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Tuesday February 7th, 2023

JKH: How Sri Lanka’s Premier Conglomerate Will Unlock Opportunities in 2023 and Beyond

Gihan Cooray Deputy Chairperson and Group Finance Director of John Keells Group

Gihan Cooray, Deputy Chairperson and Group Finance Director of John Keells Group (JKH), shares insights into the Group’s strategy for 2023 and beyond, including the iconic and transformative ventures of the Cinnamon Life integrated resort and the West Container Terminal at the Port of Colombo. JKH is the largest listed conglomerate in Sri Lanka. With a pioneering heritage and rich history of more than 150 years and comprising multiple companies across seven industry sectors, JKH indelibly impacts most sectors of the Sri Lankan economy.

Cooray begins by taking us through the performance of the JKH Group and its key business segments and ventures.

Despite the severe domestic macroeconomic pressure, JKH has continued to report a strong performance, with most businesses witnessing a robust recovery momentum from the pandemic-related disruptions. The balance of the composition of the portfolio of businesses has aided the group to navigate in these turbulent times given the diverse nature of revenue streams.

The performance of the group’s ports businesses and the supermarket business remained insulated, to a large extent, despite the macroeconomic challenges, considering its essential nature and the ports business revenue model being primarily driven by offshore markets and customers. Given the notable shortages in essential goods and other fast-moving items, the supermarket business proactively ramped up its direct sourcing strategy during the year intending to bridge gaps and, more importantly, provide customers with such products at the best possible value.

The consumer foods business had steady volume growth with the business’s volumes reaching pre-pandemic levels, despite the multiple disruptions to distribution. Whilst the Sri Lankan leisure businesses were severely impacted by the pandemic and the volatile socio-economic conditions, it is encouraging to witness the gradual recovery in tourist arrivals, particularly given the removal of travel advisories in main source markets and the increase in frequencies of flights by a few major airlines. The negative perception and lack of awareness, especially in our key source markets, have 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.

The group’s insurance business, Union Assurance PLC, and the banking arm, Nations Trust Bank PLC, continued to record a strong performance despite the challenging environment.

Heading into 2023, what would be the investment strategy of the group?

Despite the unprecedented events over the last three years, the group continued its investment cycle to pave the way for transformative growth into the future. These investments have continued steadfastly; while the investments had short-term impacts on performance over the last couple of years on account of related expenses, disruptions and gestation periods, the long-term benefits will start translating into significant positive performance impacts in the relevant businesses over the next few years.

The ongoing investments include the development of the ‘Cinnamon Life’ integrated resort and the development of the West Container Terminal (WCT1) at the Port of Colombo, both projects which are of strategic importance for Sri Lanka. With the regularising of gaming in Sri Lanka, 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, whilst the WCT-1 investment will ensure capacity led growth and regional competitiveness of the Port of Colombo.

While these two landmark projects will create transformative growth for JKH and our transportation and leisure businesses, we have invested significantly in expanding our capabilities and competitiveness across our portfolio of businesses. The levels of penetration in supermarkets, consumer foods and financial services, particularly life insurance products, remain relatively low compared to many countries in the region, and, therefore, lend themselves to continued opportunities through higher penetration. Our strong brands in many of our consumer businesses will augur well for growth prospects for JKH in the coming years.

What changes do you anticipate as Sri Lanka begins the long, arduous process of restructuring its debt?

The government has undertaken many difficult, yet necessary, measures to rebuild Sri Lanka’s fiscal position to overcome the macroeconomic crisis. Although some measures are likely to impact corporate performance in the short term, all corporates must continue to actively engage with the authorities and raise awareness amongst all stakeholders to ensure these policy reforms are implemented expeditiously to achieve a sustainable economic recovery.

Equally important, policymakers should be held accountable for the implementation of reforms and there should be increased initiatives for ensuring transparency, better governance, and a sharing of an equitable burden between both the private and the public sectors which will increase the chances of acceptability, and, therefore, success. We have a short window of opportunity to make genuine and lasting change in the country, and I hope the policymakers stay focused on achieving this objective.

When resetting the economy and driving economic reforms, what should Sri Lanka prioritize? What matters most to home-grown conglomerates such as JKH?

We are supportive of the steps taken by the authorities towards economic recovery and urge all key stakeholders to reach a consensus to ensure the actions required to revive the economy are taken decisively and expeditiously.

Whilst the progress made thus far in implementing the reforms and initiatives is commendable, it is understood that 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 to strike a balance between economic stability and growth. While revenue-enhancing measures are required, government expenditure should also be optimized to drive economic recovery in a sustained manner. We urge the authorities to expedite the implementation of much-needed public sector reforms to address the structural and governance issues of the economy to achieve long-term sustainable growth. The establishment of independent bodies is of utmost importance to ensure Sri Lanka does not get into the current conundrum it is faced with. The independence of the Central Bank and monetary policy will ensure that we achieve a better balance between government policymaking and the financial management and effect of such policies. Over time, this will ensure policymaking has to be done with cognisance of the long-term impacts of such decisions.

What are your options for funding or raising capital going forward?

Over the last two years, the group has raised approximately $500 million via the refinancing of the USD term loan facility at Cinnamon Life, the private placement of JKH shares to the Asian Development Bank, the issue of convertible debentures to Fairfax, Canada, and the IFC term loan facility. The raising of these funds by internationally reputed institutions has been a vote of confidence for Sri Lanka, particularly at this juncture in time, despite the significantly deteriorating external financing position of the country.

We managed to continue to access these pools of internationally reputed investors due to their confidence in JKH and the track record of the company in terms of governance and performance although the sovereign ratings and current financial position of the country create many obstacles for corporates in raising capital. Sri Lanka’s ongoing fiscal consolidation reforms along with the IMF board approval which is expected by early 2023 will augur well for future fundraising for corporates in Sri Lanka.