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Softlogic Holdings Plc has been progressive in the third quarter ended 31 December 2017 despite challenging times.
Following is the review of the diversified blue chip's performance by its Chairman Ashok Pathirage accompanying interim results.
For a consumer/retail-focused conglomerate such as Softlogic, a challenging operating climate was witnessed during the period, particularly in the retail sector, which was further compounded by the high interest rate regime, rising inflation levels, inclement weather and the VAT increase. Despite these systemic challenges, group revenue grew 10.3% to Rs. 49.4 billion during the first nine months of this financial year while quarterly revenue grew 17.7% to Rs. 18.3 billion. Cumulative Group topline witnessed a contribution of 31.8% from the Retail sector followed by ICT (26.3%), Healthcare Services (18.2%), Financial Services (16.3%) and Leisure (3.5%).
Gross Profit increased 22.5% to Rs. 17.6 billion during the 1-3QFY18, reflecting strong GP margin improvement from 32.1% in 1-3QFY17 to 35.7% in 1-3QFY18. The quarter too registered GP margin improvements from 33.3% in 3QFY17 to 35.3% in 3QFY18, pushing the quarterly gross profit to Rs. 6.5 billion (up 24.9%). The group’s cost conscious measures, coupled with Group synergies, helped to overcome cost hurdles in two core sectors – Healthcare and Retail – where a number of capital intensive projects are progressing.
Distribution and administrative expenses increased 10.8% and 14.4% to Rs. 2.5 billion and Rs. 9.8 billion respectively during the period resulting in the total operational expenses, which now includes Movenpick Hotel Colombo, to increase to Rs. 12.3 billion (up 13.6%) while maintaining the operating cost margins at 24% levels during 1-3QFY18. Quarterly operational cost increase remained moderate at 8.8% to Rs. 4.3 billion.
The other operating income for the period was Rs. 1.9 billion (Rs. 741.5 million in 1-3QFY17). This was composed of a mix of recurrent and one-off income lines such as fee and commission income at the retail and financial services sectors as well as disposal gains.
Cumulative operating profit improved 67.2% to Rs. 7.2 billion while the quarter registered a 124.3% increase to Rs. 3.1 billion. Cumulative Group EBITDA improved 58.9% to Rs. 9.2 billion, while quarterly EBITDA increased 97.4% to Rs. 3.7 billion.
Finance Income, which primarily consists Softlogic Life Insurance PLC’s investment portfolio’s performance, increased 52.6% to Rs. 879.5 million during the nine-month period while the quarter registered 87.9% growth to Rs. 308.2 million.
Net finance expenses increased 27.4% to Rs. 3.5 billion during 1-3QFY18 while the quarter also witnessed a similar increase of 26.1% to Rs. 1.3 billion.
The change in insurance contract liabilities depicts the transfer from the life insurance business to the policyholders’ account. The cumulative period witnessed a transfer of Rs. 1.3 billion as opposed to Rs. 95.5 million in the comparative period while the quarter witnessed a transfer of Rs. 455.1 million (Rs. 82.9 million in 3QFY17). This increase was mainly due to the growth of the life insurance business.
Profit before tax rose 60.6% to Rs. 2.4 billion for the cumulative period while reporting a four-fold increase to Rs. 1.4 billion (Rs. 274.1 million in 3QFY17).
Profit after taxation during the nine-month period registered a strong 68.1% increase to Rs.1.9 billion while the quarterly bottom line reported more than a twofold increase to report Rs. 1.2 billion as opposed to Rs. 351.8 million in 3QFY17.
The retail sector’s cumulative revenue was Rs. 15.7 billion (up 3.1%) with the quarter reporting Rs. 6.1 billion (up 8.6%). Retail sector growth was stifled by the sluggish economic climate which dampened consumer demand during this period. Retail sector revenues primarily originated from ODEL and the Consumer Electronics businesses while the QSR chain continued to report incremental earnings despite its expansion drive.
Burger King opened its 19th outlet in Kotahena to tap into growing fast food demand in that geography. The Consumer Electronics network stands with 219 stores around Sri Lanka with the latest store being opened in Thambuttegama in the Anuradhapura District. We now have a total retail space of 290,000 sq. ft in the Consumer Electronics business.
Odel will be occupying 40,000 sq. ft at the Colombo City Centre which will open in August. Odel will be retailing an exclusive sportswear section while also housing its upmarket luxury brands such as Armani Exchange, Mothercare, Fossil, Luxe bags, Aldo, Clarks, Mango, Charles & Keith, Swarovski and its own Odel brands in this mall. Also, we will take 100,000 sq. ft of mall space in Shangri-La which is expected to open in June 2019.
Plans are progressing well to unveil one of the city’s authentic malls – The Odel Mall—in 2020.
Sectorial operating profit increased 28.1% to Rs. 2.2 billion during 1-3QFY18 while the quarter saw an increase of 16.1% to Rs. 852.2 million to denote operating margin improvement from 13.0% in 1-3QFY17 to 13.9% in 1-3QFY18. The sector’s strong bargaining power and other synergies add to its cost saving strategies.
