JKH-Rights Issue Update_17 Oct 2013
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7/27/2019 JKH-Rights Issue Update_17 Oct 2013
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Top5 shareholders as of 30th June 2013 Shareholding
Mr S ECaptain 9.9%
Broga Hill Investments Limited 9.9%
3.9%
Revenue (LKR'm)
FY2011
60,500
FY2012
77,690
FY2013
85,557
FY2014E
95,852
FY2015E
105,939
FY2016E
113,303
% YoYchange 26.1% 28.4% 10.1% 12.0% 10.5% 7.0%
EBITDA (LKR'm) 8,357 11,808 12,624 14,056 16,000 16,571
% YoYchange 60.1% 41.3% 6.9% 11.3% 13.8% 3.6%
Net profit to shareholders (LKR'm) - Reporte d 8,246 9,687 12,201 10,662 11,604 11,295
% YoYchange 58.5% 17.5% 26.0% -12.6% 8.8% -2.7%
P/E(x) 21.6 17.7 17.2 19.0 18.8 19.9
ROE 15.0% 14.7% 15.1% 10.1% 9.2% 8.1%
P/B(x) 3.0 2.4 2.4 1.8 1.7 1.5
Dividend yield 1.4% 1.3% 1.4% 1.4% 1.6% 1.5%
17 October 2013
Rights Issue Update
John Keells Holdings PLC (JKH)Rights Issue A Gamble Worth Taking
RecommendationRights : SUBSCRIBE
Ordinary Voting Share : SELL
Price (17.10.13) : LKR217.50
Target Price : LKR195.00
Sector : Diversified
After much speculation for several months, JKH announced the details of its landmark integrated resort project, which was followed by the announcement of a rights
issue attached with warrants (2 for every 3 rights subscribed) to partly fund theUSD820m project. The project is planned to include apartments, a hotel,
entertainment and gaming facilities, a shopping complex, a convention centre and
office space, largely resembling some of the regional integrated resorts. We are
optimistic of this project, largely owing to the success this model has witnessed inthe region and the countrys favourable location.
Balakrishnan Nirmalan
n ir m a l an @ a s i a ca p it a l .l k
Price vs. Volume
LKR
350.00
300.00
250.00
200.00
150.00
100.00
50.00
-
Price volume
Source Asia Wealth Research, Bloomberg
Volum
e
12,000,0
00
10,000,0
00
8,000,0
00
6,000,0
00
4,000,0
00
2,000,0
00
0
Waterfront Properties (WFP) project to be the key growth driver of the group
in the long term assuming proper execution: The WFP project which is plannedto commence full operation by end of 2017E, is relying on Sri Lankas location and
the integrated resort concept to attract high spending gaming tourists and Meeting,
Incentives, Conferencing, Exhibitions (MICE) tourists. Management has indicated
that WFP would merely rent the gaming area, whilst it stated that the rental to be
received from the gaming area would consist of a fixed component; and a variable
component linked to the performance of the gaming tenant. The total rental,according to the management could account for c. 60% of the gaming economics
and would provide WFP an indirect exposure to the gaming business. We estimatethat the rental received from the above to be largest contributor to WFP project, and
hence believe that the success of WFP would largely depend on the ability of the
company to attract a well reputed international gaming operator. Meanwhile, we
expect the increase in finance charge from the 60:40 debt to equity optimal capitalstructure of WFP to exert pressure on JKHs bottom-line in the short to medium
term, as the only cash flow stream to the company during that period would be fromthe pre-sales of apartments.
Short-medium term EBITDA margin is likely to be driven by the LeisureAs at 17.10.2013 JKH ASI Divers
ified
Index PriceMovement
1Month 5.6% 4.3%5.6%
3Month s -9.1% -0.5%-5.5%
12Months 10.3% 6.6%
-1.5% Total Iss ued Qty (Mn) 989.9
Average Daily Turnover (LKR 000's )
169,443.9 (USD 000's )
1293.6
Market Capitalis ation (LKR Mn)
186,426.4 (USD Mn)
1,423.2
Trailing P/E 15.8 12.115.4
Trailing PBV 2.2 1.8
1.7
Trailing ROE % 14.8 12.5
11.2
DY % 1.4 2.71.3
Free Float %73.8
52 week High
291.2
52 week Low196.3
Source Bloomberg
Janus Overseas Fund 8.9%
Paints & General Industries Limited
5.8% Deutsche Bank AG London
Source Company Filings
and Property segments: We expect the Leisure segment, which is the largest
contributor to EBITDA and the segment with the highest EBITDA margin, tocontinue to drive the groups EBITDA and the EBITDA margin. This is likely to besupported by the growth momentum in the high margin yielding Maldivian sub-segment (c. 27% of FY2013 segment revenue); and the strong portfolio ofrestaurants and MICE facilities at the city hotels. However, we expect the SriLankan resorts to continue with their lacklustre performance. The Property segmentis likely benefit from the commencement of revenue recognition from OnThree20
project and the possible revenue recognition of the 7th
Sense premium apartmentsfrom 2HFY2014E or FY2015E. Further, we expect a recovery in the EBITDAmargins of the Consumer Foods and Retail segment from 2HFY2014E subsequent
to the ending of the re-structuring program undertaken by the Retail unit.
We recommend a SELL on the ordinary voting share and recommend a
SUBSCRIBE on the rights: Based on our sum of the parts valuation, taking
into account a probability weighted value for WFP, we arrive at a one year pricetarget of LKR195. We believe that the ordinary share is currently trading at a10.3% premium to our intrinsic value and is yet to fully reflect the dilution effectfrom the rights to be listed and the warrants. However, we believe that the rights
issue is attractively priced at LKR175 given that the attached warrants wouldreduce the effective cost of investing in the rights for an investor who opts to
dispose the warrants during the warrants trading.
mailto:[email protected]:[email protected] -
7/27/2019 JKH-Rights Issue Update_17 Oct 2013
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Asia Wealth Management Co. (Pvt) Ltd2
Rights Issue Update
Waterfront Properties Project to be the Key Growth Driver of the Group in the
Long Term
The project which would be undertaken through the project company Waterfront Properties (WFP) would consist of apartments, a
hotel, entertainment and gaming facilities, shopping complex, a convention centre and office space. The project, is estimated to cost c.
