JKH to proceed with finalising arrangements with prospective gaming operators to operate at ‘Cinnamon Life’ – Krishan Balendra

Addressing shareholders through 2Q 2022/23 financial report he further said Similar to the experience with Integrated Resorts in other Asian countries, ‘Cinnamon Life’ has the potential to transform Colombo as a destination for leisure and entertainment and lead to significant foreign exchange earnings for the country.

The full statement of JKH Chairman’s review as follows,

The Group reported a strong performance during the quarter, notwithstanding the challenging operating environment, with all businesses, except for the Property industry group, recording an increase in profitability, particularly the Transportation businesses and the continued significant turnaround in the Leisure businesses driven by the Maldivian Resorts segment.

It should be noted that the comparative performance with the corresponding quarter in the previous year is impacted by business disruptions on account of the imposition of island-wide travel restrictions from mid-August till end September 2021 due to the spread of highly transmissible Delta variant of the COVID-19 pandemic.

It was encouraging to witness a quarter of operations with day-to-day consumer and business activity reverting to levels of normalcy from late July 2022 onwards, supported by political and social stability and less disruptions on account of the macro-economic challenges.

The appointment of a new President in July 2022 and the subsequent appointment of a Prime Minister and Cabinet has resulted in a degree of political stability while many of the shortages of essential commodity items have been largely resolved enabling a resumption of normal activities. The Government has announced several significant policy actions and reforms, aimed towards achieving a path of fiscal consolidation and reaching sustainable debt levels, with some initiatives already implemented during the quarter under review. In September 2022, Sri Lanka reached a staff level agreement on an Extended Fund Facility arrangement of USD 2.90 billion with the International Monetary Fund (IMF), with expectations of a final IMF board approval by end 2022 or early 2023. Further, significant increases in both direct and indirect tax rates were announced with the intention of increasing Government tax revenue to approximately 15 per cent from 8.5 per cent of gross domestic product. Similar to the market reflective pricing mechanism for fuel and cooking gas which has been in place for a few months, the Government also announced upward revisions to electricity tariffs which will reduce the cost of subsidies to the Government.

The fuel rationing scheme implemented in July 2022, where a national fuel pass was introduced to provide a guaranteed allocation of a fuel quota on a weekly basis has been successful in ensuring an equitable and consistent distribution across the country.

This has resulted in confidence surrounding the supplies, thereby ensuring the ability for people to plan and carry out their normal activities. The reduction in consumption of fuel due to these actions, together with the drop in global fuel and commodity prices has created some space in terms of the import requirements of the country. As a result, the foreign exchange liquidity position in the country witnessed an improvement from the peak stresses witnessed in the first quarter. The significant supply chain disruptions and acute shortages of essential items which were witnessed in the first quarter have improved to a large extent with business operations witnessing less disruptions as a result.

The severe pressures on the domestic macro-economy as a result of these external pressures have now eased somewhat and will be a positive heading into the ensuing quarter. While many fiscal tax consolidation measures have been announced and partly implemented, the impact of these measures on consumer disposable incomes and spend is yet to be fully seen.

Whilst we note the positive progress made thus far in implementing the reforms and initiatives, and understand these are much required in terms of fiscal consolidation to help overcome this financial crisis, we urge the authorities to give due consideration to ensuring tax measures are implemented with a view to striking a balance between economic stability and growth, which can, in turn, affect revenue targets if the base levels of activity are impacted significantly. While revenue enhancing measures are required, Government expenditure should also be optimised to drive economic recovery in a sustained manner.

We are optimistic that Sri Lanka is on a path to recovery, and appreciate the authorities undertaking difficult, yet necessary, corrective measures to revive the economy to overcome the worst economic crisis faced by the country. We urge the authorities to expedite the implementation of much needed public sector reforms, as done by countries when faced with similar challenges in the past, to address the structural and governance issues of the economy to achieve long-term sustainable growth and emerge from this crisis stronger.

