Softlogic Holdings ends 3Q on strong note

Wednesday, 19 February 2014 00:40 - - {{hitsCtrl.values.hits}}

Softlogic Holdings Plc has ended the third quarter on a positive note, with aggregate revenue up for the nine months ended December 2013 crossing the Rs. 21.7 b mark reporting a strong growth of 14.3% YoY whilst the third quarter results recorded an increase in revenue to Rs. 7.6 Bn (up 11.4% YoY). “Healthcare Services maintained its dominant contributory position to the consolidated topline followed by Retail, Financial Services and ICT segments respectively. Topline was buoyed due to business growth relating to the festive season coming into full swing; sales growth generally outperforms budgetary expectations during the months of Nov- Dec, and Mar-Apr which chiefly the two seasons for the year,” Softlogic Holdings Plc Chairman Ashok Pathirage said.

Branch expansion, product/brand acquisitions/ development and aggressive sales efforts also assisted business growth. Insurance and healthcare sectors particularly demonstrated business growth stemming from insurance renewals crystallising during the year-end whereas, in the healthcare sector, medical insurance claims augment business growth for a similar reason. “Positive performance was reported across all our business segments with the Finance cluster reporting exceptional results followed by strong performance in healthcare and Retail, which was boosted by the seasonal swing. The ICT sector continued on a positive note with the execution of lucrative hardware solutions contracts,” Pathirage added.

"Healthcare Services maintained its dominant contributory position to the consolidated topline followed by Retail, Financial Services and ICT segments respectively. Topline was buoyed due to business growth relating to the festive season coming into full swing; sales growth generally outperforms budgetary expectations during the months of Nov- Dec, and Mar-Apr which chiefly the two seasons for the year Positive performance was reported across all our business segments with the Finance cluster reporting exceptional results followed by strong performance in healthcare and Retail, which was boosted by the seasonal swing. The ICT sector continued on a positive note with the execution of lucrative hardware solutions contracts With the interest rate regime held tightly, which is expected to continue in accordance with market dynamics and other macro-economic factors such as growth in tourism, the Group’s performance is expected to surge in the medium term notwithstanding the consolidation taking place across the sectors due to fiscal imperatives, and, for reasons of good commercial discipline, the streamlining of business operations based on capital return prerogatives – Softlogic Holdings Plc Chairman Ashok Pathirage"

Cumulative Net Profit for the period ending 31 December 2013 recorded over a three-fold YoY growth to Rs. 803.1 m whilst the quarter made Rs. 559 m reporting a near two-fold YoY growth. Gross Profit of the Group for the quarter under review increased by 32.5% YoY to Rs. 2.8 b taking the cumulative Gross Profit for the three quarters to Rs. 7.4 b (up 22.7% YoY improvement). Hence, there was a notable improvement in Gross Profit Margins during the quarter by nearly 600 basis points YoY. Operating Profit for the cumulative period under discussion recorded a 19.8% YoY growth to Rs. 2.4 b whilst Rs. 968.5 m was reported for the quarter. The external environment proved benign for the Group with falling interest rates and stabilisation of the exchange rates. The Rupee strengthened against the US Dollar during the quarter. December monthly rate settled down to Rs. 130.83 from Rs. 132.47 in September 2013. “This was a fillip to our import oriented segments – Retail and ICT. AWPLR closed the December quarter at 9.88% whilst closing at 11.94% for 2QFY14. This had an impact on performance with saving noted in financial costs. With financial costs reducing the benefits could be passed down to the end consumer thereby absorbing margin pressures and assisting Group’s topline growth momentum. Our business model is predicated on lower financial costs given the Group’s strong EBIDTA generation as opposed to more expensive alterative quasi capital financing instruments to finance growth and enhance profits,” Pathirage noted.

"Cumulative Net Profit for the period ending 31 December 2013 recorded over a three-fold YoY growth to Rs. 803.1 m whilst the quarter made Rs. 559 m reporting a near two-fold YoY growth. Gross Profit of the Group for the quarter under review increased by 32.5% YoY to Rs. 2.8 b taking the cumulative Gross Profit for the three quarters to Rs. 7.4 b (up 22.7% YoY improvement). Hence, there was a notable improvement in Gross Profit Margins during the quarter by nearly 600 basis points YoY. Operating Profit for the cumulative period under discussion recorded a 19.8% YoY growth to Rs. 2.4 b whilst Rs. 968.5 m was reported for the quarter."

