Fitch affirms John Keells Holdings at 'AAA(lka)'

Fitch Ratings this week affirmed John Keells Holdings Plc's (JKH) National Long-term rating at 'AAA(lka)'. The rating Outlook is Stable.

JKH's ratings reflect its strong cash flow generation and increasing earnings diversity. However, Fitch said it was concerned that much of its operating cash flow generation remains accounted for by the sale of marine fuels and its container terminal handling operations at the port of Colombo. Despite this, Fitch expects JKH's property development business and its resorts in Maldives to make higher contributions to JKH's cash flow generation from 2008, the statement said.

The deteriorated security situation in Sri Lanka has affected the earnings of JKH's Sri Lankan resorts, including the security threat to the port of Colombo, as a sizeable proportion of the company's earnings flow out of port-related activities. Fitch also says that there is potential for some level of margin erosion in its marine fuel sale business as increased competition is expected. Additionally, the sales growth of its container terminal handling operations (carried out by South Asia Gateway Terminals (SAGT) - which is 33.75% owned by JKH) will materially slow down as the terminal fast reaches its capacity. The additional terminal handling capacity that is expected to come on stream in 2011, as part of the Colombo harbour expansion project, will result in the current terminal operators, including SAGT, losing some market share. Despite this, Fitch views that JKH's port-related businesses are expected to generate significant cash flows (including dividends from SAGT) over the short- to medium-term.

Historically, JKH has sustained its strong financial profile by maintaining a relatively conservative financial structure. The company raised some Rs13 billion in 2006 via an equity issue with a view to finance several large investments the group was considering. However, a large part of the funds still remain un-utilised and JKH is yet to announce how these cash reserves would be employed. Hence, Fitch notes that that there may be some event risk with regards to JKH's ratings - the agency will continue to monitor developments and take necessary rating actions as warranted by such events, as and when they occur.