Issue of Unlisted Convertible Debentures

As announced to the Colombo Stock Exchange in August 2022, the Company received the funds and concluded the issuance of convertible debentures amounting to Rs.27.06 billion, by way of a private placement of LKR denominated securities to HWIC Asia Fund (HWIC), a subsidiary of Fairfax Financial Holdings Limited, Canada. 208,125,000 Sri Lankan Rupee denominated unrated, unlisted, unsecured convertible debentures were issued to HWIC at an issue price of Rs.130 per debenture. The debentures have a maturity period of three years and will accrue interest at a rate of three per cent per annum. The date of maturity of the debentures is 12 August 2025 with HWIC having the option to convert each debenture to one new ordinary share of the Company during the conversion period from 12 February 2024 to 12 August 2025.

Group Performance – Q2 2022/23 Group revenue at Rs.69.06 billion for the quarter under review is an increase of 40 per cent against the comparative period of last year [2021/22 Q2: Rs.49.27 billion].

Cumulative Group revenue for the first half of the year under review at Rs.140.58 billion is an increase of 60 per cent against the revenue of Rs.88.07 billion recorded in the corresponding period of the financial year 2021/22.

Group earnings before interest expense, tax, depreciation and amortisation (EBITDA) at Rs.9.29 billion in the second quarter of the financial year 2022/23 is a 45 per cent increase against Group EBITDA of Rs.6.41 billion recorded in the previous financial year. Cumulative Group EBITDA for the first half of the financial year 2022/23 at Rs.22.63 billion is an increase of 103 per cent against the EBITDA of Rs.11.17 billion recorded in the same period of financial year 2021/22.

Group profit before tax (PBT) at Rs.2.56 billion in the quarter under review is a 10 per cent decrease against the Rs. 2.83 billion recorded in the second quarter of 2021/22. The decline in PBT is mainly on account of the second quarter of the previous year including revenue and profit recognition from the handover of the residential apartment units at ‘Cinnamon Life’ and the higher finance expenses due to the significant increase in interest rates on working capital facilities, particularly in the Leisure and Retail industry groups. The increase in working capital in Retail is largely temporary on account of the investments to ensure continuation of supplies and minimise disruptions.

The improvement of supply chains will now enable the businesses to gradually revert to more normalised levels of working capital. Further, the PBT of the Holding Company was impacted by the translation impact of the IFC loan interest payment and the notional non-cash interest charged on the convertible debentures issued to HWIC in August 2022, in line with the accounting treatment, due to significant difference between the market interest rates and the three per cent interest accrued on the instrument. Cumulative PBT for the first half of the financial year 2022/23 at Rs.17.37 billion is an increase against the PBT of Rs.4.14 billion recorded in the comparative period of the previous financial year.

Profit attributable to equity holders of the parent at Rs.1.60 billion in the quarter under review is a decrease of 44 per cent against the comparative quarter [2021/22 Q2: Rs.2.86 billion]. On a cumulative basis, profit attributable to equity holders of the parent is Rs.12.88 billion compared to Rs.4.40 billion in the comparative period.

Company PBT for the second quarter of 2022/23 at Rs.3.62 billion is a 248 per cent increase against the Rs.1.04 billion recorded in the corresponding period of 2021/22, mainly as a result of an increase in dividend inflows to the Holding Company due to the timing of dividend receipts. Company PBT for the first half of the financial year 2022/23 at Rs.14.92 billion is a 410 per cent increase against the corresponding period of 2021/22.

Transportation

The Transportation industry group EBITDA at Rs.3.03 billion in the second quarter of 2022/23 is an increase of 153 per cent against the EBITDA of the comparative period [2021/22 Q2: Rs.1.20 billion]. The significant increase in profitability is mainly attributable to the strong performance of the Group’s Ports and Shipping business, South Asia Gateway Terminals (SAGT), and the Group’s Bunkering business, Lanka Marine Services (LMS). The profitability at SAGT recorded an increase supported by higher revenue from ancillary operations and the benefit of the depreciation of the Rupee against the previous year.

Despite a decline in market volumes and global fuel oil prices, LMS recorded an increase in profitability driven by higher margins and the translation impact due to the depreciation of the Rupee.

The groundwork on the West Container Terminal (WCT-1) at the Port of Colombo is progressing well, where the contracts for the dredging and reclamation works for the project and the construction of the quay walls were awarded during the quarter.

The dredging work has commenced while overall timelines for the project remain as originally envisaged.