USD820m (excluding land transfers) in total and is planned to be undertaken in two phases, with the estimated time of completion
between 4-5 years. Phase 1 alone would cost c. USD660m (excluding land transfer) and WFP has the option to undertake Phase 2. The
rights issue attached with warrants would be used to partly fund the project, whilst the balance would be funded via debt fin ancing.The company indicated that, at optimal funding, WFP would be operating at a D/E ratio of 60:40. The project which has been grantedthe Strategic Development Project status, would enjoy several tax concessions subsequent to the approval of the parliament.
Given the long gestation period for the implementation of the project and the lack of information regarding the international operator
who would be operating the gaming facility, it would prove to be a cumbersome task to evaluate the project at this juncture. Further,
the magnitude of the project and the long period for net cash inflow generation (the management expects the project to be in fulloperation during FY2019E) could increase the riskiness of the project in the short term. Further, we expect the bottom line of JKH to be
under pressure in the short to medium term, due to the interest cost arising from the WFP project in the absence of any signi ficantinflows from the project.
However, we remain optimistic about the project, given the success that this model has witnessed in several countries in our region anddue to the strategic location of Sri Lanka which is a key catalyst for the success of this project. We believe that the successful
implementation of the project would be value accretive to the shareholders in the long term. We discuss below the details regarding
some of the key components of the WFP project.
Gaming Facility
The project would include a 150,000 sq.ft gaming facility.
Management has indicated that it would neither own nor operate the gaming facility, but it would merely rent out the
facility.
However, the management has indicated that the rental income that WFP would earn from letting out the gaming area would
consist of a fixed component and a variable component (that would be linked to the performance of the gaming tenant), whichin total could account for c. 60% of gaming economics.
The variable component of the rental structure would enable WFP to indirectly benefit from the upside potential of the
gaming business.
As per the gazette notification issued under the Strategic Development Projects Act, if WFP engages in gaming operations,
profits from such operations would be taxed at the normal corporate tax rate (currently 40%). However, rentals (both fixed
and variable) received from letting out the gaming area would enjoy the tax breaks. By structuring its exposure to the gaming operations in the above method, WFP would benefit from the tax breaks, whilst
benefiting from the upside potential from the variable component of the rental.
In order to succeed from the exposure to the gaming operations, which would also influence the success of most of the other
units of WFP, a well reputed global gaming operator would need to be drawn into this location. Further, given the restrictionsin issuing new licenses for gaming businesses, the international partner would have to partner up with a local license owner.
Whilst, there have been media reports on the possible local partner, management has indicated that it is still in the process of
finalising an international gaming operator.
We believe that the successful execution of the gaming facility would trickle down to other units of WFP and result in
substantial value addition to the shareholders of JKH.
Convention Centre
The convention centre would have a seating capacity of 2,500 in a 247,000 sq.ft area.
The convention centre along with the 800 room luxury hotel would enable WFP to be an ideal location to host large scale
conferences and events in Sri Lanka given the current scarcity of such facilities within the country the strategic location of thecountry in the region.
Luxury Hotel
Despite the intense competition that is prevalent within the city hotel sphere, we believe that the integrated resort model
would enable the hotel to maintain substantially higher occupancy levels than the general industry average as witnessed inother regional integrated resorts.
Success in attracting a reputed global gaming operator and a successful destination marketing of WFP convention centrewould allow the hotel to attract MICE travellers during weekdays and leisure/gaming travellers during the weekends, and thus
enable to maintain relatively high occupancies.
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Rights Issue Update
Asia Wealth Management Co. (Pvt) Ltd3
Luxury Condominiums
Backed by the success witnessed in JKHs apartment projects such as Monarch, Emperor, OnThree20 and 7th
Sense; the WFP
project is planned to include 240 luxury condominiums under Phase 1, which would be followed by another 200serviced/residential apartments if Phase 2 is implemented.
Management indicated that the apartments would be priced lower than the 7th
Sense up market apartments, but would bepriced higher than the Emperor and Monarch apartments.
We believe that the initial cash inflows from the project could accrue to WFP beginning from FY2015E in the form of
apartment pre-sales. However, we remain cautious regarding the luxury condominium component of the WFP project, given the exponential
growth that is being witnessed in the apartment stock within Colombo.
Shopping Mall
The shopping mall with a floor area of c. 400,000 sq.ft is planned to be positioned as an up-market shopping mall similar to
Crescat Boulevard.
Management has indicated that it is evaluating the possibility of a tie-up with an international mall operator to manage themall operations.
We expect the shopping mall operation to benefit from the gaming facility which generally attracts high spenders and theconvention centre.
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TEUs'000
Asia Wealth Management Co. (Pvt) Ltd4
Rights Issue Update
Outlook for Other Key Segments of JKH
Transportation (accounted for c. 23% of the groups FY2013 external revenue)
Trans portation Segment FY2011 FY2012 FY2013 FY2014E FY2015E 1QFY2013 1QFY2014
External Revenue (LKR'm) 13,426 18,428 19,438 20,129 21,031 5,307 4,129% YoY Change 41.4% 37.3% 5.5% 3.6% 4.5% 2.1% n/a -22.2%
Adjus ted EBITDA (LKR'm) 852 1,215 1,074 1,106 1,142 364 250
% YoY Change 214.4% 42.6% -11.7% 3.0% 3.3% 0.9% n/a -31.3%
Transportation segment external revenue mainly consists of the bunkering revenue earned from Lanka Marine Services (LMS). We
expect the segment which witnessed a 22% YoY drop in revenue in 1QFY2014, primarily due to drop in volumes (owing to slowdown
in Sri Lankas external trade and world trade) to recover in line with the recovery witnessed in Sri Lankas external trade and the
projected recovery in world trade. Further, the opening of the Colombo International Container Terminal (CICT) deep draft terminal in
August 2013could increase the traffic in the Colombo port in the medium to long term and provide an opportunity for LMS to increaseits volumes sold. However, the growth in revenue is likely to be restricted, due to the anticipated downward trend in crude oil prices,
which would require LMS to adjust prices to remain competitive within the region.