It is natural for the retail sector which is presently the Group’s most capital intensive segment in the wake of Odel’s expansion and also the expansion of Consumer Electronics and fast food business, to witness finance cost growth of Rs. 1.6 billion (Rs. 1 billion in 1-3QFY18) during the cumulative period, leading sectorial PAT to decline 10.4% to Rs. 493.5 million.
Asiri Health revenues steadily rose 18.3% to Rs. 9 billion during the nine-month period while the quarterly top line rose 13.9% to Rs. 3.1 billion. The hospital group’s top line was led by Central Hospital Ltd. (36.0% contribution), followed by Asiri Hospital Holdings Plc (30.1% contribution) and Asiri Surgical Hospital Plc (26.7% contribution).
Growth in Non-Communicable Diseases supported the seasonal growth trends at the healthcare cluster while continuous growth in private medical care augurs well for the future.
We are awaiting the launch of Asiri Hospital Kandy, which would be the first state-of-the-art 190-bed hospital to cater to the Central, North and Eastern provinces. This facility will include state-of-the-art technology specialising in cardiac treatment, some of which will certainly be a first for the region.
The sector’s operating profit rose 79.4% to Rs. 2.8 billion during the cumulative period while quarterly operating earnings rose to Rs. 1.3 billion from Rs. 570.4 million in 3QFY17.
ICT sector revenue for the cumulative period was Rs. 13 billion while the quarter reported revenues of Rs. 4.8 billion (up 9.4%).
The Nokia business is witnessing a slow recovery following its global disruption. However, Samsung has maintained its lead in the market. The B2B IT segment progressed with its long-term contractual businesses with leading private as well as state sector clients.
Quarterly operating profit rose 55.9% to Rs. 224.7 million to take the cumulative operating earnings to Rs. 636.7 million (up 10.2%). Sector PBT rose 38.4% to Rs. 458.9 million during the cumulative period while the quarter reported Rs. 172.6 million PBT (Rs. 68.4 million in 3QFY17). Nonetheless, the sector concluded the nine-months with a PAT growth of 29.1% to Rs. 334.2 million.
Financial Services witnessed a turnover growth of 22.4% to Rs. 8 billion during 1-3QFY18 as the quarterly revenue also improved 29.8% to Rs. 2.9 billion. Cumulative Operating profit for the quarter increased to Rs. 1.7 billion as opposed to Rs. 563.7 million in 1-3QFY17. Quarterly operating earnings closed at Rs. 838.3 million (as opposed to an operating loss of Rs. 1.9 million reported in 3QFY17).
Sector PBT for the quarter was Rs. 582.3 million while cumulative PBT reached Rs. 900.0 million (Rs. 766.2 million in 1-3QFY17). Sectorial PAT registered a 52.7% growth to Rs. 1.3 billion during 1-3QFY18 while the quarter witnessed more than a three-fold increase to Rs. 988.9 million.
Softlogic Life Insurance Plc continued its strong performance recording a GWP of Rs. 7.5 billion for the financial year 2017 which is a growth of 33% compared to the previous year. It is estimated that the Insurer more than doubled market growth, which is a feat that has been achieved every year from the time Softlogic acquired the company in 2011.
Softlogic Finance PLC’s assets was Rs. 22.5 billion as at 31 December 2017 whilst Customer Deposits rose 6.6% to Rs. 17.0 billion.
Automobile sector revenue increased 70.3% to Rs. 1.9 billion during the first nine months of financial year end 2018. Continuous focus in increasing revenue targets helped the sector to trim its losses during the discussed period.
Ford business contributed steadily to the top line while we maintained steady supply to one of our biggest customers - GoSL. Retail sales was sluggish during the last three quarters which however is witnessing a strong recovery in the last quarter of the financial year. The Ford after-sales business registered an all-time high during the period with the revival of customer confidence due to high spare parts availability and enhanced service delivery standards.
Suzuki Motors, which imports and distributes motorcycles, started with 26 dealers at the time of acquisition, now stands with a dealer network of 55. We are planning to increase this to 70 by 31 March 2018. A notable increase in sales in the motorcycle business has been evident since our takeover. Capitalising on the group synergies, a special financing scheme for Suzuki Motor customers has been agreed with Softlogic Finance Plc.
Leisure sector top line more than doubled during the cumulative period, rising from Rs. 670 million in 1-3QFY17 to Rs. 1.7 billion in 1-3QFY18 while quarterly revenues rose at the same pace to Rs. 681.1 million from 271.8 million in 3QFY17.
Movenpick Hotel Colombo marked its first seasonal peak during December while Winter-peak at Centara reported healthy occupancy levels.
With a private placement, rights issue and internal restructuring in the offing, we propose to raise over Rs. 7 billion for the purpose of restructuring the balance sheet and improving key capital ratios. The exercise would no doubt reduce finance cost and significantly impact our credit rating going forward.
