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Softlogic Holdings Chairman Ashok Pathirage
Softlogic Holdings Plc has posted a Rs. 2.4 billion profit after taxation for the first half of FY2018/19 as against Rs. 677.9 million a year earlier.
Quarterly PAT reached Rs. 2 billion, up from Rs. 248.2 million a year earlier. Consolidated turnover increased 9.8% to Rs. 34.1 billion during the 1HFY19 while quarterly revenue grew 14% to Rs. 18.1 billion.
Softlogic Chairman Ashok Pathirage said the scale and diversity of the group helped in weathering the macroeconomic shocks of increased interest rates, a fast depreciating currency, adverse tax changes, import margin requirements and price-led inflation.
Gross Profit grew 10% to Rs. 12.3 billion during the 1HFY19, holding GP margins at 36% (35.9% in 1HFY18). Quarterly Gross Profit also improved 13.2% to Rs. 6.5 billion, resulting in a GP margin of 35.6%. Synergy and economies of scale protected profit margins, although there is severe pressure due to waning business sentiment and the ad hoc macroeconomic adjustments imposed by policymakers.
Group EBITDA for the cumulative period was Rs. 5.2 billion while the quarterly EBITDA was Rs. 2.7 billion.
Cumulative operating profit was Rs. 3.9 billion while the quarter reported an operating profit of Rs. 2 billion.
AWPLR increased from 11.2% (end-June) to 11.7% as at end-September. However, finance expenses reduced marginally by 2.4% to Rs. 2.7 billion during 1HFY19 while the quarter witnessed a decline of 5.6% to Rs. 1.4 billion.
Softlogic Life Insurance recognised a deferred tax asset of Rs. 2.4 billion during 1HFY19 by utilising the available brought forward tax losses already provided for in the books up to 31 March 2018. Hence, a net tax reversal of Rs. 1.5 billion was evident at the group level in the quarter under review.
Commenting on the outlook, Pathirage said the Government plays a vital role in driving an economy and ensuring investment growth. Political vacillation and policy inconsistencies have affected consumer spending patterns, slowing down the economy. Notwithstanding this, Softlogic has pursued expansionary goals in its core verticals with the aim of strategically positioning itself, anticipating that Softlogic’s proposition is a fundamental need in today’s sophisticated market and that the economy will be fast-tracked with Tourism, Leisure and Retail swinging into top gear.
Following is the full review of 1H and 2Q performance by Softlogic Chairman Ashok Pathirage.
Consolidated turnover increased 9.8% to Rs. 34.1 billion during the 1HFY19 while quarterly revenue grew 14% to Rs. 18.1 billion.
Top contributors to group turnover were Retail (52%), Healthcare Services (19.4%) and Financial Services (18.7%). The non-core vertical which includes Automobile and Leisure together contributed 4.8% to group turnover while the IT sector made up 5.2% of group topline.
The scale and diversity of the group helped in weathering the macroeconomic shocks of increased interest rates, a fast depreciating currency, adverse tax changes, import margin requirements and price-led inflation.
Gross Profit grew 10% to Rs. 12.3 billion during the 1HFY19 holding GP margins at 36% (35.9% in 1HFY18). Quarterly Gross Profit also improved 13.2% to Rs. 6.5 billion resulting in a GP margin of 35.6%. Synergy and economies of scale protected profit margins, although there is severe pressure due to waning business sentiment and the ad hoc macroeconomic adjustments imposed by policymakers.
Distribution expenses declined marginally by 2.7% to Rs. 1.5 billion while administrative expenses increased 11.8% to Rs. 7.1 billion during 1HFY19. This resulted in total operational expenses increasing 8.9% to Rs. 8.7 billion during 1HFY19, leading the operational cost margins to improve slightly to 25.4% in 1HFY19 from 25.6% in 1HFY18. Resultantly, total operating costs increased 14.3% to Rs. 4.5 billion during the quarter.
Other operating income declined 67.1% to Rs. 283 million during 1HFY19 as the comparative period had registered one-off disposal gain (Rs. 185.5 million in 1HFY18) while fee income from new loans at Softlogic Finance nearly halved consequent to a change in their product mix during the period. Similarly, other operating income for the quarter also reduced 81.5% to Rs. 86.6 million owing to the one-off disposal gain registered in 2QFY18 (Rs. 184.9 million).
Group EBITDA for the cumulative period was Rs. 5.2 billion while the quarterly EBITDA was Rs. 2.7 billion.
Cumulative operating profit was Rs. 3.9 billion while the quarter reported an operating profit of Rs. 2 billion.
