Tough 3Q for Softlogic Holdings

Softlogic Holdings Plc experienced a tough third quarter with the top line almost flat at Rs. 15.7 billion and after tax profit down by 57% to Rs. 352 million.

The company said the quarter ended 31 December 2016 saw challenging economic conditions with rising interest and tax rates and falling consumer confidence which affected retail and services. The group’s cumulative turnover crossed Rs. 45 billion (up 9.9%) for the nine months. The 1% gain in turnover in 3Q was primarily due to the group’s substantial downsizing of ‘Nokia’ operations.

Consolidated Gross Profit increased by 5% to Rs. 5.18 billion during the third quarter of the financial year with cumulative first half Gross Profit rising by 6.6% to Rs. 14.4 billion.

Quarterly Profit Before Tax was Rs. 274.1 million, down by 77.6% while the cumulative PBT reached Rs. 1.5 billion, down by 33.6%. After tax profit for nine months of FY2016/17 was Rs. 1.1 billion, down by 24% with 3QFY17 reporting Rs. 351.8 million, down by 57%. Net profit attributable to equity holders of the parent was down by 18.5% to Rs. 347 million in the nine months and by 33% to Rs. 151.5 million in the third quarter.

Despite a tough quarter, Softlogic Holdings Chairman Ashok Pathirage said the group’s outlook has tremendous potential for increasing its overall value substantially through its strategic investments in growing sectors of the economy.

Contributors to the Group turnover were primarily derived from Retail (33.8% contribution to Group topline) and ICT (30.1% of Group revenue) sectors followed by Healthcare Services (17.5%) and Financial Services (14.6%).

Consolidated Gross Profit improved 5.3% to Rs. 5.2 Bn during the quarter taking the cumulative Gross Profit to Rs. 14.4 Bn (up 6.6%) with a slight reduction in Gross profit margin. Quarterly operating expenses increased 20.3% to Rs. 4 Bn while cumulative operating expense rose 16% to Rs. 10.8 Bn. This was as a result of pre-operational costs of Mövenpick City Hotel, Group’s rapid expansion and marketing efforts of its new/ upcoming operations which are yet provide returns on the investments.

Financial discipline and Group synergies helped operational cost margins to remain in the range of 23%-25% amidst Softlgic’s increasing scale of operations. Administration and Distribution costs increased to 18.2% and 8.9% to Rs. 8.6 Bn and Rs. 2.3 Bn respectively for the first three quarters of the financial year. The quarter reported an increase of 23.8% in administrative costs to Rs. 3.1 Mn due to one-off expenditure pertaining to rebranding while distribution costs saw a marginal increase of 9.6% to Rs. 881.8 Mn.

Quarterly operating profit reached Rs. 1.4 Bn while the cumulative operating profit was Rs. 4.3 Bn.

Group EBITDA for the cumulative period was Rs. 5.8 Bn with the quarter reporting Rs. 1.9 Bn.

Finance income for the cumulative period declined 22% to Rs. 576.2 Mn while the quarter also denoted a 41.9% decrease to Rs. 164 Mn. Stock market fluctuations and increasing interest rates affected the investment portfolio of the insurance company which however will improve with the stabilization of the interest rates. Finance expenses of the Group increased 49.8% to Rs. 1.2 Bn for the quarter with finance expenses for the cumulative period also increasing 40.2% to Rs. 3.3 Bn. This was primarily led by the increase in interest rates from last year.

Other operating income continued to increase by 38.3% to Rs. 741.5 mn for the period while the quarter witnessed a 73.8% surge to Rs. 204.3 Mn. This was primarily led by fees generated from granting new loans at Softlogic Finance PLC.

Associate company, Sabre Travel Network, the leading Global Distribution System (GDS) provider to Sri Lanka’s travel network, is 40% owned by Softlogic. Sabre reported more than two-fold growth in earning to Rs. 43.6 Mn for the nine-month period with an improvement in Net Effective Fee (NEF) during the period. The change in insurance contract liabilities excludes the Life Insurance surplus for the December quarter pending approval of the Regulator and will be accounted for in the March quarter.

Quarterly PBT was Rs. 274.1 Mn while the cumulative PBT reached Rs. 1.5 Bn.

Sale of the general insurance business of the Group was concluded during the quarter and the resulting gain has been disclosed as discontinued operations PAT for nine months of FY2016/17 was Rs. 1.1 Bn with 3QFY17 reporting Rs. 351.8 Mn.

Information & Communication Technology

Information & Communication Technology continued on a steady pace as they reported a revenue of Rs. 13.6 Bn (up 8.6%) for the cumulative period with Rs. 4.6 Bn as quarterly revenue. The substantial downsizing of ‘Nokia’ business has had an impact on the segment’s topline. ICT’s operating profits declined 11.1% to Rs. 577.7 Mn. This was mainly due to Samsung business which yields lower margin. Nonetheless, this is compensated by the volume driven business that the ‘Samsung’ phones entail. Sectoral PBT for the cumulative period was Rs. 331.6 Mn while the quarterly ICT sector PBT was Rs. 68.4 Mn. Sectorial PAT was Rs. 259 Mn with the quarterly segmental PAT being at Rs. 58.8 Mn (up 117.1%).