Consumer Foods

The Consumer Foods industry group EBITDA at Rs.1.01 billion in the second quarter of 2022/23 is an increase of 68 per cent against the corresponding quarter of the previous year [2021/22 Q2: Rs.600 million]. The increase in EBITDA is mainly attributable to the performance of the Beverages and Frozen Confectionery businesses which witnessed growth in volumes during the quarter despite the disruptions to distribution in the first few weeks of July 2022. The volumes in Frozen Confectionery were driven by a significant increase in the Impulse segment.

Similar to the previous quarter, the margins of the businesses continued to be under pressure due to the significant raw material and input cost increases. The profitability during the quarter was supported, to an extent, by the recouping of eroding margins through price increases, together with the benefit of operating leverage on account of the growth in volumes and forward buying of raw materials.

With many global raw material prices coming off its peak together with declining freight costs, the gradual easing of the country’s foreign exchange liquidity position and the improved raw material availability, the pressure on margins is expected to start easing from the fourth quarter onwards since current inventory levels sourced at higher costs will be utilised in the ensuing months.

The business will continue to undertake all necessary measures to mitigate impacts from eroding margins to the extent market conditions permit, with due consideration to the price elasticity of demand for the products in the portfolio.

Retail

The Retail industry group EBITDA of Rs.1.96 billion in the second quarter of 2022/23 is an increase of 48 per cent over the EBITDA for the second quarter of the previous financial year [2021/22 Q2: Rs.1.33 billion]. The Supermarket business EBITDA of Rs.1.67 billion in the second quarter of 2022/23 is an increase of 189 per cent over the EBITDA for the second quarter of the previous financial year [2021/22 Q2: Rs.579 million].

The PBT of the industry group was impacted by higher finance expenses in both the Supermarket and Office Automation businesses due to the significant increase in interest rates on working capital facilities obtained to sustain business momentum. The increase in working capital is largely temporary on account of the investments to ensure continuation of supplies and minimise disruptions. The improvement of supply chains will enable the Supermarket business to gradually revert to more normalised levels of working capital. The performance of the Supermarket business was also negatively impacted due to the one-off impact on the increase in the rate of the value added tax (VAT) which affected the closing stocks.

Despite the challenging operating environment, the Supermarket business recorded a strong performance with same store sales recording encouraging growth. On a consecutive quarter on quarter basis, same store sales during the quarter under review recorded growth over the first quarter of 2022/23, driven by a combination of higher basket values due to high inflation and an increase in customer footfall.

Given the notable shortages in essential goods and other fast-moving items, the business continued to proactively ramp up its direct sourcing strategy with the aim of bridging inventory gaps. This has also helped drive footfall to our outlets. Whilst the Supermarket business has significantly increased penetration of its private label range, this was augmented with the intention of managing inventory better and providing customers with alternative options and ‘value for money’, both of which are important decision drivers for consumers, particularly in the current high inflationary environment.

During the quarter under review, two new outlets were opened and one outlet was closed. The total outlet count as at 30 September 2022 is 129. The business will closely review and monitor the timing of expansion due to the macro-economic conditions and uncertainty over construction costs prevailing at present.

The Office Automation business recorded a significant reduction in sales volume due to the continued import restrictions on non-essential items, which was further exacerbated by the steep increase in unit prices of all imported products as a result of the depreciation of the Rupee. The performance of the Office Automation business is expected to undergo challenges until such time the foreign currency liquidity position of the country stabilises.

Leisure

The Leisure industry group EBITDA of Rs.1.01 billion in the second quarter of 2022/23 is a significant turnaround over the EBITDA for the second quarter of the previous financial year [2021/22 Q2: negative Rs.46 million].

The strong performance of the Maldivian Resorts segment and better performance in the Sri Lankan Resorts and Colombo Hotels segments contributed to the turnaround in performance. The PBT of the industry group was impacted by higher finance expenses due to the significant increase in interest rates on working capital facilities obtained and on account of the translation impact stemming from the amortisation of leases across the Maldivian Resorts given its US Dollar denomination.

The Maldivian Resorts segment continued its strong performance with occupancies averaging over 85 per cent across all our properties, supported by arrivals from both traditional and new source markets.