AWPLR increased from 11.2% (end-June) to 11.7% as at end-September. However, finance expenses reduced marginally by 2.4% to Rs. 2.7 billion during 1HFY19 while the quarter witnessed a decline of 5.6% to Rs. 1.4 billion. In the wake of the equity infusion and repositioning of the retail sector, ICRA rating agency upgraded Softlogic Holdings Plc to BBB+.
The change in insurance contract liabilities, which is the transfer from the life insurance business to the policyholders’ account, showed a transfer of Rs. 810.5 million during 1HFY19 as opposed to Rs. 873.3 million in 1HFY18. The quarterly transfer was Rs. 546.2 million (Rs. 633.8 million in 2QFY19).
Profit before tax for 1HFY19 was Rs. 855 million while the quarter reported a PBT of Rs. 198.4 million.
Softlogic Life Insurance recognised a deferred tax asset of Rs. 2.4 billion during 1HFY19 by utilising the available brought forward tax losses already provided for in the books up to 31 March 2018. Hence, a net tax reversal of Rs. 1.5 billion was evident at the group level in the quarter under review.
Profit after taxation for the first half of FY2018/19 was at Rs. 2.4 billion as opposed to Rs. 677.9 million in 1HFY18. Quarterly PAT reached Rs. 2 billion (Rs. 248.2 million in 2QFY18).
Performance review of core verticals
The Retail sector post restructure, which comprises the consumer electronics, QSR, furniture, departmental store, branded fashion outlets and telecommunications companies, registered growth of 5.1% to Rs. 17.7 billion during the first half of the financial year while quarterly revenue improved 6.9% to Rs. 9.5 billion.
This is currently the group’s most capital-intensive sector which is redefining the country’s retail landscape with several new projects in the pipeline. This sector also witnessed numerous challenges in the business environment following tax changes and price inflation which dampens the purchasing power of consumers and depresses the business sentiment.
The rupee/US dollar increased from Rs. 158.26 as at 30 June to Rs. 169.24 as at 30 September. Rupee continued to depreciate against the US dollar to reach Rs. 177.3 as of today. Nonetheless, the sector internally maintains a margin to withstand such foreign exchange fluctuations, however, competition and grey market activity offset re-pricing adjustments which generally impact profit margins.
A 100% cash margin was imposed on refrigerators, TVs, air-conditioners and phones seriously impacting cash flows due to the recent policy of removing bank accommodation for import bill refinancing requiring cash upfront for establishing import LCs.
The imposition of applicable restrictions on selected import items, especially in the electronics and footwear sector defeats the long-term vision of establishing Sri Lanka as a shopping destination to compete with other regional tourist destinations. The short-sightedness of policymakers could result in several adverse side effects reverberating in the retail sector which is inextricably intertwined with the tourist industry as a whole.
The telco companies maintained its performance during the quarter.
Softlogic Retail opened its 21st Max store in Kalubowila last week, taking its total store count to 215 and retail space to 315,798 sq.ft. The redesigned store concept - with the inclusion of furniture and fitness equipment- adds to the product range enhancing our value proposition to customers.
ODEL Group and Softlogic Retail continued to be dominant contributors to the sector performance.
Our stores at Colombo City Centre has had positive response. Our brands occupy 40,000 sq.ft at this mall. We are now investing in our 90,000 sq.ft space at One Galle Face by Shangri La which is to open in 2019.
Softlogic Restaurants will soon open its first self-branded Asian fusion – Wangediya - at the Promenade, Odel Flagship store.
Construction of the Odel Mall is progressing to open early 2021.
We opened our first supermarket outlet in Delkanda. This would enhance our position in the country’s retail industry. We believe this is a natural progression which will complement the group’s other consumer driven businesses affording visibility and presence across all key consumer value chains to operate under one loyalty platform where consumers could earn and burn points across all sectors of the group.
Sector operating profit was Rs. 1.6 billion during 1HFY19 with the quarter reporting Rs. 811.4 million. Sector EBITDA was Rs. 1.9 billion during 1HFY19 while the quarter reported an EBITDA of Rs. 979.2 million.
Cumulative sector PBT for the period was Rs. 543.2 million while making a PBT of Rs. 271.8 million for the quarter.
Retail sector PAT for the cumulative period was Rs. 304.1 million while the quarter reported a PAT of Rs. 122.2 million. Finance costs and increasing operating cost margins resulting from ongoing capital projects are typically short-term financial hurdles.
Healthcare services
Performance of Asiri Health continued steadily with quarterly revenue of the sector witnessing a growth of 16.1% to Rs. 3.4 billion while cumulative sector revenue improved 11.2% to Rs. 6.6 billion.
The hospital chain’s topline was led by Central Hospital (37% contribution), followed by Asiri Hospital Holdings (31% contribution) and Asiri Surgical Hospital (25% contribution).
