Bartleet Religare Securities says “JKH’s casino entry a game changer”

Wednesday, 18 September 2013 00:38 - - {{hitsCtrl.values.hits}}

The entry of John Keells Holdings (JKH) into the casino business via its $ 850 million mega integrated resorts would be “a game changer” and re-rate top blue chip’s valuations, according to Bartleet Religare Securities (BRS). “The JKH’s entry into the gaming led- USD 850mn mixed development project would be a game changer for the company and the economy as a whole. However, the raising of equity and the ensuing dilution makes JKH a pricy short to medium term investment,” BRS said. “We believe the project would enjoy high ROCEs and EBITDA margins alongside the proxies considered for the gaming project. The

share has a significant long-term upside with a value of Rs. 314. However, we feel JKH is a pricy medium term investment considering the dilution, long gestation period and high execution risk. We value the Warrant 1 at Rs. 61.49 and Warrant 2 at Rs. 71.45,” a research report from BRS added. It also said the gaming led mixed development project would re-rate JKH’s valuations post FY 2015E. JKH has already collaborated with a local license holder, but it’s vital that a name with global reach (e.g. Sands, SJM, Caesars) partners with JKH to make the resort, a destination resort. The hotel project, conventions and other JKH hotels would get spill-over benefits if gaming hits the target. BRS also said interest income to cushion the shortfall from transportation and hospitality adding that “lower bunkering volumes would bring down transportation segment earnings in forecast period while the leisure earnings are challenged by lower ARRs of the resorts.” “In the forecast period, we could look forward to interest income from part of the Rs. 23.1 b collected through the rights issue that could cushion the EPS impact of the dilution,” the broking firm added. BRS has arrived at an EV of Rs. 285.8 billion including the value of a successfully executed base case gaming venture. “We believe the project has the ability to double the current Group net earnings by FY 2019E, but the long gestation period and execution risk make this expensive for the players with shorter investment horizons. We feel the rights issue with attached warrants would dilute the value of the JKH share in the medium term. We recommend Long term BUY,” BRS said.