Despite the slowdown in tourist arrivals to Sri Lanka, the Sri Lankan Resorts segment recorded an increase in occupancies during the quarter. The Colombo Hotels continued its steady pick-up in the number of events and banquets while restaurant operations recorded a strong performance in line with pre-pandemic levels of activity.

Despite the challenging operating environment, occupancies of the Colombo Hotels improved on the back of a slow recovery in business travel against the previous year which was affected due to the pandemic.

Profitability in the Sri Lanka leisure business improved against the previous pandemic affected year although margins were under pressure given the rising input costs and the limited revenue from foreign arrivals.

The Group is confident that a recovery could take place in time for the peak season which commences from around December onwards, particularly given the removal of travel advisories in main source markets and the increase in frequencies of flights by a few major airlines. While the current situation on the ground has reverted to levels of normalcy, the negative perception and lack of awareness, specially in our key source markets, has been a challenge in improving the recovery momentum in tourist arrivals. In light of this, we urge the tourism authorities to expedite the launch of Sri Lanka’s much awaited global marketing campaign. Sri Lanka continues to remain attractive as a tourist destination given our diverse landscape and unique offerings, with the added competitive advantage from a pricing perspective due to the significant depreciation of the Rupee.

Property

The Property industry group EBITDA of negative Rs.279 million in the second quarter of 2022/23 is a decrease against the EBITDA of the second quarter of the previous financial year [2021/22 Q2:Rs.1.26 billion]. The second quarter of the previous year included revenue and profit recognition from the handover of the residential apartment units at ‘Cinnamon Life’. The revenue on all units sold at ‘Cinnamon Life’ as at 31 March 2022 was recognised in the previous financial year, with the revenue on the inventory of 161 units that remains to be recognised as and when the units are sold. Construction at both the ‘Cinnamon Life’ and ‘Tri-Zen’ sites have progressed well during the quarter.

In August 2022, the Government gazetted regulations under the Casino Business (Regulation) Act of 2010 to formalise the process of issuing of licences and monitoring of operations for casinos in Sri Lanka. With the regularising of Gaming, the Group will proceed with finalising arrangements with prospective gaming operators to operate at ‘Cinnamon Life’. Similar to the experience with Integrated Resorts in other Asian countries, ‘Cinnamon Life’ has the potential to transform Colombo as a destination for leisure and entertainment and lead to significant foreign exchange earnings for the country.

The PBT of the Property industry group was impacted on account of exchange losses on a few residual collections during the current quarter, although revenue was recognised in the previous financial year. Since the collections have now been completed, there are no further exchange impacts expected on the residual units.

Financial Services

The Financial Services industry group EBITDA at Rs.1.10 billion in the second quarter of 2022/23 is an increase of 12 per cent against the EBITDA of the corresponding period in the previous year [2021/22 Q2: Rs.982 million]. Union Assurance PLC recorded an increase in gross written premiums whist Nations Trust Bank PLC (NTB) recorded an increase in net interest margins and lower costs for the quarter, although profitability was impacted, to an extent, by the impairment charges, in line with industry, on the Sri Lankan Government foreign securities. The total exposure in this segment is low at approximately 2.5 per cent of total assets of NTB.

Other, including Information Technology and Plantation Services

The Other, including Information Technology and Plantation Services industry group EBITDA of Rs.1.46 billion in the second quarter of 2022/23 is an increase of 35 per cent over the EBITDA for the second quarter of the previous financial year [2021/22 Q2: Rs.1.08 billion]. The increase in EBITDA is mainly attributable to the increase in interest income due to the translation impact on the foreign currency denominated cash held at the Holding Company on account of the depreciation of the Rupee. The PBT of the Holding Company was negatively impacted by an increase in finance expenses as a result of the increase in interest rates, the translation impact of the IFC loan interest payment and the notional non-cash interest charged on the convertible debentures issued to HWIC in August 2022, in line with the accounting treatment, due to significant difference between the market interest rates and the three per cent interest accrued on the instrument.

The Plantation Services sector recorded an increase in profitability as a result of improved tea prices. The Information Technology sector recorded a growth in profitability driven by growth in revenue.

