First quarter reflects mixed fortunes for Softlogic Holdings

Softlogic Holdings Plc on Tuesday said the first quarter of the new financial year reflected mixed fortunes though there was healthy growth in the top line and bottom line.

Following is the review by Softlogic Holdings Chairman Ashok Pathirage. 

The first quarter financial results of FY2016/17 reflected mixed fortunes. The floods and landslides that affected Sri Lanka in May had taken its toll on some parts of the economy, dampening the business sentiment further.

Furthermore, the introduction of VAT to the healthcare sector resulted in such services being viewed by the public as too expensive to bear, which adversely affected the quarter results of this sector.

Nonetheless, Group revenue increased a strong 13.3% to Rs. 14.8 billion for the quarter. Group turnover was primarily dominated by its fully-owned sectors – Retail (32.1%) and ICT (30.6%). Financial Services improved its contribution to Group revenue to 17.2% whilst Healthcare Services sustained its turnover contribution at 16.4%. Automobiles continued with a marginal contribution as plans are underway to improve the sector performance in the period to come.

Gross Profit registered a marginal improvement of 4.2% to Rs. 4.5 billion during the first three months of the financial year. Despite increasing business activities, operational cost margins were optimised at 24% during the period with operational expenses increasing 14.5% to Rs. 3.5 billion. Distribution costs increased 30.3% to Rs. 853.0 million whilst administrative costs registered an increase of 10.2% to Rs. 2.7 billion during the quarter.

Other operating income, primarily composing of fees received for new loans at Softlogic Finance Plc, increased 53.9% to Rs. 298.4 million. Subsequently, results from operating activities reached Rs. 1.3 billion for the quarter under review. 

Finance Income continued to contract on the back of unrealised fair value gains at Asian Alliance Insurance Plc’s investment portfolio with increasing interest rates affecting its bond portfolio. 

Consequently, Finance Income declined 38.8% to Rs. 184.3 million during the three-month period. Rs. 30.8 million was transferred to life policyholders’ accounts for the quarter. 

Increasing interest rates was a systemic challenge faced by many corporate leaders in recent times. Finance Expenses increased 11.8% to Rs. 901.1 million during the quarter. 

Profit before tax improved 13.2% to Rs. 533.1 million, taking the profit after taxation for the first three months of FY2016/17 to Rs. 428.4 million, a 40.8% improvement compared to last year. Earnings per share improved to Rs. 0.13 from Rs. 0.11 last year.

Information and Communication Technology 

ICT revenue was up 19.6% to Rs. 4.5 billion for the quarter. Samsung operations led the sector performance followed by ‘Microsoft and HTC. The IT business performance exceeded expectations with realisation of business contracts. 

Business areas such as IT Security and end-user computing, which gained renewed focus, have been rewarding. This segment’s operating profit for the period was Rs. 260.9 million, taking sectorial PBT to Rs. 177.1 million. ICT sector PAT for the period was Rs. 127.6 milion.

Retail

The retail sector’s revenue rose 9.0% to Rs. 4.7 billion, with primary performers being Softlogic Retail and Odel Plc. Performance of Softlogic Brands, a fully-owned subsidiary of Odel Plc which operates the sector’s international branded apparel and fashion accessories business, witnessed significant financial improvement with further realisation of synergies, optimisation of the supply chain and inventory management. Burger King operations reported strong earnings despite its expansion imperatives.

The Consumer Electronics network stands with 232 stores island-wide, with the last being opened in Hettipola in the Kurunegala District. We now have a total retail space of 291,631 sq. ft in the Consumer Electronics business. We launched our second ‘Softlogic’ brand – Softlogic Prizm TV, a wide range of Smart TVs sold at affordable prices. 

Operating profit improved 19.9% to Rs. 428.0 million during 1QFY17. Operating profit margins improved to 9.0% from 8.2% last year despite brand acquisitions and store expansions. Sector PBT improved 33.9% to Rs. 148.5 million before reaching a PAT of Rs. 93.5 million, up 18.6% following an increase in taxation to Rs. 55.0 million due to tax provisions made during 1QFY17.

Healthcare Services

Healthcare Services reported a top line of Rs. 2.4 billion, a 4.6% increase, during 1QFY17 with sector’s operating profit reaching Rs. 428.3 million, down by 14.1% to conclude quarterly PAT at Rs. 296.0. 

The private healthcare industry was negatively affected by the 15% VAT imposition on the sector in May discouraging patients from private healthcare to escape the unaffordable surcharge in their medical bills. However, with the suspension of VAT subsequently the sector’s performance has been restored.

Our Laboratory Services, where we hold a dominant market share, has been in a rapid expansion mode. Asiri Health will expand its footprint with centers island-wide in the upcoming periods. Asiri Kandy hospital, which has commenced construction, will be completed by 2018.

Financial Services

Financial Services witnessed a strong 17.3% growth in top line to Rs. 2.5 billion during 1QFY17 with its contribution to Group revenue constituting 17.2%. Operating profit for the quarter was Rs. 217.7 million. 

Sector PBT achieved more than a two-fold growth to Rs. 316.2 million (versus Rs. 89.8 million in 1QFY16). Both the Life and Non-Life business of Asian Alliance Insurance Plc performed within expectations during the quarter ranking 5th in Life business. 

Strengthening the distribution channel and innovative product offers added to the growth story of the insurance business whose GWP increase 35.2% to Rs. 1.9 billion during the quarter under review. Softlogic Finance’s assets rose to Rs. 22.5 billion (Rs. 21.6 billion n as at 30 June 2015) whilst Customer Deposits improved to Rs. 15.2 billion. NPLs of legacy lending is retarding while the new loans are performing strongly in comparison.

Asian Alliance Insurance signed a Share Sale and Purchase Agreement (SSPA) to dispose of its General Insurance business to Fairfax Group in June. This will help Asian Alliance Insurance Plc to focus on its thriving life insurance business. The sale of this will be concluded by end September.

Automobile

The Automobile sector registered strong revenue improvement of 28.4% to Rs. 381.0 million during the first quarter of FY2016/17. The turnaround of this sector continued as operating profit for the quarter improved to Rs. 9.6 million from Rs. 1.8 million reported last year. The sales driver during the quarter was ‘Ford’ business with ‘Ranger 2016’ which is far superior with better safety rating to competitors. Hence, our market share in the double cab industry vastly improved.

Leisure

The leisure sector primarily reflected Ceysand Resorts’ performance to make a top line of Rs. 159.6 million, a 21.8% increase. Operating performance improved significantly as losses of the two-year old resort reduced to Rs. 59.7 million as opposed to losses of Rs. 86.2 million reported last year. 

Ceysand Resorts was given a rating of excellence, 4.3 out of 5.0, by hotels.com which is a company of Expedia Inc. 

The resort is presently enjoying healthy occupancy levels. Movenpick’s fit-out is at its final stages with testing and commissioning work expected to start in October so that the hotel will be operational by January 2017. This will be the country’s first five-star hotel in three decades.

Future outlook

Despite challenging times ahead, a rising business confidence level following policy framework changes will ensure that the negative climate will be offset by robust consumer demand. 

It should be noted that the overall economic value creation of Softlogic continues unimpeded due to the recognition of the inherent value of the businesses which are in the right economic sectors.