Finance expenses reduced to Rs. 603 m which is 43.4% YoY during the third quarter of the year under discussion whilst the cumulative finance cost eased 15% YoY to Rs. 2 b. As such, the Group’s cumulative PBT was Rs. 1 b, a remarkable 166.5% YoY growth after the quarter under analysis saw a 168.9% YoY improvement to Rs. 682.6 m. Softlogic’s quest for more retail space continues encouraged by the positive results reported by its most recent brand/branch expansions. Softlogic Brands Ltd. opened the flagship French Connection store recently, while the opening of Burger King was a resounding success with the three restaurants being visible in a big way in the metropolis. Plans are ahead to expand Burger King’s franchise in the forthcoming months. The accelerated expansion mode for its Consumer Electronics division is well under control targeting 200 by 31 March 2013. The expansion focuses primarily on less costly small-format showrooms outside the Western Province and hence makes the expansion target more realistic and financially viable. The 173rd showroom was opened in the Jaffna Peninsula in January 2014. The Branded Apparel Division continued its induction of world’s renowned fashion brands adding ‘Splash’ to its authorised franchise list. The high street Middle Eastern fashion house marked its identity in Sri Lanka with Softlogic at K-Zone, Ja-ela. Your Extending Softlogic’s mini departmental store concept, it is also looking to house its premier apparel brands along with its fast food franchise at the upmarket shopping arcade located in the refurbished former Auditor General’s Building. A dedicated Apple Service Centre was launched in February consequent to Softlogic Information Technologies being appointed as the Authorised Service Provider and Distributor for Apple products in Sri Lanka. Softlogic’s Finance cluster has crafted groundbreaking equity/debt instruments with renowned global agencies such as the IFC, DEG and FMO. Softlogic Finance PLC announced a deal with GuarantCo, a multilateral orgainisation, physically based in UK, which would be guaranteeing the issuance of Softlogic Finance Debentures. The transaction will become a ‘AAA’ rating for the debenture issue making Softlogic Finance Debenture issue the first ever ‘AAA’ rated debenture to be listed on the Colombo Stock Exchange. Information & Communication Technology Information & Communication Technology sector’s revenue continued recording a modest growth rate of 9% YoY during the 1-3QFY14 thus reflecting a strong contribution of 21% to the Group topline with the sector’s quarterly revenue improving 8.3% YoY to Rs. 1.5 b. Operational Profit for the cumulative period was reported at Rs. 534.8 m (up 7.2% YoY). ICT cluster’s contribution to the Group PAT was 24.3% after adding in Rs. 195.1 m for the cumulative period under discussion. Smart phone sales continued to grow adding to the total sales of the communications division. “The IT business has been moving forward successfully. The business is now diversifying its focus beyond end-user computing towards enterprise computing. We provide nearly 50%-60% of storage business to EMC, the largest storage supplier in the country. We also tied up with EMC and Lenovo for the back-up recovery system space. A number of contracts have already been struck for this solution. We are targeting the enduser computing via Lenovo and Apple. Considerable effort has been expended in Continuous Professional Development (CPD) for corporate software security solution,” Pathirage said. Leisure The hotel project at Bentota – Centara Ceysands Luxury Resort & Spa – is nearing its completion. This new resort, situated in idyllic location with a blend of luxury and unprecedented style, will open its doors for external guests in April 2014; hence this would add to the Group’s consolidated performance in FY14/15E. Construction of Movenpick city hotel is progressing as per the envisaged time lines. With the completion of the transfer floor at Level 6 as of 10 February, the target date for opening the 5 star hotel remains on course – 15 September. Retail Retail sector continued its growth in terms of business volumes as well as profitability during the period under review. New brand and branch sales coupled with the seasonal effect drove the Retail sector’s revenue to cross Rs. 2 b (up 8.4% YoY) for the third quarter of FY 2013/ 2014 whilst the cumulative retail sector sales improved a by 14.4% to Rs. 5.7 b. The sector maintained its contribution at 26% to the Group’s topline. Sector’s third quarterly operating profit reported Rs. 224.1 m, down by a marginal 2% YoY. This is due to the increased administrative and distribution cost increasing in line with the Company’s expansion plans. However, cumulative Operating Profit of the sector was up 23.8% YoY improving to Rs. 690.7 m. Retail sector’s profitability remained strong with an aggregate PAT of Rs. 412.2 