Diversity, Equity and Inclusion Initiative

In a significant step towards strengthening Diversity, Equity, and Inclusion (DE&I), the Group introduced an equal 100 days of maternity and paternity days as parental leave at the birth or adoption of a child.

During the period in review, the Group also introduced the use of gender-neutral terminology with the objective of avoiding word choices which may be interpreted as biased, discriminatory or demeaning by implying that one social gender is the norm. As one of the first steps in developing the new strategy to increase career opportunities for persons with disabilities, a tri-lingual survey to understand the needs and perceptions was launched.

Sustainability Initiatives

During the quarter under review, the Group’s carbon footprint per million rupees of revenue decreased by 29 per cent to 0.37 MT while the water withdrawal per million rupees of revenue decreased by 36 per cent to 7.10 cubic meters. In absolute terms, the Group’s carbon footprint increased by 19 per cent to 25,666 MT and the Group’s water withdrawal increased by 8 per cent to 492,982 cubic meters, mainly due to higher levels of operational activity during the quarter compared to the corresponding quarter of the previous year, particularly in the Leisure and Supermarket businesses. On average, Group employees were provided with 5 hours of training per employee, whilst 56 occupational injuries were reported during the quarter.

Plasticcycle

During the period in review, ‘Plasticcycle’ – the Social Entrepreneurship project of John Keells Group, collaborated with the Maharagama District Secretariat to commence awareness sessions at multiple schools on minimising plastic pollution and the inaugural session in August 2022 was conducted for over 900 students.

Corporate Social Responsibility

With the ongoing socio-economic crisis continuing to affect large numbers of families and communities in Sri Lanka, particularly in low-income households, John Keells Foundation (JKF) together with the Group businesses initiated a multi-pronged crisis response programme in selected communities to address the areas of food security and the education of children and youth as follows.

Rollout of home gardening initiatives through ‘Elephant House’ and ‘Cinnamon Hotels and Resorts’ in and around their businesses in various parts of the country, impacting 1,116
Installation work on Farmer Empowerment in identified farmlands in an around ‘Cinnamon Hotels and Resorts’ accounting for over 19 acres in Beruwala, Habarana, Kandy, Trincomalee and Weerawila leading to certification in Good Agriculture Practices such as insect proof nets, poly mulch and suitable irrigation techniques such as drip irrigation and sprinkler
Launch of the John Keells Pasal Diriya programme on 3 October to coincide with National Children’s Day in partnership with the Ministry of The programme aims to supplement the Government’s free school meal programme and is expected to impact the daily nutrition levels of over 3,300 students in selected schools over an initial period of six months.

The English Language Scholarship Programme and the pilot under John Keells Praja Shakthi Digital Learning Initiative have been expanded to increase the number of school children and locations served by the respective programmes while the respective selection and tab sourcing processes have been
Utilising its network of customers, the Supermarket business launched a crowd-funded initiative whereby customers could support by way of purchasing ration packs or meal

vouchers for children. The business will also contribute towards supplementing the donations received through this initiative. The response from our customers has been encouraging and the business intends to ramp up the volumes of meals provided through this initiative.

In addition to the crisis response initiative, JKF’s on-going work during the quarter under review included the following:

Virtual Soft Skills workshops for 689 undergraduates of the University of Ruhuna and the Faculty of Law, University of Colombo.
Under Project WAVE (Working Against Violence through Education), a total of 2,155 staff completed the online modules on Gender Based Violence (GBV) and Child Protection while 95 employees were sensitised on GBV through induction programs.
Youth mental health and well-being: A visual and performing arts exhibition was organised in collaboration with Child Fund Sri
Enhancing the security of Metro Homes Complex in Colombo 2 through the sponsorship and installation of CCTVs.
Donation of relief packs to 300 low-income residents in Colombo
Sustained business opportunities for the Batik Artisans in Hikkaduwa by ‘Hikka Tranz by Cinnamon’.
Under JKF’s environment-related initiatives:
Suduwelipotha Forest Restoration Project with Ruk Rakaganno recorded the planting of a total of 14,258 trees (reaching the target set by the Forest Department) while four successful volunteer programmes were conducted.
Nature Field Centre, Rumassala, Galle conducted two school awareness sessions educating 175 students and one programme for 33 government
The Museum of Modern and Contemporary Art, Sri Lanka (MMCA) recorded 10,000 visitors for the ‘Encounters’ exhibition and delivered a total of 25 public programmes. MMCA also curated a series of three online discussions, attracting 1,574 views.