Asiri Health has been the first private hospital in Sri Lanka to expand outside Colombo. We operate two hospitals in Matara while Asiri Hospital Kandy, a 180-bed multi-specialty hospital, would soon open in the Central Province. To further capture market share in the developing metropolitan towns, Asiri acquired Hemas Southern Hospitals Ltd. in Galle.
Asiri-AOI Cancer Centre, in partnership with the American Oncology Institute (AOI), is scheduled to open the facility on 18 November. Asiri-AOI Cancer Centre will not only be Sri Lanka’s latest and most comprehensive Cancer Treatment Centre, but also will be positioned as one of the top oncology facilities in the region.
Sector’s operating profit rose 4% to Rs. 1.6 billion during the first half of the financial year with the quarter witnessing a marginal growth of 0.9% to Rs. 802.6 million. The sector’s contribution to group topline is expected to rapidly increase with the initiation of Asiri Hospital Kandy next year.
Financial Services
Financial Services recorded growth of 24.5% in turnover to Rs. 6.4 billion during 1HFY19 as quarterly revenue also improved 26.5% to Rs. 3.3 billion. Cumulative sector operating profit rose marginally by 1.9% to Rs. 835.4 million. Sector PBT reached Rs. 239.5 million after reporting Rs. 5 million for the quarter. Sector PAT rose to Rs. 2.4 billion (Rs. 281 million in 1HFY18) as a result of the tax impact at Softlogic Life Insurance.
Softlogic Life Insurance recorded GWP of Rs. 4.9 billion during 1HFY19, a growth of 34% compared to the previous year, while registering a GWP growth of 30% to Rs. 2.5 billion during 2QFY19. Softlogic Life continued its growth momentum to double to that of the industry with a market share of 13%.
Softlogic Life Insurance is one of the top three finalists for the 22nd Asia Insurance Industry Awards for the year in the category of Life Insurance Company. Softlogic Life is the only company in the history of the Sri Lankan Insurance Industry to achieve this leadership milestone within such a short period of time.
Softlogic Finance Plc’s assets were Rs. 21.3 billion as at 30 September 2018 while Customer Deposits was Rs. 15.6 billion. The company’s renewed interest in leasing business is expected to augur well for the future as it repositions strongly in the B2C segment. However, the industry has some challenges to overcome with more stringent standards concurrently imposed by the regulator to ensure stability.
Performance review of Non-Core Vertical
The IT business continued smoothly despite its import-oriented hardware operations being affected by corporate investment slowdown and ensuing currency depreciation.
The IT segment’s revenue improved 50.9% to Rs. 1.8 billion during 1HFY19 while the quarterly revenue crossed the Rs. 1 billion mark (Rs. 422.2 million in 2QFY18). The sector’s quarterly operating profit recovered to Rs. 72 million as opposed to a loss of Rs. 1.5 million reported in the comparative quarter. Cumulative operating earnings of the sector improved 45.4% to Rs. 119.6 million. Sector PBT was Rs. 36.3 million during 1HFY19 while the quarter witnessed a recovery from a loss of Rs. 20.6 million in 2QFY18 to Rs. 17.9 million in 2QFY19. The sector’s PAT for the period was Rs. 29.6 million. This sector will soon be transferred to the core verticals.
Automobile sector revenue was Rs. 462.6 million for the first half of the financial year. The wait-and-see approach taken by customers following duties and exchange rate depreciation dragged down the performance of this sector. Ford sales is primarily generated from Corporate and Government tenders which are now affected by the political uncertainty prevailing in the country.
Suzuki Motors has been continuously strengthening its distribution network. The company now has 93 dealers (26 dealers at the time of acquisition). Suzuki launched the ‘Suzuki Intruder’, a Cruiser type 150 cc motorcycle, which is the only available class in Sri Lanka. In addition, Suzuki is planning to launch a new 125 cc Scooter in December to make inroads into the Scooter market.
The Leisure sector recorded strong revenues with better-than-expected occupancy levels at the two hotels.
The sector registered a topline growth of 10.3% to Rs. 1.2 billion during 1HFY19 while the quarter made a turnover of Rs. 670.4 million (up 6.8%).
The Government plays a vital role in driving an economy and ensuring investment growth. Political vacillation and policy inconsistencies have affected consumer spending patterns, slowing down the economy.
Notwithstanding this, Softlogic has pursued expansionary goals in its core verticals with the aim of strategically positioning itself anticipating that Softlogic’s proposition is a fundamental need in today’s sophisticated market and that the economy will be fast-tracked with Tourism, Leisure and Retail swinging into top gear.
