Shareholder questions JKH’s increased stake in SAGT

The return on equity of JKH during the year ending March 31, 2005 was only 12.6%. As shareholders, are we not been led up the garden path through top line figures freely advertised by JKH and readily highlighted by the media?” he asked.
“Before committing an investment of Rs. 3.6.billion for a stake of 7.5% at SAGT, yielding a return on investment of 8.57% should not have the Directors of JKH sought approval from its leading shareholders? Should not the Securities Exchange bring in adequate regulations to protect the interest of shareholders?” the shareholder asked.

A shareholder of John Keells Holdings Ltd (JKH), last week raised the question as to whether the group’s recent increased stake in the SAGT (South Asian Gateway Terminals) with an additional 7.5 % at a cost of Rs 3.6 billion would bring in sufficient returns.

Saying that on this investment JKH would receive a return on investment of only 8.57%. “Can paid Directors of JKH who are interested only in building empires be allowed to commit funds on projects that would yield a return of only 8.57%,” he asked.

The shareholder who requested anonymity, in a letter to The Sunday Times FT, was responding to a newspaper report from a JKH media release about JKH buying CDC’s (Commonwealth Development Corporation’s) 7.5% of the SAGT. The acquisition which raised the JKH stake in SAGT to 33.75% was part funded by internally generated cash and part by debt. JKH recently placed debentures to the value of Rs. 2 billion which some analysts believe would have part funded the new acquisition.

Asked for a response, JKH in a statement said that investment decisions are not based on short term profitability alone but on long term expectations and potential. “As a company which has delivered superior returns to our stakeholders through aggressive investment decisions, our track record speaks for itself," it added. The unnamed shareholder said while inflation is hovering around 17% and with most banking institutions offering interest rates of around 16-17%, concealing the return on investment of 8.57% in the JKH press release is not only an act of deception but is an ‘Enron’ type corporate crime. “Since the corporate sector of Sri Lanka is in the habit of dishing out top line figures for public consumption, should we not start looking at return on equity, particularly, when we have very high inflation/interest rates.

The return on equity of JKH during the year ending March 31, 2005 was only 12.6%. As shareholders, are we not been led up the garden path through top line figures freely advertised by JKH and readily highlighted by the media?” he asked.

“Before committing an investment of Rs. 3.6.billion for a stake of 7.5% at SAGT, yielding a return on investment of 8.57% should not have the Directors of JKH sought approval from its leading shareholders? Should not the Securities Exchange bring in adequate regulations to protect the interest of shareholders?” the shareholder asked.

JKH, in its response, also drew attention to an October 25 report by C.T. Smith Stockbrokers Ltd analysing JKH’s increased stake in SAGT.

It said that despite the ROI (Return on Investment) likely to be below prevailing risk free Treasury yields, and earnings negative once funding costs are considered, “we believe that the price paid is a reflection of the longer term growth potential of SAGT, especially in the light of the company possibly being given the opportunity to develop a number of berths in the proposed new Colombo South Harbour.”