Dividend

Your Board declared a first interim dividend of Rs.1.00 per share to be paid on or before 6 December 2022. The declaration of this dividend during this challenging environment reflects the cash generation capability of the Group’s diverse portfolio of businesses.

Summarised below are the key operational and financial highlights of our performance during the quarter under review

Group EBITDA recorded a notable improvement to Rs.9.29 billion during the quarter under review, which is an increase of 45 per cent against the comparative period of last year [2021/22 Q2: Rs.6.41 billion], demonstrating the strong underlying cash operational performance of the Group.
While the second quarter of the previous year was partially disrupted on account of the lockdowns due to the pandemic, the overall operating indicators in most businesses demonstrated activity at pre-pandemic levels.
With the exception of the Property industry group, the Group’s businesses recorded strong growth in EBITDA, compared to the second quarter of the previous year, on the back of a continued recovery momentum.
Group PBT recorded a decline of 10 per cent to Rs.2.56 billion in the quarter under review, mainly on account of the second quarter of the previous year including revenue and profit recognition from the handover of the residential apartment units at ‘Cinnamon Life’, and the higher finance expenses due to the significant increase in interest rates on working capital facilities, particularly in the Leisure and Retail industry groups. Further, the PBT of the Holding Company was impacted by the translation impact of the IFC loan interest payment and the notional non-cash interest charged on the convertible debentures issued to HWIC Asia Fund (HWIC) in August 2022, in line with the accounting treatment, due to significant difference between the market interest rates and the three per cent interest accrued on the instrument.
In August 2022, the Government gazetted regulations under the Casino Business (Regulation) Act of 2010 to formalise the process of issuing of licences and monitoring of operations for casinos in Sri Lanka. With the regularising of Gaming, the Group will proceed with finalising arrangements with prospective gaming operators to operate at ‘Cinnamon Life’. Similar to the experience with Integrated Resorts in other Asian countries, ‘Cinnamon Life’ has the potential to transform Colombo as a destination for leisure and entertainment and lead to significant foreign exchange earnings for the country.
The profitability of the Transportation industry group recorded an increase driven by the Group’s Bunkering business, which recorded higher margins, and the Group’s Ports and Shipping business, where both businesses benefitted from the translation impact due to the depreciation of the Rupee against the previous year.
The Leisure industry group recorded a continued turnaround in performance primarily driven by the Maldivian Resorts segment, supported by higher occupancy.
The Consumer Foods industry group continued its recovery momentum with the Beverages and Frozen Confectionery businesses recording growth in volumes.
The performance of the Supermarket business was driven by a growth in same store sales through a combination of higher basket values on account of inflation and an increase in customer footfall.
The Property industry group recorded a decline in profitability as the second quarter of the previous year included revenue and profit recognition from the handover of the residential apartment units at ‘Cinnamon Life’. The recognition of revenue of all units sold at ‘Cinnamon Life’ up to 31 March 2022 was recorded across 2021/22.
The Insurance business recorded a growth in gross written premiums whilst Nations Trust Bank PLC recorded an increase in net interest margins and a reduction in costs.
As announced to the Colombo Stock Exchange, the Company concluded the issuance of an unlisted, unsecured, LKR denominated convertible debentures amounting to Rs.27.06 billion, through a private placement to HWIC, a subsidiary of Fairfax, Canada. The coupon interest payable on the debenture is at three per cent per annum.
In a significant step towards strengthening Diversity, Equity, and Inclusion (DE&I), the Group introduced an equal one hundred days of maternity and paternity days as parental leave at the birth or adoption of a child.
In light of the current socio-economic crisis in Sri Lanka and hardships faced by people in the country, the Group initiated a multi-pronged crisis response programme in selected communities to address the areas of food security and the education of children and youth.
The Group’s carbon footprint per million rupees of revenue decreased by 29 per cent to 0.37 MT while the water withdrawal per million rupees of revenue decreased by 36 per cent to 7.10 cubic meters.

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