Financial Times

JKH pulling out of plantations?

By Duruthu Edirimuni
John Keells Holdings' sale of its stake in RPK Management Services (RPK), which owns the Kegalle and Maskeliya plantation companies, has triggered speculation that the conglomerate plans to completely divest itself of its plantations interests.

JKH announced last week it sold its 50 percent stake in RPK Management Services to Richard Pieris and Company Ltd for Rs 465.75 million.

Susantha Ratnayake, acting CEO and joint managing director of JKH, said the move was in line with the company's usual evaluation and restructuring of their portfolio. "We're constantly evaluating all our businesses."

He declined to say whether the sell-off of RPK meant JKH was exiting from its tea plantations.

He also said no decision had yet been taken about further developing their extensive property holdings such as the Crescat and former Oberoi properties and the Elephant House building.

When asked about reports that the JKH management was under pressure from big shareholders to improve real returns, Ratnayake said the company was doing very well and that returns were in line with expectations. "We have not been told by anyone that our performance is below par," he said.

JKH chairman Vivendra Lintotawela, who was expected to return to the country last week, has extended his stay in India for medical treatment, company officials said.

Stock market analysts said they viewed the RPK sale as part of a move to completely eliminate exposure to the plantation sector by the conglomerate which recently sold off a new tea marketing and export venture (Gorden Frazer) as returns were not adequate.

They said the group had felt that with returns from plantations being low in recent years it found it difficult to sustain plantation middle management which was seen as expensive to maintain.

Analysts said that the cyclical nature of the industry, volatility in performance in the medium term due to fluctuations in the tea prices, and strong trade unions cannot justify the management time and cost for JKH.

JKH's plantations interests accounted for about 10 percent of the island's tea and rubber production.

HNB Stockbrokers said in a report that JKH made a "marginal profit" from the disposal of RPK. The plantation sector contributed 15 percent to the group's gross turnover and five percent to profit before tax in FY 2003.

"We initially projected this to be maintained during FY2004, and to grow at 10 percent during FY2005. However, due to the cyclical nature of the industry, we highlighted the possible volatility in performance in the medium term, due to fluctuations in the tea prices and strong trade unions."

JKH still owns majority stakes in Namunukula Plantations and Tea Smallholders through the Keells Management Services.

HNB Stockbrokers said they feel that JKH is on the look out to dispose of these holdings if they are offered a "reasonable price."

However, they said the real estate value of Namunukula plantations may jump up significantly since many of its estates are located close to the proposed southern highway.

They say that the disposal will have a minimal impact on the projected earnings for FY2004, since JKH has already apportioned the bulk of the profits of Kegalle Plantations, which mainly produces rubber, and Maskeliya Plantations. Rubber prices have more than doubled in recent years and look set to stay firm while tea prices have been firm in the first quarter of this year.

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