25,000
20,000
5,000
0,000
5,000
0
Transportation Segment Revenue Fluctuation withCrude Oil Price
FY2009 FY2010 FY2011 FY2012 FY2013
Revenue (LKR'm) Revenue growthBrent crude oil price change
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
2,500
2,000
1,500
1,000
500
0
SAGT's Share of Containers Handled Trending
Downwards
CY2007 CY2008 CY2009 CY2010 CY2011 CY2012
Containers handled by SAGT
SAGT containers handled as a % of total container
51.0%
50.0%
49.0%
48.0%
47.0%
46.0%
45.0%
44.0%
43.0%
42.0%
41.0%
Source: Company filings, EIA, Asia Wealth Research traffic
Source: SAGT website, Central Bank Annual Report
South Asia Gateway Terminals (SAGT), an associate of JKH which operates a container terminal at the Colombo port, is the cash cow
of the JKH group and the key driver of the bottom-line of the Transportation segment. SAGT witnessed a slowdown in its volumes
handled during FY2013 in line with the slowdown in global trade and the tight monetary policy adopted in Sri Lanka during 2012. Thistrend persisted in 1QFY14, which resulted in the groups share of SAGTs profits dipping 17% YoY. We expect an improvement in
SAGTs performance subsequent to the recovery that is being witnessed in Sri Lankas external trade after the expansionary monetarypolicies adopted by the Central Bank and the improvement witnessed in several developed economies. However, the commencement of
operations of CICT (with a 1.4m TEU capacity), which is a joint venture between China Merchants Holdings (International) Co., Ltd.
(85% shareholding) Sri Lanka Ports Authority (SLPA) (15% shareholding) could increase the competition for SAGT. As such, weexpect the share of containers handled by SAGT to continue its downward trend.
According to the management, the segments latest associate Saffron Aviation which is in the business of domestic airline operations,
commenced its operations during 2QFY14. However, the management indicated that the company which operates two aircrafts (eight
seats each), has been witnessing low load factor. Given, the comparatively small size of the investment (LKR238m), we expect the
impact on same to be limited.
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TotalRevenue(LK
R'm)
Occupanc
ies
Leisure (accounted for c. 24% of the groups FY2013 external revenue)
Leis ure Segment FY2011 FY2012 FY2013 FY2014E FY2015E 1QFY2013 1QFY2014
External Revenue (LKR'm) 13,810 17,415 20,593 22,951 24,522 3,913 4,117
% YoY Change 20.1% 26.1% 18.2% 11.4% 6.8% 6.3% n/a 5.2%
Adjus ted EBITDA (LKR'm) 3,294 5,595 6,864 7,495 7,950 1,107 956
% YoY Change 46.1% 69.9% 22.7% 9.2% 6.1% 5.0% n/a -13.6%
The Leisure segment had been witnessing an uptrend in revenue and EBITDA post war in line with the overall growth witnessed in Sri
Lankan tourism. However, occupancies have been trending downwards in the properties in Sri Lanka in line with overall dip witnessed
in star class hotels in Sri Lanka as the country continues to attract a high number of low end customers. This has been partly reflected in
the 1QFY14 performance, where the revenue growth slowed down to 5.2% YoY, whilst the EBITDA dipped 13.6% YoY. In addition,the hike in electricity prices and the industry wide wage hike in Sri Lanka could also have contributed to the dip in EBITDA.
Leisure Segment Revenue - City Hotels have beenDriving the Revenue During the Past Few Years
25,000
20,000
15,000
10,000
5,000
0
FY2009 FY2010 FY2011 FY2012 FY2013
City Hotels Sri Lankan Resorts
Maldivian Resorts Destination Management
90%
80%
70%
60%
50%
40%
30%
Segment Occupancies Across Hotel Categories -
Maldivian Resorts Top the List
FY2009 FY2010 FY2011 FY2012 FY2013
Cinnamon Grand Cinnamon Lakeside
Sri Lankan Resorts Maldivian Resorts
Source: JKH, AHPL and KHL company filings, Asia Wealth Research
Source: AHPL and KHL company filings, Asia Wealth Research
The city hotel sub-segment which has been driving the overall segment revenue during the past few years and catering to MICEtravellers is likely to witness intense competition in the medium to long term with the entrance of several new hotels in the city hotel
sphere. However, the successful implementation of WFP project and the increase in number of entertainment facilities within the city
limits could assist the city hotels to maintain sustainable occupancy levels. In addition, the strong portfolio of restaurants of the cityhotels is likely to support the revenue growth momentum. The city hotels are likely to witness a slight improvement in occupancies
during 2HFY2014E due to the Commonwealth Heads of Government Meeting (CHOGM) that is being held in Colombo.
Sri Lankan resort hotels are likely to continue to witness slowdown in occupancies, amidst a rise in room stock, unless the country as
whole is able to draw in high a proportion of high-end tourists. Further, relatively higher Average Room Rates (ARR) cf. regionalcompetitors could restrict the Sri Lankan resort hotels to increase the ARR, despite the rise in operating expense. This is also likely to
exert pressure on the margins.
The Maldivian resorts are likely to be a key growth driver amidst a rise in occupancies. Further, the region which attracts a high
number of high end tourists and charges premium ARRs, yields higher margins cf. other locations. This is likely to support the Leisuresegment to sustain its margins.
JKH expects the 240 room Sancity Hotels project (which is a joint venture between JKH and Sanken Lanka) to commence operations
during 2QFY2015E. The hotel is branded as a three star business hotel, where JKH currently holds a c. 28% stake in it. Management
indicated that the shareholding would dilute to c. 20% as at the completion of the project and the hotel would be treated as an associate
in the books of JKH. We expect the demand for this hotel to be driven by the budget MICE travellers.
