Hemas reasserts agility with strong 3Q performance

• Underlying Group operating profit for 3Q up 17.5% to Rs. 2.1 b; Group earnings up 36.5% to Rs. 1.3 b
• Group revenue up 3.3% to Rs. 17.7 b
• First 9 months revenue up 4% to Rs. 48 b
• Pre-Tax Profit from continuing operations up 103% to Rs. 2.16 b
• Cumulative losses attributable to parent from discontinued operations for 9 months was Rs. 601.7 m, inclusive of losses from disposal of Serendib Hotel 
• 9-month bottom-line up 216% to Rs. 2.4 b

Hemas Holdings PLC (HHL) has delivered another strong quarter of results, driven by its commitment to serve its customers in the core segments, Home and Personal Care (HPC) and Healthcare, amidst the outbreak of the second wave of the COVID-19 pandemic and the resultant localised lockdowns within the Western Province and suburbs.

Continued focus on working capital efficiencies and cost rationalisation measures strengthened Group’s liquidity position, which was also endorsed by Fitch ratings with the reaffirmation of the ‘AAA (lka)- Outlook Stable’ rating criteria for the Group, following the recalibration of its Sri Lankan National Rating scale.

HHL posted an underlying Group revenue of Rs. 17.7 billion for the quarter ended 31 December 2020, an increase of 3.3% over the corresponding period last year, after adjusting for the disposal of the Leisure segment as a ‘discontinued operation’, except for joint venture investments held by the Group. 

Underlying Group operating profit for the quarter under review at Rs. 2.1 billion is a growth of 17.5% over Rs. 1.8 billion recorded last year whilst the underlying Group earnings of Rs. 1.3 billion is an increase of 36.5% over last year.

Whilst the quarter-on-quarter growth momentum slowed down during Q3 in the backdrop of the second wave of COVID-19 in the Western Province, the Group reasserted its agility with revenue growth of 2.3% and operating profit growth of 3% over the preceding quarter.

The Group recorded a cumulative underlying revenue of Rs. 47.9 billion leading up to the first nine months of FY 2020/21, indicating an 8% growth against the same period last year. Similarly, the cumulative underlying Group operating profit of Rs. 4.7 billion for the nine-month period is a notable year-on-year increase of 61% over Rs. 2.9 billion recorded last year despite the challenges encountered in the macro-environment and the intensity of competitive landscape.

Rationalisation of HHL’s business portfolio was further actioned during the quarter under review with the divestment of its shareholding in Serendib Hotel PLC to Eden Hotel Lanka PLC for a total consideration of Rs. 792.9 million. Cumulative losses attributable to the parent from discontinued operations for the nine months under review amounted to Rs. 601.7 million inclusive of disposal losses.

HHL Group Chief Executive Officer Kasturi C. Wilson said following this transaction, HHL has classified the Leisure segment as a ‘discontinued operation’ and the said portfolio rationalisation is accretive to “HHL’s earnings per share and returns on equity going forward whilst enabling us to further our investments into core sectors”, she added.

Commenting on the outlook HHL Group CEO Wilson said the global vaccination program and treatments across the world have built cautious optimism that a similar program will soon be rolled out in Sri Lanka, allowing activity to return more rapidly to pre-pandemic levels than currently projected. 

However, the uncertainty of the spread of COVID-19 pandemic and the likelihood of subsequent waves is expected to give rise to significant challenges in managing our day-to-day business operations. Similarly, inflation and currency devaluation are expected to add pressure on the Group’s profitability in the final quarter.

“We will continue to focus on strengthening the core portfolio, whilst continuing to drive efficiencies and leveraging on digital platforms and capabilities to sustain our growth in the fourth quarter. I am extremely proud of our entire team for bringing out the best in themselves to push forward during challenging times, while still making sure we do our part in keeping ourselves and our communities safe,” she added.

Following are excerpts from Wilson’s review on the segmental performance of HHL. 

The Consumer sector reported a revenue of Rs. 7.9 billion during the quarter, a decline of 5.5% over the corresponding quarter last year. The cumulative revenue for first nine months recorded a decline of 2.6% compared to last year due to slowdown in the stationery business as the peak season which falls during the quarter under review did not materialise its full potential. 

