John Keells Holdings Ltd. (JKH), one of the country’s premier blue-chip companies, saw its after tax profits (after deducting minority interest) dip by 45% to Rs 141.5 million for the six months ended September 30, when compared with a profit of Rs 257.6 million made during the corresponding period last year, data on a company document showed.

The Group’s chairman Vivendra Lintotawela, in his review of the company’s performance for the period in question says that despite the deceleration in the economy and the associated reduction in spending power/consumer confidence, together with the protacted power outages, Group turnover during the first half of the year under review increased by 4%, from Rs 5.56 billion to Rs 5.79 billion.

‘Even while having to meet with inflationary pressures, an increase of 1% in the national security levy, a 13% depreciation of the rupee, a 40% duty surcharge, a 25% surcharge on electricity and the wage hike in the plantation sector all of which affected this period, concerted efforts to manage total operating expenses, inclusive of cost of sales, have resulted in an increase of 7% in such expenses over the comparative figures for the previous year.

Consequently, profit from operating activities was Rs 392.97 million, a drop of 22% from the previous year. Finance expenses increased by 89% on account of the higher cost of funds experienced during this period.

This has caused profit before extraordinary items and tax to drop by 40% to Rs 315.75 million, from Rs 527.27 million in the previous year. The extraordinary item represents the amount charged against the total payment due on a voluntary retirement scheme being implemented by Ceylon Cold Stores (CCS).

The 20% surcharge imposed in the current year on corporate tax has resulted in an increase of Rs 26 million in the income tax provision for the period, while the reduction in minority interest was due to losses incurred by subsidiaries, where there is a high minority holding.

As a result, net profit was reduced by 45% to Rs 141.5 million. Meanwhile, the turnover of the company was impacted by the prevailing market conditions and the performance of the Group, with a 5% reduction, from Rs 463.7 million to Rs 440.9 million.

The increase in cost of funds also impacted, with a 73% increase increase in finance costs, from Rs 47.7 million to Rs 82.7 million. Profit after tax therefore fell by 26%, from Rs 271.9 million to Rs 200.2 million.

CCS has been able to increase its market share over the last six months. Consequent to the Katunayake and terrorist attacks in the USA, the leisure sector has been most adversely affected, with profits in the Maldives being insufficient to compensate for losses in the company’s local operations.

While the forthcoming parliamentary elections are likely to dampen the prospects for a short-term recovery in the sector, we plan to expand our operations into South India and the Maldives before the end of the year to reduce its reliance on the volatile domestic market.

In the plantation sector, the drought that prevailed during the first half of this financial year contributed to a sharp decline in output and a rise in the cost of production of tea. With national sales averages failing to benefit from the rupee depreciation and wage costs being higher on account of the attendance incentive granted in February sector profitability has been adversely affected.

The transport sector has continued to perform ahead of last year, with most sector companies engaged in shipping and air travel exceeding expectations, notwithstanding a likely higher contribution from SAGT in the final quarter. In the IT sector, recently established strtategic partnerships in Dubai and Scandinavia, will, we believe, help enhance our ‘deal flow’ during the remainder of the year, says Lintotawela.

In the fiancial services sector, the Waldock Mackenzie portfolio has been restructured and is benefiting from lower interest rates. John Keells Stockbrokers is performing ahead of expectations. ‘Given the recent recovery in stockmarket activity and a further reduction in interest rates, we anticipate an improved performance from this sector during the second half of the year,’ he says. The Board continues to critically review its existing operations and at the end of the first half of this year disposed of its interests in Keells Diamonds Ltd to its overseas partners, Lintotawela, further said.