CAL - Flash note on JKH Right Issue

CAL RESEARCH’s VIEW ON JKH – FV LKR192; HOLD


In FY14E, CAL expects an EPS decline of -6% YoY (Best Case Scenario) – CAL Research continues to expect JKH’s Transport, Leisure and Retail segments (80%+ of EBIT) to face challenges over the next year. The transport segment will face competition from the Colombo South Port and is likely to become heavily reliant on transshipments (i.e. trade) to the sub-continent. In FY14E, JKH’s Sri Lanka resorts are likely to see occupancies at c.60%, (c.70% group-wide) due to high pricing and low product quality. Re-pricing of flagship hotels are very likely towards later FY14E as new int’l brand hotels enter the market. Finally, the retail segment is likely to see margin pressure due to operational cost increases, while higher taxes may dampen consumer purchases (retail side). All else unchanged (i.e. ex-Integrated Resort investment), CAL Research continues to expect a c.6% YoY decline in EPS in FY14E. Please refer 1QFY14 Earnings Note for details

Integrated Resort Funding Remains a Concern – JKH management expects phase I of the project to cost USD650mn (including land value of USD60mn). CAL Research remains cautious regarding funding. If the investment commences in FY14, JKH EPS may decline by 30%+ YoY to LKR9.3.

1. As at 1QFY14, JKH had net cash and short-term investments of LKR19bn (USD145mn).
Including the land, this amounts to USD205mn, leaving a funding shortfall of USD445mn for the first phase if management’s project cost expectation remains intact.

2. CAL anticipates phase I costs (excluding car park and land) to reach USD450 psf, which is 50- 60% cheaper than regional IR costs (excluding land). Therefore, total phase I project cost is likely to reach USD700mn (including land), bringing the funding shortfall to USD495mn.

3. The announced rights issue may raise USD176mn, leaving a shortfall of USD270-320mn for phase I. This shortfall may partly be bridged if all warrants are exercised, providing JKH with USD128mn. The remaining USD192mn may be financed via debt.

CAL Research continues to expect significant cash outflow over the next 5 years for development and is still awaiting announcement of the casino license. We expect project break-even to take between 12-14 years if a 50% JV is assumed. The company has yet to disclose the structure of the venture.

FV for JKH is LKR 192 (Current Price LKR 208) – Following the announcement of the rights issue (28 Aug 2013), CAL has revised our recommendation to a HOLD based on share price adjustment (-40%+ since our SELL call in May). CAL Research’s FV for JKH is LKR192 and a liquidity premium of 10% is arguable. At current prices of LKR208, we upgrade JKH to a HOLD.

Source: CAL Research

Hope this will not be a another Krish ,Shangrila standstill case

After all these rights and warrants, they can go for another round of right issues in 2017.
I would wait n see if Casino can generate some profits prior to that.

I am expecting massive market downfall due to JKH's huge right issue. Ordinary people are having very hard time finding new money and JKHs want huge money from its share holders. so I believe this right and warrant issue is another total failure like GREG, REEF, CLPL considering the current market situation.

If this right issue gonna fail it will be a disaster for everyone. Therefore, big parties including foreigners will play for the success of the right issue. By issuing warrants it was made attractive to some level. I hope they will try to maintain the price above 200 (What GREG tried to do sometimes ago)

One main purpose of having a stock exchange is to rise the capital required by the private companies to expand their operation and there by the country. What we have to do is to develop investor's friendly environment in the country and it need to be competitive with other countries to attract foreign capital.

What needed in the moment is develop harmony with adjacent India (1/6 of world population and therefore significant world market) EU and US (our main export market) Russia and China (they have supported throughout the history) and with our own people (I think racism has no future. If we too much gonna ride on racism SL will not have a future). Most importantly capable persons need to be in place to make this Island a paradise and we have prove it by defeating the war against the ruthless LTTE.

this share will end up at around rs 100/= only time will tell ! so play safe

Can someone tell me how this right and warrant thing happen? Do I have to apply , how warrants are given like that. This is for the first time I'm gonna subscribe to a right.

thanks

JKH’s entry into the gaming led- USD 820mn mixed development project would be a game changer for the Company and the economy as a whole. However, the raising of equity and the ensuing dilution makes JKH a pricy short to medium term investment, Bartleet Religare Securities (BRS) said in a recent report.

"We believe the project would enjoy high ROCEs and EBITDA margins alongside the proxies considered for the gaming project. The share has a significant longterm upside with a value of LKR 314. However, we feel JKH is a pricy medium term investment considering the dilution, long gestation period and high execution risk. We value the Warrant 1 at LKR 61.49 and Warrant 2 at LKR 71.45.

Gaming to be key re-rating catalyst for JKH

"The gaming led mixed development project would re-rate JKH’s valuations post FY 2015E. JKH has already collaborated with a local license holder, but it’s vital that a name with global reach (E.g. Sands, SJM, Caesars) partners with JKH to make the resort, a destination resort. The hotel project, conventions and other JKH hotels would get spillover benefits if gaming hits the target.

