Softlogic Holdings FY pre-tax profit up 42% to Rs. 3.2 b, after tax profit up 23% to Rs. 2.2 b

Softlogic Holdings Chairman Ashok Pathirage

Softlogic Holdings Plc has posted impressive growth in profits as well as turnover in the financial year ended on 31 March 2016.

Profit before taxation for the year recorded an exceptional growth of 41.8% to Rs. 3.2 billion whilst the recurrent PBT for the quarter, excluding fair value adjustments, was Rs. 770.9 million as opposed to Rs. 311.2 million reported during the comparative quarter.

Profit after tax for the year was Rs. 2.2 billion, up 23.5% whilst recurrent PAT for the quarter, excluding fair value adjustments, was Rs. 502.3 million (up 165.5%).

Prime contributors to the growth were the Group’s almost fully owned subsidiaries, Retail sector - which is involved in electronics and consumer durables and fashion retailing with its first-in-class local and foreign franchises - contributed 33.1%, and ICT – which is involved in Samsung, Microsoft/Nokia and Dell-- contributed 28.6%. Healthcare Services added in 17.7% to Group topline whilst Financial Services contributed 16.7%.

Following is the review by Softlogic Holdings Chairman Ashok Pathirage accompanying the interim results.

Softlogic’s consolidated turnover continued to progress according to plan with strong growth of 41.7% to Rs. 56.1 Bn during FY2015/ 16 whilst the quarter recorded a 18.3% increase in turnover to Rs. 13.9 Bn. Prime contributors to the growth were the Group’s almost fully owned subsidiaries, Retail sector – which is involved in electronics and consumer durables and fashion retailing with its first-in-class local and foreign franchises – contributed 33.1%, and ICT – which is involved in Samsung, Microsoft/Nokia and Dell – contributed 28.6%. Healthcare Services added in 17.7% to Group topline whilst Financial Services contributed 16.7%. The fully owned Leisure sector would soon contribute to the Group with the completion of the five-star city hotel in Colombo – Movenpick. The Automotive sector is prone to a number of ad hoc policy decisions and has various other challenges besetting it notwithstanding taxation and import tariffs.

Group gross profit registered a strong growth of 32.1% to Rs. 18.7 b for the year with the quarter witnessing an improvement of 23.0% to Rs. 5.0 b. Operating profit increased 51.1% to Rs. 6.4 b for the year with the quarterly operating profit registering a 65.6% growth to Rs. 1.6 b. Selling and distribution expenses moved in tandem with Group’s activity levels to report a 39.6% increase to Rs. 2.8 b (cost margins at 5%). With the Group’s continuous cost-discipline and efficiency plans, administrative costs increased by 17.5% to Rs. 10.6 b to report a cost margin reduction reflecting an improvement from 23% in the comparative year to 19% during the period under review. Operational expenses increased 21.6% to Rs. 13.4 b although the operational cost margins indicated internal efficiencies as it reduced to 23.9% reflecting an improvement from 27.9% reported last year. 

Quarterly operational costs reflected the same with an increase of 12.6% to Rs. 3.8 b with cost margins reducing to 27.2% improving from 28.5% last year. Consequently, operating profit margins improved to 11.5% from 10.7% reported last year. Other operating income of Rs. 1.2 b was as a result of fees received for new loans at Softlogic Finance and realised mark-to-market gains on equity and available-for-sale portfolio at Asian Alliance Insurance, Asiri Hospital Holdings and other subsidiaries.

Key contributors to Group operating profit for the year were Healthcare Services, Financial Services, Retail and ICT. 

EBITDA advanced 44.8% for the year to Rs. 8.2 b from Rs. 5.7 b reported last year. Quarterly EBITDA was Rs. 2.1 b, up 50.5%.

Finance income, which primarily composed of gains in Asian Alliance Insurance’s investment portfolio, registered a marginal decline of 7.3% to record Rs. 1.0 b during the year while the quarter reported an increase of 26.2% to Rs. 180.1 m. The latter was primarily due to mark-to-market losses in their equity and fixed income portfolio being highly sensitive to treasury/bond market rates. Of this, Rs. 1.0 b was transferred as share to life policy holders/insurance contract liabilities during the year while the quarter recorded a transfer of Rs. 181.1 m.

Finance expenses increased 20.7% to Rs. 3.3 b during the period with market interest rates continuing to surge. Consequently, net finance expenses increased 40.7% YoY to Rs. 2.2 b for the year. The quarter’s finance cost also increased by 39.8% to Rs. 879.1 m before arriving at a net finance cost increase of 43.7% to Rs. 699.0 m.

Profit before taxation for the year recorded an exceptional growth of 41.8% to Rs. 3.2 b whilst the recurrent PBT for the quarter, excluding fair value adjustments, was Rs. 770.9 m as opposed to Rs. 311.2 m reported during the comparative quarter. Accordingly, profit after tax for the year, was Rs. 2.2 b, up 23.5% whilst recurrent PAT for the quarter, excluding fair value adjustments, was Rs. 502.3 m (up 165.5%). Earnings were predominantly led by Healthcare and Financial Services Sectors, followed by Retail and ICT.

SECTOR ANALYSISHealthcare Services

Turnover of the Healthcare Services turnover grew by 15.8% to reach Rs. 10 b for the year whilst the quarter recorded a strong growth of 18.6% to Rs. 2.6 b. Central Hospital Ltd. emerged as the top contributor with 36% contribution followed by Asiri Surgical Hospital adding in 29% and Asiri Hospital Holdings with a 27% contribution. 

