FLASH NOTE ON JKH RIGHTS ISSUE

TERP LKR209; CALs FV LKR192; CURRENT PRICE LKR208 - HOLD

TERP CALCULATION Present value of two-year warrant Present value of three-year warrant Value of combined warrants Warrants per right Rights per share Value of warrants per existing share Rights Price Number of rights Cum-rights Price Shares outstanding TERP
* Calculation based on Black-Scholes Option Valuation methodology (refer appendix 1)

LKR 66 76 142 0.33 0.15 7 175 2 223 13 209

Current Price (LKR)

208
Fair value (LKR)

192
Recommendation

HOLD
Date

29-August-13
Market Capitalization (USD): 1.3bn Market Capitalization (LKR): 178bn 6mos avg. Daily T/O (USD): 1.1mn Free Float: 98.45%

CAL RESEARCHs VIEW ON JKH FV LKR192; HOLD

In FY14E, CAL expects an EPS decline of -6% YoY (Best Case Scenario) CAL Research continues to expect JKHs Transport, Leisure and Retail segments (80%+ of EBIT) to face challenges over the next year. The transport segment will face competition from the Colombo South Port and is likely to become heavily reliant on transshipments (i.e. trade) to the sub-continent. In FY14E, JKHs Sri Lanka resorts are likely to see occupancies at c.60%, (c.70% group-wide) due to high pricing and low product quality. Re-pricing of flagship hotels are very likely towards later FY14E as new intl brand hotels enter the market. Finally, the retail segment is likely to see margin pressure due to operational cost increases, while higher taxes may dampen consumer purchases (retail side). All else unchanged (i.e. ex-Integrated Resort investment), CAL Research continues to expect a c.6% YoY decline in EPS in FY14E. Please refer 1QFY14 Earnings Note for details Integrated Resort Funding Remains a Concern JKH management expects phase I of the project to cost USD650mn (including land value of USD60mn). CAL Research remains cautious regarding funding. If the investment commences in FY14, JKH EPS may decline by 30%+ YoY to LKR9.3. 1. As at 1QFY14, JKH had net cash and short-term investments of LKR19bn (USD145mn). Including the land, this amounts to USD205mn, leaving a funding shortfall of USD445mn for the first phase if managements project cost expe ctation remains intact. CAL anticipates phase I costs (excluding car park and land) to reach USD450 psf, which is 5060% cheaper than regional IR costs (excluding land). Therefore, total phase I project cost is likely to reach USD700mn (including land), bringing the funding shortfall to USD495mn. The announced rights issue may raise USD176mn, leaving a shortfall of USD270-320mn for phase I. This shortfall may partly be bridged if all warrants are exercised, providing JKH with USD128mn. The remaining USD192mn may be financed via debt.

2.

CAL Research
Level 5, Millennium House, No.46/58, Nawam Mawatha, Colombo 2

3.

CAL Research continues to expect significant cash outflow over the next 5 years for development and is still awaiting announcement of the casino license. We expect project break-even to take between 12-14 years if a 50% JV is assumed. The company has yet to disclose the structure of the venture. FV for JKH is LKR 192 (Current Price LKR 208) Following the announcement of the rights issue (28 Aug 2013), CAL has revised our recommendation to a HOLD based on share price adjustment (-40%+ since our SELL call in May). CAL Researchs FV for JKH is LKR192 and a liquidity premium of 10% is arguable. At current prices of LKR208, we upgrade JKH to a HOLD

Tel: +94 11 231 7786 Email: purasisi@cal.lk

Purasisi Jinadasa

Refer p.3 for Important Disclaimer

Appendix 1 Black-Scholes Option Value Calculation

Two year warrant Three year warrant

Current Stock Price Exercise Price of Option Number of periods to Exercise (years) Compounded Risk-Free Interest Rate Standard Deviation (annualized

208 185 2 11.72% 24.00%

208 195 3 11.72% 24.00%

Present Value of Exercise Price *t^0.5 d1 d2 Delta N(d1) Normal Cumulative Density Function Bank Loan N(d2)*PV(EX) Value of Call

146.3369 0.3394 1.2057 0.8663 0.8860 118.0694 66

137.1853 0.4157 1.2091 0.7934 0.8867 107.8584 76

Contacts
Research Team
Tel No: +94 11 231 7777 (General) Email: teamresearch@cal.lk Head of Research Purasisi Jinadasa Tel No: +94 11 231 7786 Email: purasisi@cal.lk Udeeshan Jonas Tel No: +94 11 231 7746 Email: udeeshan@cal.lk Reshan Wediwardana Tel No: +94 11 231 7777 (Ext: 7814) Email: reshan@cal.lk Dushan de Silva Email: dushan@cal.lk Thushani de Silva Email: thushani@cal.lk

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