployments are likely to be staggered over multiple financial periods. Fitch views this as an ‘event risk’ in relation to JKH’s overall risk profile.
The Stable Outlook is based on the expectation that JKH, particularly at HoldCo level, will continue to maintain a conservative financial profile over the medium-term. That said, negative rating pressure may occur if HoldCo’s financial leverage is sustained at levels above 1.5x, or if its gross debt exceeds 4.0x SAGT’s annual dividend contribution on a sustained basis.
The rating may be downgraded if there is greater structural subordination of HoldCo creditors either due to a reduction in control or an increase in debt at its key dividend contributors, or a material shift in the risk profile of these companies. A more concentrated shareholding that leads to a change in JKH’s conservative management style would also be a rating negative.