Consumer Foods & Retail (accounted for c. 28% of the groups FY2013 external revenue)
Cons umer Foods & Retail FY2011 FY2012 FY2013 FY2014E FY2015E 1QFY2013 1QFY2014
External Revenue (LKR'm) 18,358 21,969 24,267 26,742 29,316 5,987 6,155
% YoY Change 15.9% 19.7% 10.5% 10.2% 9.6% 9.0% n/a 2.8%Adjus ted EBITDA (LKR'm) 1,113 2,257 1,826 2,012 2,336 555 421
% YoY Change 41.5% 102.8% -19.1% 10.2% 16.1% 9.0% n/a -24.1%
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LKR'm
LKR'm
The Consumer Foods & Retail (CF&R) segment, despite witnessing a double digit growth in revenue during the past few years has
been witnessing high volatility in EBITDA margins due to fluctuation in raw material prices, hike in import duty, etc. In addition the
FY2013 performance was hampered by the one-off VAT impact after the introduction of VAT on retail trade, where the Retail unit was
unable claim input VAT on the inventory as of 31 December 2012 due to a non-availability of a transitional provision in the VAT Act.
Further, the restructuring expense incurred by the retail unit termed as the way forward strategy also impacted the performance of thesegment.
The 1QFY2014 performance of the CF&R segment was affected by the weakening consumer demand due to rise in cost of living,
increase in raw material and energy costs and the continuation of the restructuring program at the Retail unit. However, with the
completion of the restructuring at the Retail unit during 1QFY2014, the EBITDA margin of the segment is likely to improve in theabsence of the one-off restructuring expense. Further, the projected growth in per capita income and improvement in life style is likely
to improve the demand for the CF&R segment, albeit the rise in cost of living could be a damper.
Financial Services (accounted for c. 10% of the groups FY2013 external revenue)
Financial Services FY2011 FY2012 FY2013 FY2014E FY2015E 1QFY2013 1QFY2014
External Revenue (LKR'm) 6,484 7,932 8,599 9,931 11,256 1,997 2,230
% YoY Change 23.2% 22.3% 8.4% 15.5% 13.3% 13.2% n/a 11.6%
Adjus ted EBITDA (LKR'm) 953 1,514 1,204 1,392 1,607 257 116
% YoY Change 87.6% 58.9% -20.4% 15.6% 15.4% 12.5% n/a -54.7%
Segments revenue is derived from Union Assurance (c. 98% contribution to revenue) and John Keells Stock Brokers (c. 2%
contribution to revenue). Despite the gradual growth that has been witnessed in the insurance industry, the life insurance industry in Sri
Lanka continues to be under penetrated, which provides ample growth opportunity for the industry. The projected growth in disposable
income coupled with the enhanced awareness on insurance products is likely to drive the demand Union Assurances (UAL) life
insurance products. However, the rise in cost of living and high interest rates provided by banks creates a resistance for the growth ofthe life insurance business. The general insurance business is likely to benefit from the growth in post war business activity in the
country and due to the slight recovery witnessed in the automobile market.
However, the industry is likely to witness certain structural changes due to the newly introduced regulations which requires composite
insurance companies (companies involved in both life and general insurance business) to segregate both the business segments into
different entities by February 2015. This would be followed by the listing of the unlisted unit within three years from the issue of new
license. This could possibly result in cost increases arising from duplication of overheads and capital expenditure; and also from one-off expenses resulting from restructuring.
UAL's Life Insurance Unit Continues to Maintain the
Fourth Position Whilst Increasing its Market Share6,000
5,000
4,000
3,000
2,000
1,000
0
CY2008 CY2009 CY2010 CY2011 CY2012
Life Insurance - Gross premium written
Life Insruance - UAL's market share
15.0%
10.0%
5.0%
0.0%
UAL General Insurance Unit Continues to Maintain
the Fourth Position Whilst Gradually Loosing Market
5,000Share
4,000
3,000
2,000
1,000
0
CY2008 CY2009 CY2010 CY2011 CY2012
General Insurance - Gross premium writtenGeneral Insruance - UAL's market share
10.0%
9.5%
9.0%
8.5%
Source: Insurance Board of Sri Lanka Annual Report 2012 Source: Insurance Board of Sri Lanka Annual Report 2012
The Monetary Board of the Central Bank has directed JKH to reduce its current shareholding of c. 30% held in Nations Trust Bank(NTB) to 15%, whist JKH has requested for an extension for same. We believe that JKH could look into the possibility of trimming its
shareholding in NTB depending on the funding requirements for the WFP project. This would result in a one-off gain in the incomestatement of JKH, whilst the share of profits from NTB would be stopped being recognized in the income statement.
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Property (accounted for c. 4% of the groups FY2013 external revenue)
Property FY2011 FY2012 FY2013 FY2014E FY2015E 1QFY2013 1QFY2014
External Revenue (LKR'm) 2,494 3,790 3,170 5,410 6,974 612 673
% YoY Change 53.9% 52.0% -16.4% 70.7% 28.9% -27.9% n/a 10.0%
Adjus ted EBITDA (LKR'm) 617 763 720 1,249 1,610 33 133
% YoY Change 63.8% 23.7% -5.7% 73.5% 28.9% -27.9% n/a 299.5%
According to management, the 475 unit OnThree20 apartment project has witnessed c. 80% completion to date and is poised to be
fully completed by the scheduled date of December 2014. The project which has witnessed c. 81% pre-sales to date has commenced
revenue recognition and we expect the revenue recognition from the project to continue to add strength to the Property segmen t during
FY2014E-FY2016E.
During 1QFY2014, the segment commenced construction of the 7th
Sense premium residential apartment project with a targeted date
of completion of April 2015. According to management, the 65 unit apartment project, which is priced at a premium rate of c. USD380-
390 per sq. ft, has already witnessed c. 50% pre-sales. Given the projected 2 year period for completion of the project, we expect the
revenue recognition from this project to commence towards the latter part of FY2014E.