The sector’s operating profit improved 30.6% to Rs. 2.4 b during the year with the quarter reporting a strong 89.7% to Rs. 571.0 m. This was due to the gain of Rs. 227.3 m reported on disposal of equity investments at Asiri Hospital Holdings recorded in other income. Asiri’s strong performance over the years has been driven by the Group’s investments in state-of-the-art medical facilities coupled with strong consultation assemblage. Asiri was the first private healthcare to look beyond Colombo when we opened our first unit in Matara in 2007.

A fully-fledged 133-bed hospital is under construction in Kandy. This modern hospital is expected to be completed by 2018E. Piling works have been completed. 

Retail

Turnover of the retail sector recorded an increase of 50.8% to Rs. 18.6 b whilst the quarterly revenue reached Rs. 4.6 b, up 19.5%. The sector performance was led by Softlogic Retail followed by Odel. Sector’s operating profit recorded an exceptional growth of 105.5% to Rs. 1.8 b during the year under review whilst the quarter saw 144.7% improvement to Rs. 441.2 m. The sector’s bottom line improved 85.3% to Rs. 502.4 m whilst the same for the quarter reported Rs. 36.9 m (Rs. 10.0 m reported in FY15).

The QSR chain, Burger King, has been exhibiting steady progress as its 11th store was opened in Wattala with Odel too relocating to neighborhood. The Consumer Electronics section opened its 229th store in the Badulla District, taking it cumulative retail space to 287,681 sq. ft. 

Realisation of synergies at retail is happening on a daily basis with tremendous savings on operational expenses as well as an enhanced sales platform with diverse brand/product range. Expansion strategy of the retail sector, upcoming Odel Mega Mall coupled with many other international fashion brands which are yet to be unveiled will make Softlogic’s competitive edge in the retail sector unmatchable.

ICT

ICT sector performance remained strong as Softlogic Mobile Distribution, the Samsung distribution, continued its strong contribution followed by Softlogic Communication and Softlogic Information Technologies. Sector turnover improved 73.6% to Rs. 16.1 b for the year whilst the quarter revenue moved up 12.7% to Rs. 3.6 b. Operating profit grew 10.3% to Rs. 778.0 m for the year whilst the quarter recorded an operating profit of Rs. 128.6 m, up marginal 2%. Profit for the year was Rs. 354.1 m, up 30.9%, whilst the quarter reported Rs. 73.2 m as opposed to Rs. 13.3 m reported last year following a tax reversal of Rs. 16.6 m during the quarter.

Financial Services

Financial Services sector recorded a topline growth of 16.9% to Rs. 9.4 b during the year with the quarter witnessing a 24.2% growth to Rs. 2.6 b. The Operating profit of the sector improved 53.9% to Rs. 1.6 b for the year whilst the quarter saw an increase of 24.3% to Rs. 496.5 m. Sector PAT for the year improved 47.4% to Rs. 1.2 b whilst the quarter recorded a growth of Rs. 46.6% to Rs. 336.7 m. Asian Alliance Insurance headed the way of the Financial Service sector with an impressive performance to deliver PAT of Rs. 1.0 b followed by Softlogic Finance with Rs. 368 m.

Automotive

Automotive sector turnover improved a strong 57.3% to Rs. 1.2 b for the year primarily led by King Long bus range which successfully won the tourist and high way transport markets. The quarterly revenue increased 15.4% to Rs. 197.6 m. The Ford range of products is beset by challenges and is highly sensitive to the external duty environment, although the franchise is globally recognised. Going forward, we will do what is necessary to turn the sector around as there is much potential in this area.

The unit rate tax for vehicles with an engine capacity above 1,000 cc will not have a big impact on the top selling vehicle range of Softlogic’s automobile sector. The double cab and the bus range remains unaffected whilst the car range would see some price escalation.

Leisure

Leisure sector topline increased 47.5% to Rs. 926.6 m for the year whilst the quarterly revenue, which also captures the peak season, recorded a 19% growth to Rs. 351.7 m. The financials for this sector primarily composed of the resort whilst the city hotel is yet to be completed. Operating earnings turned positive during the year to Rs. 64.9 m compared to the operating losses of Rs. 58.7 m reported last year. The quarter’s operating profit recorded a 26.8% growth to Rs. 92.1 m. Centara Resorts, which will be celebrating its second year in operations soon, has become one of the most preferred choice for those holidaying in the Southern beaches of the island. This sector is expected to accelerate its contribution to the Group’s financial performance.

Movenpick City Hotel is through its fit-out process. The guest room fit-out is expected to be completed by end of June whilst the public area fit-out will be completed by September 2016. The hotel would have its soft launch in October 2016 and be fully operational for the year-end holiday season.

Outlook

The businesses we are in show tremendous potential for continued growth. Our operations could get affected in the short term with challenging economic conditions currently witnessed in the country but as a conglomerate we are engaged in the right products and services unrivalled by other industry players and we are hence confident--with an economy that shows resilience and strong potential for significant growth – our businesses will also, assuredly, grow in tandem with or much faster than the economy.

We recognise the scope of the retail market and our forward thrust will be concentrated in this particular area going forward. The other sectors are continuing to grow and all our investments in them will ensure a chain of value creation hitherto not seen.