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Fitch Ratings Lanka (FRL) has removed John Keells Holdings Ltd (JKH) from its rating watch list. The SLAAA rating of JKH has now been affirmed.

The rating action reflects the continuing recovery in the core business segments following the difficult operating environment faced by the company and the expectation of a recovery in the group's financial metrics to higher levels in the current financial year. The rating does not take into account possible acquisitions by the group. Fitch Ratings will evaluate the impact of such events on the group's credit risk profile as and when they occur.

A more favourable operating climate and measures initiated by the management led to a recovery in earnings in the fourth quarter of the financial year 2001/02 and is expected to continue in the current financial year.

The food and beverages segment of the group sustained its position as the largest contributor to sales, accounting for 43 per cent of consolidated revenues in FY2001/02. Segment revenues surpassed previous year's levels despite a weak economic condition. Profitability however, was adversely affected primarily due to the voluntary retirement scheme (VRS) currently being implemented by Ceylon Cold Stores (CCS). In FY2001/02 the cost of the VRS scheme was Rs. 150 million. Further costs of Rs. 250-300 million are expected in FY2002/03 which would be somewhat mitigated by savings arising from implementation of the scheme. Supermarket operations and the ice-cream division are however vulnerable to competition from enhanced performance of existing players and new entrants.

The leisure segment, the most adversely affected, recorded a lower than expected pre-tax loss Rs. 50 million in FY 2001/02 largely due to the gradual recovery of the Maldives tourists market and rationalisation of operations. The successful completion of the ongoing peace process holds great promise for the domestic tourism industry. Given the high degree of operating leverage in the leisure segment, a recovery in tourist numbers would have a high impact on profitability, which would also have a complementary effect on the food and beverages segment.

The IT segment would no longer be a cash drain on the company. However, the segment is not expected to make a significant contribution to earnings in the medium term.

A strong performance by the transport segment increased pre-tax profits of the segment by 35 per cent in FY2001/02, contributing 59 per cent to consolidated pre-tax profits. South Asia Gateway Terminals (SAGT will make a significant contribution to profitability in FY2002/03 with the commissioning of the first berth in February this year. After December 2001, total container handling at SAGT had increased by 10 per cent to 330,000 TEUs despite the difficulties faced. JKH utilised its bank facilities to fund a further component of its committed investments in SAGT, which contributed to the increase in balance sheet debt in the FY2001/02 without a commensurate rise in earnings to maintain creditor protection levels.

The group's EBITDA/interest cover was 6.5x after adjusting for non-recurrent expenditure for the 12 months ended March 2002 and is reasonable given the extreme operating environment faced by the company. Balance sheet debt increased by Rs. 981 million over the corresponding period in the same year, largely driven by higher short term debt.

Additional debt was mainly for the investment in SAGT and restructuring of Namunukula Plantations Ltd. It is expected that earnings from these investments would improve creditor protection levels in the future. Total borrowings are not expected to increase substantially in the future due to the lower than expected investment in SAGT and the rationalisation of the plantation segment. Free cash flow net of operating activities improved to Rs. 323 million in FY 2001/02 in comparison to Rs. 199 million in the corresponding period due to the curtailment of capital expenditure and the cash generated from the sale of the entire 27.21 per cent stake in Richard Pieris and Company Ltd. The group also divested its holding in Keells Diamonds Limited at a net loss of Rs. 14.15 million is expected that in the future JKH would show a greater concentration on its core business segments and divest non-viable business operations. 

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