Valuation
Sum of the parts (SOTP) Valuation
Segment/Line Item Sub-s egment/Comments Method of valuation and Inputs
LKR'm
Trans portation South As ia Gateway Terminals DDM (Ke=14.9%, TGR=3%) 18,519
Others (LMS) FCFF (WACC=14%, TGR=3%) 6,871
Leis ure FCFF (WACC=14.1%, TGR=6%) 62,346
Property P/B (peer average P/B of 1.0x) 11,969
Cons umer Foods & Retail FCFF (WACC=14.8%, TGR=5%) 11,186
Financial Services Nations Trus t Bank Jus tified P/B of 1.1x 4,294
Others (UAL & JKSB) P/B - 2.1x. (Five year average P/B ofUAL adjus ted for peer average P/B
of JKSB)
8,405
Information Technology FCFF (WACC=14%, TGR=5%) 3,163
Others FCFF (WACC=13.7%, TGR=5%) 1,213
Waterfront Properties Probability weighted average value
of bas e cas e, optimis tic cas e and
pessimis tic case
FCFF (WACC: 1-4 years =13.6%, 5-10
years =13.7%, 10-25 years =13.3%,
after
25 years =12.9%, TGR=3%, Exchange
rate=LKR130/USD)
82,769
OtherAdjus tments Adjus tment for net debt, land
and minority interes t
(8,843)
Dilution effect from warrants Effect from iss uing warrants at a
dis count to the current market price
ofthe share
Black-Scholes model (2 year bondyield
=10.8%, 3 year bond yield
=11.1%, current s hare
price=LKR217.50, adjus ted s hare
price LKR199.74)
(5,539)
Total Equity Value 196,352
Number ofs hares (m) Shares pos t rights iss ue + outstanding
ESOPs
1,007
Price per s hare (LKR) 195
DDM Dividend Discount Model, FCFF Free Cash Flow to Firm, Ke Cost of Equity, WACC Weighted Average Cost of Capital, TGR Terminal Growth Rate
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We believe that SOTP valuation is the most suitable valuation methodology for JKH, given its diverse unrelated business segments.
The valuation of the WFP project poses several challenges due to the long gestation period of the project, inclusion of multiple
components in the project, inclusion of an option to undertake Phase 2 and also due to the international gaming operator not being
selected yet. Despite WFP playing a passive role in the gaming unit, we believe that the rental income (fixed + variable) generated from
renting out floor space to the gaming operator would be the key driver and the largest contributor to the WFP project.
In valuing the WFP project, we have considered similar integrated resorts in the region and projected the cash flows over the three
different tax regimes (i.e 1-10 years 0% tax, 11-25 years - 6% tax and after 25 years the current tourism tax rate of 12%) under a base
case, optimistic case and a pessimistic case. We have assumed that under the base case and the optimistic case, WFP would undertake
Phase 2. In arriving at the probability weighted value for WFP, we have assigned the highest weightage for the base case whilstassigned a lower weightage for the optimist case (due to the peer integrated resorts considered being in close proximity cf. Sri Lanka to
countries with a large gambling population), and the pessimistic case (on the assumption that JKH would be able to attract aninternational casino operator who would be successful in attracting gaming tourist). As per our estimation, we believe that WFP would
be the largest contributor to the share price of JKH and hence it is critical that JKH successfully implements the project.
Value (LKR'm) Weight
WFP -bas e case 60,348 60.0%
WFP - optimis tic case 216,850 20.0%
WFP -pessimis tic case 15,951 20.0%
Weighted average value 82,769
Based on the above valuation, we believe that the ordinary share of JKH is currently trading at a c. 10.3% premium to its intrinsicvalue of LKR195 and has not fully factored in the dilution effect from rights and the warrants yet. However, we believe that the rights
are attractively priced at LKR175. Given that every 3 rights subscribed entitles the investor for 2 warrants, we believe that the effectivecost of investing in the rights would be much lower than LKR175 assuming that the investor opts to dispose the warrants during
warrants trading. Hence we believe that the rights issue attached with warrants provides an opportunity to gain for both a trader with a
short term investment horizon (through arbitrage) and a long term investor who is likely benefit from the long term growth prospects of
the WFP project.
Valuation of Rights and Warrants
We illustrate below the implied value of warrants and the right considering the current price of LKR217.50 and our intrinsic value of
LKR195 as two scenarios. We have valued the warrants using the Black-Scholes model with the following inputs: 2 year government
bond yield =10.8%, 3 year government bond yield =11.1%, 2 year share price volatility =21.4%, 3 year share price volatility =28.0%.Further, we have assumed at the time of disposal the current price will prevail in the current price scenario and our intrinsic price will
price will prevail in the intrinsic price scenario.
Current Price
LKR217.50
Intrins ic Value
LKR195
Subs cription of 3 rights @ LKR175 (LKR) (525) (525)
Es timated value of 2015 Warrant (LKR) 71 51
Es timated value of 2016 Warrant (LKR) 86 67
Dis pos al of the 3 s hares s ubs cribed via rights (LKR) 645 585
Total value of 3 rights (LKR) 277 178
Implied value per right (LKR) 92 59
Relative Valuation
Source: Bloomberg, Asia Wealth Research
JKH is currently trading at a premium to its closest peers in terms of P/E, EV/EBITDA, P/BV and P/S. We expect the multiples to re-
rate downwards in the short term, due to the dilution effect from the rights issue and due to the slowdown in the short term performance
of the group.
Based on our above analysis we recommend a SELL on the ordinary voting share due to the potential downside within a 1 yearperiod and recommend a SUBSCRIBE for the rights due its attractiveness.
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Key Risks to Our Recommendation, Target Price and Estimates
The Gazette notification issued for WFP under the Strategic Development Projects Act is yet to obtain the Parliamentsapproval to be valid. A failure to obtain such approval from the Parliament could significantly impact our estimates.
Fluctuation in exchange rates, cost overruns and delay in completing the construction could affect the estimates of the WFP
project.
In ability to attract one of the leading gaming operators who has a network of large amount of high spending clientele couldresult in lower than expected return from the WFP project.
Management has indicated that the rental received from the gaming area would account for c. 60% of the gaming economics.
A steep reduction in this percentage (arising from the higher bargaining power of the casino operator) could significantly
impact the valuation of the share.
The WFP includes a condominium component in its each Phase. If an oversupply of apartments results in a drop in real estate
prices, it could adversely affect the margins of the condominium component of the WFP project.
