John
Keells Holdings and the Small Investor
By Ravi Mahendra
John Keells Holdings has been in the news in recent
weeks attracting a lot of speculation. Our financial analyst this
week takes a looks at the JKH numbers based on recent company figures
and what it means to small investors.
My
previous articles focused on the performance indicators, which small
investors should look into when considering investment decisions
in companies. This article will be focusing on the performance of
John Keells Holdings, the most diversified and admired Sri Lankan
corporate. The analysis is based on the Annual Report for the year
ended 31st March 2003 and Interim Reports as per 31st December 2003.
The
Company
JKH as it is commonly known is a highly diversified Conglomerate,
which operates in segments such as Food and Beverages, Transportation,
Plantations, Leisure, Real Estate, Information Technology and Financial
Services.
As
per the Interim Reports published in December 2003, JKH had earnings
of Rs 1.03 billion over a turnover of Rs 15.3 billion. This was
over a period of 9 months with the Annual Report for 2004 not yet
published. JKH has also exited from its plantation sector within
the last few weeks.
The
Analysis
The performance of the Company is analysed from the point
of the following measures:
* Profitability
* Liquidity
* Gearing
* Investor Perspective
Profitability
Within this measure we will look at two indicators, which
are:
*Gross Profit Margin
*Return on Capital
Employed (ROCE)
Gross Profit Margin
This
is Gross Profit as a percentage of sales. JKH had earned a margin
of 32% for the nine months to December 2003 where as it had earned
29% for the same period in the previous year and 30% as at the year
ended 31st March 2003. Hayleys, another conglomerate earned a GP
margin of 27% for the same 9-month period.
Return
on Capital Employed
I will compare the profit before Interest and Tax of the
group with that of the total capital employed for the period.
JKH has earned a return of 7% on the total capital employed for
the 9-months period. This was 8% for the previous period and 11%
for the year ended 31st March 2003. Hayleys earned an ROCE of 6%
for the same time period.
One has to note that I took an extreme method of calculating ROCE
and that different methods are possible.
Liquidity
We will look into the following measures to consider liquidity:
* Cash and Cash
Equivalents
* Acid Test Ratio
Cash and Cash
Equivalents
These would either be cash or investments, which can be quickly
converted to cash. At 31st December 2003 cash and cash equivalents
were Rs. 2.13 billion and they had increased by Rs. 1.43 billion
during the period. The main contributor for this was proceeds from
an issue of shares of Rs. 6.1 billion. The cash and cash equivalents
were Rs. 0.31 billion at 9 months ended December 2002.
Hayleys
cash and cash equivalent position at the end of 31st December 2003
was a negative Rs. 2.9 billion.
Acid Test Ratio
This is a measure of the extent to which current assets minus stocks
can cover the current liabilities as they fall due. As at 31st December
2003 the acid test ratio of JKH was 1.18 as against 0.84 at the
end of the similar period last year and 0.95 as at the year ended
31st March 2003.
Hayleys
had an acid test ratio of 0.98 as at 31st December 2003. The main
reason for the increase in the acid test ratio of JKH is the availability
of surplus cash due to issue of shares during the period.
Gearing
This is a measurement of the debt capital as a percentage
compared to the equity capital. JKH has a gearing level of 27% at
31st December 2003, which is a significant decline from 46% gearing
at the same time previous year and 42% level as at 31st March 2003.
The
gearing of Hayleys is 87% as at 31st December 2003.
The main reason for the decline in the gearing of JKH is the issue
of shares during the current financial year whereby equity capital
has increased. A lower gearing indicates that the financial risk
to the shareholders is low.
Investor
Perspective
From the perspective of Investors let us consider
* Earnings Per Share
* Dividends Per Share
* Price Earnings Multiple
Earnings
Per Share
This is a measure of how much of earnings are made per share. JKH
had earnings per share of Rs 3.96 for the period ended 31st December
2003.
In comparison Hayleys made an EPS of Rs 9.85. One reason for JKH
having lower EPS could be the significant share issue during the
period.
Dividends
Per Share
For the year ended 31st March 2003 the shareholders of JKH earned
a dividend of Rs. 2 per share. The shareholders of Hayleys received
dividends of Rs.3.5 per share.
PE
Multiple
This is a measure of the confidence the market places on a company.
It is the measure of the multiple in which the market is willing
to pay a price when compared to the current earnings. In the case
of JKH the share price post elections was Rs 100 approximately resulting
in a PE of 25. Hayleys prices are in the range of Rs.105 and the
PE would be 11. This indicates that the market has higher level
of confidence on JKH as an investment.
Message
for the
Small Investor
Since the financial year has already ended I would also wait for
the final report.
Further, I would do some research on how the different sectors would
perform as per the current political and economic conditions and
would also watch carefully for future strategies.
Overall it is a stock worth buying or holding since financial and
business risks appear to be well managed and earnings are growing.
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