Interest income to cushion the shortfall from Transportation and hospitality

"Lower bunkering volumes would bring down Transportation segment earnings in forecast period while the leisure earnings are challenged by lower ARRs of the resorts. In the forecast period, we could look forward to interest income from part of the LKR 23.1bn collected through the rights issue that could cushion the EPS impact of the dilution.

Valuation: Long term value but expensive in the short-medium term.

"We have arrived at an EV of LKR 285.8bn including the value of a successfully executed base case gaming venture (Refer sensitivity chart on page 17). We believe the project has the ability to double the current Group net earnings by FY 2019E, but the long gestation period and execution risk make this expensive for the players with shorter investment horizons. We feel the rights issue with attached warrants would dilute the value of the JKH share in the medium term," BRS said.

"We expect JKH to record an EBIT growth of 38.4% YoY to LKR 8.86bn (FY 2013 –LKR 6.4bn) and a YoY growth of 9.6% to LKR 9.71bn for FY 2014E and FY 2015E respectively. The EBIT growth for FY 2014E is steered by the growth in the property segment as a result of the ongoing residential property projects.

"However, the largest contributor to the Group EBIT is the Leisure sector contributing ~47% in the forecast period (FY 2013 – 54%) with the Consumer foods & retail sector and the Transportation sector following with contributions of ~12% each. EBIT margins on the other hand is expected to be stable at ~9.8% in the forecast period (FY 2013 – 7.5%).

"During Q1 FY 14 the Group recorded an EBIT of LKR 1.47bn and an EBIT margin of 7.3%.

"We forecast an EPS of LKR 12.74 for FY 2014E after adjusting for the dilution of the rights issue (-8.8% YoY as FY 2013 EPS also includes fair value adjustment on investment property of LKR 2.01bn) and an EPS of LKR 12.79 for FY 2015E (+0.4% YoY).

"We see JKH’s entry into the regional gaming industry with a two-phase USD 820mn project, as a game changer for the group. Phase one will consist of a USD 650mn investment (LKR 87.7bn) that would include a 150,000sq.ft gaming and entertainment facility, 800 room five-star hotel, convention centre, shopping mall and a 240 unit luxury condominium with a car parking facility of 2,500 slots.

"Phase two would consist of 200-unit serviced apartment and 400,000 sq.ft of prime office complex. JKH would have 96.7% effective ownership of the project through its subsidiaries.

"We are of the view that gaming would be the key attraction and the revenue generator for the mixed development project as a whole.

"We believe the JKH mixed development project will push itself as a destination venue that encourages pre-determined travelers to play games or undertake a range of non-gaming activities. Destination venues involve a premeditated decision to travel to the venue, often over a significant distance. The main targets will be VIP initiatives and gaming enthusiasts in the region (India, China and the Middle East).

"Destination casinos contrast markedly with other gaming venues, such as hotels and clubs. Hotels and clubs are considered to be convenience venues, providing facilities a consumer may encounter during their daily activities which may lead to an impulse decision to gamble. These venues often have a high accessibility to consumers and few barriers to consumption.

"The management is of the view that the residential project/ luxury condominium would be the first to make a Revenue contribution given the periodic Revenue recognition based on sales and percentage completion.

Sri Lanka as a gaming hub in South Asia

Sri Lanka has the regional advantage of being in the centre of a fast developing economic region. The global gambling capital Macau is within a onehour ferry ride from Hong Kong and Singapore’s casinos are located in the heart of the city, convenient not only to the local population but also to Malaysians. Sri Lanka outperforms regional peers in social and economic benchmarks, with its location. The country is poised to become a viable hub for tourism, particularly entertainment and gaming activities similar to other established regional destinations such as Macau, Singapore and Philippines.

"VIP gamblers from India are the second biggest gaming populace in Macau after the Chinese and we believe the geographical proximity would give SL the edge over Macau and Malaysia for the segment.

"We believe in the medium term Sri Lanka could gain significant advantage from the proximity to the densely populated bracket of developing economies such as India, Pakistan and also China and the Middle east. Fitch Ratings projects the Asia-Pacific region's casino gaming market to be worth USD 80bn by end-2015. The rating agency forecasts the region's market share of global casino revenue to reach 44% by then.

"Additionally, the region boasts of consumers with a higher propensity to gamble and the likelihood of legalization and expansion of new jurisdictions.

"Focusing on Malaysia, Fitch expects the gaming industry to record a midsingle-digit growth in revenue this year, driven by rising per capita income, robust visitor numbers and the upgrade of facilities. Resorts World Genting (RWG), which is owned by Genting Malaysia Bhd, monopolises the sector in the country. Gaming revenues in Malaysia have been resilient amid the global economic downturn. At the height of the subprime crisis between 2008 and 2009, RWG still managed to record a 1.4% growth in revenue.

"At present, Macau is the only location in China to offer legalised casino gaming. In 2011, annual gaming revenues rose 42.2% to USD 33.6bn from a year ago. We see the possibility of JKH leveraging on the first mover advantage into the region betting on itself as a destination venue to create the desired demand," BRS said.
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