John
Keells and shareholder value
By Ravi Mahendra
Our columnist gives tips to investors on how to assess the performance
of one of the top blue chip conglomerates listed on the Colombo
bourse.
John Keells is the largest among the listed companies in the stock
market and its shares presently trade at Rs 130. For the financial
year 2004/2005 JKH had a turnover of Rs 23.64 billion with profits
attributable to shareholders of Rs 2.27 billion. I intend to discuss
the financial performance of the group so that small investors can
gather better insight into the company.
The
criteria
The analysis will focus on the following areas
*Profitability and
liquidity
*Gearing
*Corporate governance
*Sector performance
Profitability
and liquidity
The key measures of any company’s performance are profitability
and liquidity (cash position).
In terms of profitability the key measures to use would be the ROCE
(Return on Capital Employed) as well as the Earnings per Share.
ROCE compares the return the company generates for its shareholders
against the capital employed by the company and for the period JKH
had generated an ROCE of 11.6% excluding extraordinary items when
compared to the previous period’s 15.7%.
The
chairman attributes this drop primarily to the tsunami effect in
December 2004. The EPS of the company was 5.26 for the year compared
to 5.12 for the previous period reflecting marginal growth.
Liquidity
is a reflection of the cash availability to fund the day to day
operations of the business. A business would be sound if enough
current (short-term) assets are available to fund the current liabilities.
The current ratio would be an ideal measure and it would compare
the current assets against the current liabilities. The group’s
current ratio as at the end of the financial year was 1.1 which
was less than the previous year’s 1.6. The group attributes
the reason for this as the increase in short term borrowings.
Gearing
This is the comparison of the debt capital of a company against
the equity capital of the company. As loan capital increases there
is a tendency for the financial risk of a group to increase. JKH
had a gearing ratio of 27.6% as against 18.3% in 2004. The goal
is to have 100% gearing eventually. When compared to the target
present gearing is very low without a need for excessive worry.
Corporate
governance
From a shareholder’s point of view how safe your investment
is ultimately depends on the systems of corporate governance which
are in place in a company. Corporate governance can be regarded
as the systems which are in place for best management of the company.
JKH currently possesses the following:
1.
Non-executive directors –There are four non-executive directors
as against five executives. The chairman shares the role of CEO
which is against the modern corporate governance best practices.
2.
Audit committee – comprises of three non-executive directors
and reviews internal controls and independently monitors the issues
arising from internal or external audit
3.
Remuneration committee- This also comprises of non-executive directors
and ensures that the group management team is rewarded according
to performance and that salaries are benchmarked against industry
standards
4.
Nominations committee- This comprising of non-executive directors
looks in to the appointment of a suitable chairman and deputy chairman
of the group where relevant and also the appointment of non-executive
directors.
Sector
performance
JKH is a conglomerate which is diversified into a number of sectors
which are Food and Beverages, Transportation, Leisure, Information
Technology, Financial Services, Property Development, and Plantations.
During the year there was a significant growth in transportation,
city hotels, tea broking and manufacturing arm of food and beverages.
At the same time declines were experienced in earnings with regard
to Information Technology, Resort hotels, Food retail, Financial
services etc. There is scope for significant restructuring in many
of these sectors there by improving the group’s overall return.
Message
to the investor
JKH is the oldest and one of the well managed companies in the stock
exchange.
It
has positive plans and is making significant effort to revamp and
reorganise itself with a focus on shareholder wealth. This is likely
to increase shareholder wealth in the future subject to other macro
conditions prevailing in our market.
(The writer could be reached at - ravim@icbsgroup.com) |