However, operating profit for the quarter saw a year-on-year increase of 31.6%, driven by both HPC and Stationery businesses, aided by favourable macro conditions such as stable raw material prices and exchange rates coupled with cost conservation initiatives and supply chain efficiencies. The cumulative earnings for the first nine months stood at Rs. 1.9 billion. 

During the period under review, HPC industry in Sri Lanka continued to experience the shift in consumer preference towards personal hygiene and home care products resulting in an increase in offtake of products within these categories to reach pre-COVID levels. However, a slowdown in demand was experienced towards the latter part of the quarter under review which is likely to roll-over into the forthcoming quarter. 

The innovation pipeline of the HPC business continued to expand the product offering with the introduction of Diva Power germ guard in liquid and powder form, Baby Cheramy new Herbal Soap range and Kumarika oil ‘thinning control’ variant to the market during the quarter. 

With the second outbreak of the pandemic, Atlas experienced significant disruption to the back-to-school season. Despite market challenges, Atlas was able to capture shelf space by driving stock to trade and well-positioned itself to gain market share advantage during the extended season which enabled achievement of quarter-on-quarter revenue growth. 

The business was able to partially offset the impact on profitability stemming from the drop-in revenue through the realisation of cost savings supported by the adoption of world-class lean manufacturing practices.

With a view to achieving cross-functional synergies within the Group, the restructuring of over the counter (OTC) segment of Morison, distribution of OTC products will be handled by Group’s Pharmaceutical Distribution business which possesses greater reach and distribution capabilities allowing Morison to focus on being excellent in manufacturing and marketing of its products. 

The Healthcare sector recorded revenue for the quarter amounting to Rs. 9.3 billion against Rs. 8 billion recorded over the corresponding period last year, which is an increase of 16.2%. Operating profits for the quarter recorded a year-on-year increase of 3% to deliver Rs. 657.8 million. The growth in the sector was predominantly driven by both our Pharmaceutical businesses. Cumulative revenue for the first nine months of the financial year under review stood at Rs. 27.2 billion with earnings of Rs. 1.5 billion. 

Following the outbreak of COVID-19, more importance was placed on delivering healthcare services across the island. 

The country experienced a surge in demand for telehealth, and home care visits as patient footfall at hospitals declined. Similarly, the e-pharmacy, too, experienced a significant rise in demand in fulfilling repeat medical prescriptions.

The Group’s Pharmaceutical segment, Morison and Pharmaceutical distribution business experienced steady year-on-year performance across most of the key therapeutic segments, whilst the prescription driven antibiotics segment witnessed a slowdown resulting from increased health awareness and good hygiene practices. 

However, the Myanmar operation continued to face challenges during the quarter, resulting in deteriorating profitability for the segment. Commencement of commercial production at Morison’s new state-of-the-art plant is expected during the second quarter of the next financial year, barring any unforeseen events arising due to the prevailing environment. 

During the quarter under review, our Hospitals business encountered numerous challenges, such as lower patient footfall and cost increases on account of the stringent adoption of COVID-19 related health and safety protocols. Both Thalawathugoda and Wattala facilities reported an average occupancy of 48% for the quarter against a 60% occupancy last year. However, the increase in mobile lab services and home care services supported Q3 revenues whilst lean initiatives and resultant cost savings contributed to the profitability of the hospitals business. 

The Mobility sector revenue for the quarter under review at Rs. 458.1 million is a decline of 38% over the corresponding period last year, and the operating profit for the quarter at Rs. 143.3 million is an increase of 27.3% against the previous year. Cumulative revenue for the first nine months at Rs. 1.4 billion is a drop of 33.5% year on year and the cumulative operating profits at Rs. 398.9 million is a year-on-year growth of 33.6%. 

The Group’s Maritime businesses were adversely affected due to the Port congestion experienced following the outbreak of the second wave of the pandemic. However, improved year-on-year performance at Group’s logistics business, Spectra, drove the growth in sector profitability. Both Container Depot and Distribution Centre verticals witnessed improved occupancy and handling volumes against the corresponding period last year. Spectra was also successful in securing higher margins by way of offering more integrated solutions.