Pressure groups against the operation of casinos in Sri Lanka could negatively impact the successful implementation of thegaming business.
A sharp drop in occupancies in Sri Lankan resorts could impact the margins of the group, whilst political instability in
Maldives good impact the performance of the high margin yielding Maldivian segment.
Slow down in global and local trade could adversely impact the performance of the Logistics segment.
A sharp rise in cost of living could hamper the performance of the CF&R and the Financial Services segment.
Volatility in LKR, volatility in exchange rates and rise in raw material costs could significantly affect the margins of thegroup.
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Annexure 1
Summary Financial Statements
Income Statement (LKR'm) - Condensed FY2011 FY2012 FY2013 FY2014E FY2015E FY2016E
Revenue 60,500 77,690 85,557 95,852 105,939 113,303
EBITDA 8,357 11,808 12,624 14,056 16,000 16,571
Total segment res ults 6,062 9,185 9,447 10,613 12,628 13,248
As sociate Profits 2,641 2,765 3,369 3,458 3,765 4,132
Profit Before Tax 10,629 12,820 15,775 14,323 15,588 15,123
Net profit to shareholders (reported) 8,246 9,687 12,201 10,662 11,604 11,295
Net profit to shareholders (recurring) 6,025 8,440 10,172 10,662 11,604 11,295
Diluted EPS (LKR) - reported 9.77 11.44 14.22 11.42 11.55 10.95
Diluted EPS (LKR) - recurring 7.14 9.96 11.85 11.42 11.55 10.95
Balance S heet (LKR'm) - Condensed FY2011 FY2012 FY2013 FY2014E FY2015E FY2016E
Non-current As s ets
Property, plant and equipment 28,628 34,290 49,273 56,338 84,631 104,770
Intangible as s ets 2,632 2,633 2,690 2,504 2,325 2,150
Investment in as s ociates 14,692 15,654 15,724 16,123 16,648 17,354
Other non-current as s ets 30,644 34,134 41,413 41,054 41,278 41,808
Current As s ets
Cas h in hand and at bank 2,113 4,267 3,555 4,024 3,169 4,070
Other current as s ets 20,971 28,603 31,855 53,210 49,464 60,648
Total As s ets 99,680 119,582 144,510 173,254 197,515 230,800
Total Equity
Non-current Liabilities
67,748 80,201 101,185 133,167 142,763 160,265
Borrowings 8,275 12,221 11,858 9,525 23,887 37,719
Other non-current
liabilities Current
Liabilites Borrowings
15,276
6,334
17,567
7,833
20,576
8,259
21,971
6,218
22,870
5,477
24,008
6,183
Other current liabilities 2,046 1,760 2,632 2,374 2,518 2,624
Total equity and liabilities 99,680 119,582 144,510 173,254 197,515 230,800
Net as s et value pers hare (LKR) 71.59 84.51 104.78 122.05 130.55 140.70
Growth rates and Ratios FY2011 FY2012 FY2013 FY2014E FY2015E FY2016E
Growth rates
Revenue 26.1% 28.4% 10.1% 12.0% 10.5% 7.0%EBITDA 60.1% 41.3% 6.9% 11.3% 13.8% 3.6%
Total s egment res ults 83.3% 51.5% 2.8% 12.3% 19.0% 4.9%
Net p rofit to s hareholders (reported) 58.5% 17.5% 26.0% -12.6% 8.8% -2.7%
Net p rofit to s hareholders (recurring) 42.9% 40.1% 20.5% 4.8% 8.8% -2.7%
Diluted EPS (LKR) - reported 54.7% 17.1% 24.3% -19.7% 1.1% -5.2%
Diluted EPS (LKR) - recurring
Margins and Ratios
Gros s profit margin
39.5%
22.6%
39.6%
23.4%
18.9%
23.9%
-3.7%
23.4%
1.1%
23.4%
-5.2%
23.4%
EBITDA margin 13.8% 15.2% 14.8% 14.7% 15.1% 14.6%
Total s egment res ults margin 10.0% 11.8% 11.0% 11.1% 11.9% 11.7%
Net margin (reported ) 15.0% 14.1% 15.9% 12.5% 12.3% 11.2%
Net margin (recurring) 11.2% 12.3% 13.3% 12.5% 12.3% 11.2%
ROE (bas ed on reported net income) 15.0% 14.7% 15.1% 10.1% 9.2% 8.1%
ROE (bas ed on recurring net income) 11.0% 12.8% 12.6% 10.1% 9.2% 8.1%
Dividend Yield 1.4% 1.3% 1.4% 1.4% 1.6% 1.5%
S eg ment Exte rnal Revenue (LKR'm) FY2 011 FY201 2 FY2013 FY20 14E FY201 5E FY2016E
Transpo rtation 13,426 18,428 19,438 20,129 21,031 21,480
Leisure 13,810 17,415 20,593 22,951 24,522 26,057
Property 2,494 3,790 3,170 5,410 6,974 5,030
Consumer food and retail 18,358 21,969 24,267 26,742 29,316 31,967
Financial s erv ices 6,484 7,932 8,599 9,931 11,256 12,737
Information Technology 3,107 5,926 6,514 7,445 8,494 9,647
Others 2,823 2,229 2,978 3,244 3,569 3,906
W aterfront Prop erties - - - - 777 2,478
S egment EBITDA (LKR'm) FY2011 FY2012 FY2013 FY2014E FY2015E FY2016E
Transpo rtation 852 1,215 1,074 1,106 1,142 1,152
Leisure 3,294 5,595 6,864 7,495 7,950 8,348
Property 617 763 720 1,249 1,610 1,161
Consumer food and retail 1,113 2,257 1,826 2,012 2,336 2,547
Financial s erv ices 953 1,514 1,204 1,392 1,607 1,808
Information Technology 200 341 547 627 715 812
Others 1,328 122 390 175 474 211
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W aterfront Properties - - - - 166 530
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Asia Wealth Management Co. (Pvt) Ltd1
Annexure 2
Waterfront Properties at a Glance
Rights Issue Update
Salient Features of the Project
Project scope Integrated resort consisting of multiple businesses including a luxury hotel, convention centre,
entertainment and gaming facilities, international standard shopping mall, luxury condominiums,
serviced apartments and office space. The project would be undertaken in two phases and the
implementation of Phase 2 would depend on the market conditions.
