Financial Times

JKH to sell Namunukula Plantations
By Duruthu Edirimuni
Speculation that John Keells Holdings (JKH) is completely divesting itself of its plantations interests following its RPK Management Services sale has turned to fact. The conglomerate is in talks with Misty Mountain Holdings (MMH) to buy the 58.7 percent stake Keells Management Services owns in Namunukula Plantations Ltd., the last JKH plantation agriculture firm, official sources told The Sunday Times FT.

Misty Mountain Holdings, a Sri Lankan company with an American, English and Chinese-Canadian partnership, was incorporated early this year and operates three estates leased from Talawakelle Plantations, owned by Hayleys Plantations Services.

The company's CEO, Allen Lipscomb told The Sunday Times FT that discussions are being carried out with JKH on the Namunukula sale. He said that it was to be finalised last week but was postponed to Monday.

Susantha Ratnayake, acting CEO and joint managing director of JKH, said there were several discussions going on with several parties on the Namunukula sale and that nothing has been finalised yet.

A top JKH official involved in plantations also said the conglomerate is in no hurry to sell Namunukula, which has six estates, but will dispose of it at the right price. He said that this is in line with their usual evaluation and restructuring of their portfolio.

He said that over the past year the company had been trying to promote the Namunukula sale. According to the Boston Consultancy Survey JKH underwent in May last year, it was suggested that they need a new operating model to improve asset utilisation.

As such, stock analysts said that the cyclical nature of the plantations industry, volatility in performance in the medium term, fluctuations in tea prices and strong trade unions cannot justify the management time and cost of JKH. The sources said that by end-April the last details of the transaction will be finalised.

Stock market analysts said JKH cannot merely focus on the marginal yields that their plantations give and that lately this sector has been one of their most under performing areas. Their FY2003 return on equity (ROE) was 14.6 percent whereas it is targeted at 15-16 percent. The group feels that they cannot raise plantation yields to match this target.

The analysts said that Tea Smallholders Factories, of which JKH is the majority shareholder with 37.6 percent, has the lowest chance of being divested as it is a cost-effective profitable venture. Namunukula Plantations has been unprofitable for the past two years. When asked about this issue, Lipscomb said that the entire tea industry has had two difficult years.

"The tea industry cycle has improved in recent times and business practices used are at times short-sighted," he said. "How tea is grown, dealt with in the plantations, processed, packaged and shipped are all going to be different with the company focussing on making branded products."

Lipscomb said he estimates the tea market can grow in double digits in the next few years and that Sri Lanka has a larger role to play, as it is one of the cleanest tea producers in the world.

When asked about whether MMH is considering retaining the middle management of Namunukula, Lipscomb said that the company would very much like to keep the existing teams in place. MMH, which has a modern production facility with a brand name registered in over 35 countries, is planning to develop its estates on an organic forest gardens concept.

Industry sources said that the company will be using Namunukula as a launch pad to take to tea production. MMH has a 60 percent holding in HVA Lanka, which is the brand developer of Heladive tea positioned for international tea connoisseurs. Rohan Fernando, Managing Director of HVA Exports, said one way of dealing with competition and the threat of losing market share was through branded products and effective marketing. He stressed that forging a national policy for the tea industry is of paramount importance.

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