‘Samsung’ commands over 50% of Sri Lanka’s handset market with Softlogic being a key local distributor of the brand. Group’s IT segment progressed with its B2B operations successfully penetrating the data center space and becoming a leader in this domain.

Retail

Retail sector recorded a 8.5% revenue growth to Rs. 15.2 Bn during 1-3QFY17 while the quarter registered a 6.2% improvement in sector revenue to Rs. 5.6 Bn. Operating profit improved strongly by 21.0% to Rs. 759.1 Mn during 1-3QFY17 while the quarterly operating profit of the sector grew 26.8% to to Rs. 734 Mn. Operating profit margins continued to improve to 11.4% for the cumulative period as opposed to 9.7% reported in the comparative period despite the sector’s rapid expansion. Retail sector’s cumulative PBT improved 21.0% to Rs, 759.1 Mn with the quarter reporting a PBT increase of 27% to Rs. 389.3 Mn. Sectorial PAT for the quarter increased 24.6% to Rs, 293 Mn while cumulative PAT increased 18.3% to Rs. 550.6 Mn.

The Consumer Electronics opened its 237th showroom in Bibile taking its cumulative retail space to sq.ft as of today 294,500 sq.ft. Better utilizing its retail space, ODEL opened a 16,000 sq.ft open-air lounge, the ODEL Promenade, that consists of two a-la-carte spaces that include restaurants, a café and a bistro, eight food and drink vendor outlets, a nail and foot spa. This has now become a popular hang-out spot for ODEL customers. The construction of ODEL’s Mega Mall has been planned and will be initiated soon. BURGER KING opened its 13th restaurant at Nugegoda.

Healthcare Services

The Sector added Rs. 7.9 Bn to Group cumulative topline (17.5% contribution), which is 8% growth. The quarterly revenue grew 7.2% to Rs. 2.8 Bn. The quarter reported 12.1% increase to Rs. 2.7 Bn. The segmental revenue was led by Asiri Central Hospital Ltd. which contributed 35.6%, Asiri Medical Hospital PLC (30% of segmental revenue) and Asiri Surgical Hospital PLC (27% of segmental revenue). Operating profit of the sector was Rs. 570.4 Mn during the quarter with the cumulative operating earnings reaching Rs. 1.6 Bn. Sector PBT stood at Rs. 355.3 Mn for the quarter with the cumulative period reporting Rs. 954 Mn. Sector PAT for the cumulative period was Rs. 869.3 Mn. In order to improve access to Asiri Health laboratory services across the country, the laboratory operations rapidly expanded its footprint to now stand with 42 collection centres (21 centres reported last quarter). Construction of Asiri Kandy is well in progress to commence operations by end next year.

Financial Services

The Financial Services segment witnessed a steady 16.7% growth in topline to Rs. 6.6 Bn during 1-3QFY17 with its contribution to the Group revenue remaining at 14.6%. The quarterly sector revenue registered a 13.2% growth to Rs. 2.2 Bn. The sector’s cumulative PBT achieved Rs. 766.2 Mn. Softlogic Life Insurance achieved top line Gross Written Premiums of Rs 5.6 Bn with a 38% increase over the previous 12months which is expected to almost double industry growth. Loan Advances at Softlogic Finance PLC reached Rs. 17.9 Bn and grew at 8.6% compared to the previous year with Customer Deposits increasing to Rs. 15.5 Bn. Total Assets of the Company were recorded at Rs. 22.5 Bn. Softlogic Stockbrokers maintained its ranking in the top three broking slot amidst volatile market conditions. Its strong foreign as well as high net worth local client base supported its growth momentum.

Automobile

Automotive sector revenue grew 16.8% during the nine months of the financial year while the quarterly revenue was Rs. 351.4 Mn. Ford Ranger drove the volumes while its after sales business also reported a steady increase in revenues. The luxury coach business gathered momentum after relaxation of leasing restrictions for tourist buses from 70% to 100%.

Leisure

Softlogic unveiled Colombo’s first international five-star hotel in three decades, Mövenpick City Hotel. This 219-room property, which officially opened on 16th January, is Mövenpick Hotels & Resorts, a Swiss management firm. Leisure sector witnessed a cumulative revenue growth of 16.6% to Rs. 670 Mn during the nine-month period of the financial year while the quarter saw an improvement of 16.5% to Rs. 271.8 Mn. We expect this sector to increase its contribution to Group earnings in the periods to come with Ceysand Resorts being almost fully booked for Winter-peak and fresh earnings flow from our new city hotel.

Group Outlook

The opening of Mövenpick City Hotel, a substantial investment of the Group, received rave reviews from the industry. This is the first new five-star luxury hotel to operate after almost three decades in the city of Colombo. The Group’s diversity is well entrenched although the economic outlook is beset by unforeseen challenges. ODEL Mall will commence in the near future so that its unrivalled leadership in retailing would take the country to its next level of consumerism and life style improvements. With Asiri Kandy, the Central Province will see its landscape change offering the best services in the medical world. The Group’s outlook has tremendous potential for increasing its overall value substantially through its strategic investments in growing sectors of the economy.