New deep-water terminal could trigger medium-term risks for JKH
View(s):A new deep-water container terminal will provide a significant challenge through medium-term risks to John Keells Holdings (JKH), a rating agency said. “Key among JKH’s medium-term risks is the introduction of a new deep-water container terminal at the Port of Colombo (POC) – according to industry estimates the first phase of this project is expected to be commissioned by end-2013 or early 2014. The consequent increase in container handling capacity is likely to result in profit-margin pressures and the market share erosion of existing companies, including JKH’s 42%-owned associate South Asia Gateway Terminals (SAGT),” Fitch Rating Sri Lanka said in a media statement.
The statement was based on the agency affirming JKH’s (JKH) ‘AAA(lka)’ National Long-Term rating at a Stable Outlook. “The affirmation reflects the continued strong dividend income from JKH’s core investments and its subsequent low financial leverage,” the statement said.
“Mitigating factors include SAGT’s higher operational efficiency compared with other existing terminal operators and POC’s closer proximity to key regional shipping routes compared with peer Indian ports. Fitch also estimates that so long as JKH maintains a conservative capital structure at the holding company level, its credit metrics should remain fairly resilient, even to a sharp deterioration in SAGT’s profits over the medium-term. SAGT accounted for nearly 50% of JKH’s recurring dividend income in FY12,” it said.
Fitch said the rating also continues to reflect the low structural subordination of JKH’s creditors due to low debt at most key dividend paying assets, the company’s track record of maintaining a conservative capital structure due to its shareholders’ ability and willingness to inject cash into new projects and expansions in a timely manner, and its strong liquidity.
JKH reported strong earnings growth across its core subsidiaries in FY12 (year end March). Fitch said a rating action (change in the rating) would occur if JKH’s liquidity gets weaker due to un-even debt-maturities that may introduce refinancing risks; and if there is an increase in shareholder concentrations “that could result in an adverse change in the management’s conservative approach to funding expansions and new investments.”
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