Sri Lanka’s Keells Says Peace Dividend Not Priced in (Update3) - By Frederik Balfour
March 25 (Bloomberg) -- John Keells Holdings Plc., Sri Lanka’s biggest company, is yet to see the full “peace dividend” from the end to the county’s 26-year-long civil war reflected in its shares, its deputy chairman said.
The defeat of the Liberation Tigers of Tamil Eelam in May ended a conflict that left 100,000 dead, emptied hotels and scared away investors. John Keells’ hotel revenues will rise 50 percent in the fiscal year beginning April 1 as the government expects visitors to the teardrop-shaped island to more than double, Ajit Gunewardene said in an interview in Hong Kong yesterday.
Keells, which has port, supermarket, hotel, property development and brokerage arms, stands to gain from any broad- based recovery. Peace may enable the economy to grow at 7 percent annually for the next few years and investors haven’t fully appreciated how that will boost profits at companies such as John Keells, Gunewardene said.
“Leisure and tourism have been the biggest beneficiaries of post-war Sri Lanka,” said Gunewardene, who was in Hong Kong speaking to investors at a Credit Suisse conference. “The momentum of the third quarter is continuing for us, and that is really the peace dividend,” he said. The Colombo-based company reported a 174 percent jump in pre-tax profit from its hotel businesses in the three months ended Dec. 31.
The company’s stock is down 0.3 percent this year, lagging behind the Sri Lanka All-Share Index’s 10 percent gain. Shares in Keells, accounting for 8.9 percent of the benchmark, more than tripled in 2009, helping make the index the second-best performer in Asia.
Significant Upside
The shares rose as much as 4 rupees, or 2.35 percent, to 174 rupees today, set for their highest close since Feb. 5. The benchmark was 0.1 percent higher.
“When the real results or performance of the group is seen in the next 12 to 24 months there is significant upside,” Gunewardene. “When all the businesses start firing, the possibility can be quite considerable.”
The shares are trading at 23.71 times most recent earnings, lower than the average 25.27 times for the 238-member All-Share Index. The MSCI Emerging Markets Index trades at 20.1 times.
As many as 650,000 visitors are expected in the country in 2010 compared with 300,000 last year. Monthly tourist numbers peaked in December 2004 at 66,159, according to data compiled by Bloomberg, before an Asia-wide Tsunami on the 26th devastated the island, killing at least 39,000 people.
Heartbreak Hotels
Hotel properties, which account for 40 percent of group assets and 23 percent of revenues, have underperformed for the past 10 years and will be “over performing in the next few years and that is going to have a significant benefit to our profitability and performance,” he said.
In November, Gunewardene said the group may spend as much as $100 million building resorts and refurbishing hotel properties in the next few years.
About $50 million has been spent or committed he said, including a $22 million, 195-room resort in Berawula on the country’s southwest coast where construction is to begin in May.
The group’s has spent $4.5 million to refurbish and expand an 80-room, four-star hotel in the eastern coastal town of Trincomalee, a five-hour, 120 mile drive from Colombo.
“This is an area with no investment in 25 years with great potential and scope for tourism,” he said.
Gunewardene said the return on capital invested in its hotels could increase from 5 percent to 18 percent in the next two to three years.
Container Craze
The group reduced its holding in the listed hotels company John Keells Hotels PLC to 82 percent from 92 percent after a $30 million rights offering last year. Gunewardene said there are no plans for further divestment.
The group’s container port is also benefiting. Volume at its Colombo port, with a capacity to handle two million containers per year, has grown 20 percent in the past 12 months, and grew 40 percent year-on-year in February, he said.
Most of the increase comes from transshipment of goods to India that previously used facilities in Singapore or Dubai during the war, he said. Utilization is running at about 65 to 70 percent of capacity compared with 55 percent a year ago.
More important, he said, is the potential for an increase in imports and exports related to economic growth and reconstruction, which earns higher margins than the transshipment services that now account for 80 percent of all traffic.
More Supermarkets
Political stability has also enabled the group to resume expansion of its 40-store grocery retail chain, Ceylon Cold Stores. The group plans to add as many as 10 supermarkets this year, which could contribute an additional $20 million to retail revenues that were already expected to reach $100 million in the 12 months ending March 31, he said.
Sri Lankan-born Raj Rajaratnam the co-founder of hedge fund Galleon Group LLC who is accused of insider trading in the U.S. has sold “virtually all” of his 12 percent stake in the company, Gunewardene said. Institutional investors now include Janus Capital Management, Arisaig Partners and Aberdeen Investment Services, according to data compiled by Bloomberg.
source - http://www.businessweek.com
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