Time line 4 to 5 years. Management has indicated that the decision to undertake Phase 2 would be taken while the
construction of Phase 1 is in progress and the decision would not impact the estimate time line.
Estimated cost of
the project
(excluding land)
Phase 1 + Phase 2 = USD820m or;
Phase 1 only = USD660m
Tax benefits The project company, Waterfront Properties would enjoy several tax concessions under the Strategic
Development Projects Act. Profits and income derived from non-gaming activities would be exempted
for 10 years from income tax and would be taxed at a concessional rate for another 15 years. Dividends
distributed by Waterfront Properties would be exempted from income tax for 11 years. Further,
importation of projected related goods and services would be exempt from Value Added Tax for 5-8years depending on the implementation of Phase 2.
Proposed mode of
funding
Land transfer amounting to USD60m
Equity infusion by JKH USD240m
Pre-sales of residential apartments
Balance to be funded by debt (The company has indicated that the optimal Debt/Equity ratio would
be 60/40)
Source: Company circular to the shareholders, Asia Wealth Research
Artists Impression of the Waterfront Properties Project
Source: Company
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Asia Wealth Management Co. (Pvt) Ltd1
Annexure 3
Rights Issue Update
Proposed Shareholding Structure of Waterfront Properties (Approximate
Shareholding)
81.36%
John Keells Holdings
(effective shareholding of c.
96.7%)
86.9
%
100%
Ceylon Cold Stores John Keells PLC John Keells Properties
79.24%
5.03%
14.15%1.57%
Waterfront Properties
(Project Company)
Phase 1 Phase 2
Luxury hotel (800 rooms)Convention centre to
Serviced apartments (200 units)
Office complex (400,000 sq. ft)accommodate 2,500 guests
Shopping mall Entertainment and gaming
facilities Luxury condominiums (240
units)
Car park facilities (2,500 slots)
Source: Company circular to the shareholders, Asia Wealth Research
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Asia Wealth Management Co. (Pvt) Ltd1
Annexure 4
Proposed Rights Issue Attached with Warrants at a Glance
Rights Issue
Rights Issue Update
Proportion 2 new shares for every 13 shares held
Number of rights to be issued (m) 132.0
Issue price LKR175
2015 Warrant
Proportion 1 warrant for 3 subscribed rights
Number of warrants to be issued (m) 44.0
Conversion to ordinary shares 1 warrant to 1 share
Issue price LKR185
Point of exercise 24 months from the issue of rights (12 November 2015)
2016 Warrant
Proportion 1 warrant for 3 subscribed rights
Number of warrants to be issued (m) 44.0
Conversion to ordinary shares 1 warrant to 1 share
Issue price LKR195
Point of exercise 36 months from the issue of rights (11 November 2016)
Share Dilution from Rights Issue and Warrants
The following illustration excludes the dilution effect from ESOPs.
Period Description Number of shares
issued (m)
Total shares
outstanding (m)
4 October 2013 Outstanding N/A 857.9
4Q2013 Listing of rights 132.0 989.912 November 2015 Conversion of 2015 warrant 44.0 1,033.9
11 November 2016 Conversion of 2016 warrant 44.0 1,077.9
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Asia Wealth Management Co. (Pvt) Ltd1
Rights Issue Update
Important Disclosures
Equity Rating Definition
Buy The stock is expected to deliver an absolute return greater than or equal to 15% within a 12-month time horizon
Long-term buy The stock is expected to deliver an absolute return less than 15% but greater than or equal to 5% within a 12-month time horizon. However, we maintain a positive outlook for the stock based on the underlying fundamentals and the future
growth prospects of the firm.
Hold The stock is expected to deliver an absolute return less than 15% but greater than -5% within a 12-month time horizon.
Sell The stock is expected to deliver an absolute return less than or equal to -5% within a 12-month time horizon.
Disclaimer
The report has been prepared by Asia Wealth Management Co (Private) Limited. The information and opinions contained herein
has been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such
information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its
accuracy, completeness or correctness, reliability or suitability. All such information and opinions are subject to change w ithoutnotice. This document is for information purposes only, descriptions of any company or companies or their securities mentio ned
herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an
offer, to buy or sell any securities or other financial instruments. In no event will Asia Wealth Management Co (Private) Limited
be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss ordamag e
whatsoever arising out of, or in connection with the use of this report and any reliance you place on such information is therefore
strictly at your own risk.
Asia Wealth Management Co (Private) Limited may, to the extent permissible by applicable law or regulation, use the above
material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Not all
customers will receive the material at the same time. Asia Wealth Management Co (Private) Limited, their respective directors ,
officers, representatives, employees, related persons and/or Asia Wealth Management Co (Private) Limited, may have a long or
short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and maymake a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from
time to time in the open market or otherwise, in each case either as principal or agent. Asia Wealth Management Co (Private)
Limited may make markets in securities or other financial instruments described in this publication , in securities of issuers
described herein or in securities underlying or related to such securities. Asia Wealth Management Co (Private) Limited may
have recently underwritten the securities of an issuer mentioned herein. The information contained in this report is for general
information purposes only. This report and its content is copyright of Asia Wealth Management Co (Private) Limited and all
rights reserved. This report- in whole or in part- may not, except with the express written permission of Asia Wealth Management
Co (Private) Limited be reproduced or distributed or commercially exploited in any material form by any means whether graphic
, electronic, mechanical or any means. Nor may you transmit it or store it in any other website or other form o f electronic
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Rights Issue UpdateResearchnager - Research Assistant Manager - Research
akrishnan Nirmalan (94-11)5320362 Amali Perera (94-11)5320256
rporates
nir m a la n @ a s iaca p ita l. lk
Economy
a m a li@ a s iaca p ita l. lk
gini Yogarasa (94-11)5320361 Dhanusha Pathirana (94-11)5320254
Statistician
Nuwan Pradeep (94-11)5320257
Salesti t ut i o n al S ales R e tail S ales
riMarikar (94-11) 5320224 077 3-576868 s ab ri@ a s iacap ita l. lk ShiyamSubaulla (94-11)5320218 0773-502016 s hiy a m @ a s iacap ita l. lk
oshanWijayakoon (94-11) 5320208 0777-713645 niro s h a n @ a s iacap ita l. lk PriyanthaHingurage (94-11)5320217 0773-502015 p r iy a n t h a @ a s iaca p ita l. lknjulaKumarasinghe (94-11) 5320211 0777 -874310 m a nj u la @ a s iaca p ita l. lk SubeethPerera (94-11)5320227 0714-042683 s u bee t h @ a s iaca p ita l. lk
elakaHapugoda (94-11)5320240 0777 -256740 c h e lak a @ a s iacap ita l. lk NelukaRodrigo (94-11)5320214 0777-366280 n e luka @ a s iaca p ita l. lkamindaMahanama (94-11) 5320223 0777 -556582 m a h a n a m a @ a s iaca p ita l. lk GaganiJayawardhana (94-11)5320236 0714-084953 g a g a ni@ a s iaca p ita l. lkanBibile (94-11) 5320238 0777 -352032 hira n @ a s iacap ita l. lk ShamalPerera (94-11)5320219 077-3717558 s h a m a l@ a s a iaca p ita l. lkoshanRathnam (94-11) 5320242 0773 -717515 ra t n a m @ a s iacap ita l. lk NuwanEranga (94-11)5320246 0777368012 e ran g a @ a s iaca p ita l. lkvanHett igoda (94-11) 5320220 0773 -691251 je e v a n @ a s iaca p ita l. lk RomeshPriyadarshana (94-11)5320228 0772548795 p r iy ada rs h a n a @ a s iaca p ita l. lk
ajFouz (94-11) 5320210 0773 -810159 fa raj @ a s iacap ita l. lk RukshanLiyanage (94-11)5320235 077-3413297 r u k s h a n @ a s iacap ita l. lk
flalFarook (94-11) 5320247 0772-253730 m if la l@ a s iaca p ita l. lk NathashaMunasinghe (94-11)5320231 0777-569266 n a t h a s h a @ a s iaca p ita l. lk
IreshaFernando (94-11)5320232 0777359012 ire s h a @ a s iaca p ita l. lkSharikaRathnayake (94-11)5320209 0777567994 s h a r ika @ a s iaca p ita l. lk
BranchesE Floor CSE,01-04, World Trade Centre, Colombo 1. ThusharaAdhikari (011)-5735122 0773-688202 adhika r i@ a s iaca p ita l. lk
M G Suranjana (011)-5763539 0773-954994
runegala Union Assurance Building, No.6,1stFloor,Rajapilla Rd, Kurunagala. AsankaSamarakoon (037)-5628844 0773-690749 a s a n ka @ a s iaca p ita l. lkGayanNishsanka (037)-5642717 0777-105356 n is h s h a n k a @ a s iacap ita l. lk
tara E.H.Cooray Building, Mezzanine Floor, No:24, AnagarikaDarmapala Mw, SumedaJayawardena (041)-5677525 0773-687307 s u m ed a @ a s iaca p ita l. lkMatara LalindaLiyanapathirana (041)-5677526 0778-628798 r is h a n @ a s iaca p ita l. lk
MaheshaMadurangi (041)-5620727 m a h e s h a @ a s iaca p ita l. lk
lle Peoples Leasing Building,2nd Floor,No.118,Matara Road,Galle RuchiraHasantha (091)-5629998 0773-687027 r u c h ira @ a s iaca p ita l. lk
gombo Asia Asset Finance, 171/1, Station Road, Negombo. UthpalaKarunatilake (031)-5676881 0773-691685 u t hp a la @ a s iaca p ita l. lk
ratuwa Asia Asset Finance, No.18, New De Zoysa Rd, Moratuwa.
CharithPerera (011)-5238663 c h a r it hn @ a s iacap ita l. lk
nadura Asian Alliance Building, 293, Galle Road, Panadura RanganathWijetunga (038)-5670400 0715-120723 rang a n a t h @ a s iacap ita l. lkAsankaChaminda (038)-5670407 0713-559552 c h a m inda @ a s iaca p ita l. lk
ndy 132 2/7, Hill City Complex,D. S .Senanayake Street, Kandy.
NilupulHettiarachchi
RadhikaHettiarachchi
(081)-5628500
(081)-5625577
0777410164
0773692242
nilu p ul@ a s iacap ita l. lk
ra d h ik a @ a s iacap ita l. lkTharinduPr iyankara (081)-5625577 0777282586 p r iy a n k a ra @ a s iacap ita l. lk
mpara Bandula Cinema Shopping complex, No-103,D S Senanayaka Street,Ampara.
Ravi De Mel
NalakaDhanushka
(063)-5679071
(063)-5679070
0772-681995
0771-520376
ravide @ a s iaca p ita l. lk
n a lak a @ a s iacap ita l. lk
ervi ce Centersibathgoda Level 2-6,Udeshi City Shopping complex, No 94,Makola Rd,Kiribathgoda DanushkaBoteju
KasunNavoda(011)-5634803 0716-270527 botej u @ a s iaca p ita l. lk
mbantota Hambanthota Chamber of Commerce, ThangalleRoad,Hambantota. SherminRanasinghe (047)-5679240 0777681866 s h e r m in @ a s iaca p ita l. lkSamithEdirisinghe 0775-486869 s a mit h @ a s iaca p ita l. lk
fna 62/20, First Floor, Stanley Road, Jaffna GratianNirmalan (021)-5671800 0777-567933 nir m a l@ a s iaca p ita l. lkS.Puviraj (021)-5671801 0775-096969 puviraj @ a s iacap ita l. lk
ASIA WEALTH MANAGEMENT CO.(PVT) LTD
21-01 West Tower,World Trade Centre, Echelon Square,
Colombo 01, Sri LankaTel: +94 11 5320000
Website: ww w .as i ac a p it a l.lk
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