m during the FY 2013/14 (up 61.4% YoY) after the 3QFY14 reported a PAT of Rs. 177 m (Vs. Rs. 76 m in the comparative period). Declining interest rate added to the cluster’s performance supporting its Hire Purchase financing power. “Suffice it is to say, with the implication of the new VAT law restricting the retail industry’s overall exemption of sales for qualifying items, the retail industry is unsure as to how to treat the negative impact arising from this without affecting consumer demand. Industry as a whole has appealed to the authorities in this instance, otherwise, the future of the consumer electronics and durables segment may find it increasingly difficult to operate should these warning go unheeded,” Pathirage stated. Automobile The automobile sector is through a challenging phase until such a time the removal of those selective duty waivers is instituted. However, Softlogic is now focusing on related diversification to overcome the systemic challenges. The appointment of an experienced CEO with strong global automotive background in both sales and after-sales for those globally leading automobile brands is one step forward for the segment to reach the next level of operational potential. Plans are underway to work with Softlogic Finance to support the financing side of customers, reorganisation of service and spare-part operations, appointment of an island wide service and parts network and moving into a state-of-the-art 3S facility (Sales, Service and Spare Parts); the latter which is expected to be fast tracked. This facility will be one of the most modern automotive facilities in Asia, built entirely to FORD’s global corporate identity (CI) standards. The Softlogic Rent-a-Car business has also been initiated under the automobile banner with reorganisation of its service operations. Financial Services Financial Services recorded remarkable growth during 3QFY14 recording a 29% YoY quarterly increase in topline to Rs. 1.9 b, taking the cumulative topline to Rs. 5.4 b (up 34% YoY). The sector’s contribution to Group topline stood strong at 25%. Performance during the quarter, a PAT of Rs. 356.5 m (over twofold YoY growth), was a major turnaround to the sector’s cumulative bottom line status which recovered from losses during the first half of FY 2013/2014 to a cumulative PAT of Rs. 56.7 m. Asian Alliance Insurance PLC’s performance deserves a special applause as it continued to outperform industry growth rates. Its strong sales effort in capturing new business eclipsed yet another milestone, with new business crossing the Rs. 1 b mark for Life Insurance segment. Average Client Value has reached Rs. 76,000 – the highest in the industry whilst YTD GWP for the company crossed Rs. 4 b. Non-Life business also continued to outperform the industry with an impressive top line growth of 31% YoY (Vs. industry average of 9%). Synergies of the Group continue to be exploited through branch expansion in collaboration with Softlogic Finance and Softlogic Retail. Balanced growth also formed the cornerstone of Softlogic Finance, with the company recognising impressive growth of 49% on income earned up to 3QFY14, once again showcasing the tremendous potential for growth both in the company and in the industry. This also resulted in a 19% growth in assets of the company and thereby allowing it to move two places forward and achieve 12th place in the industry in terms of asset size. Prudent and proactive measures taken during the period in review also resulted in minimisation of the potential impact from both the depreciation of gold in the global markets as well as exposure to the domestic infrastructure sector, and combined with aggressive steps taken on recoveries and client management, allowed the company to maintain its profits for the period in question. Softlogic Stockbrokers Ltd.’s performance saw slight improvement toward the latter part of the quarter in line with the Colombo Bourse. “However, we remain quite optimistic with the last quarter of the FY 2013/ 2014 with the renewed local investor confidence and notable improvement in local institutions activity in the stock market,” Pathirage added. Consequent to solid performance at its subsidiaries, Softlogic Capital, the financial services sector’s holding arm of the Group, reflecting commendable growth versus the loss reported during the comparative period. This comprehensive financial service portfolio is well positioned to continue on its platform of aggressive growth, leveraging on its accelerated growth in customer base acquired from diverse sectors of the overall Group. Total assets of the sector were Rs. 27.4 b as at 31 December 2013 and recorded an increase of 15% for the nine-month period compared with Rs. 23.8 b as at 31 March 2013. Healthcare Services Healthcare Services continued its uninterrupted growth story with revenue contribution still dominant at 26% of the Group. Sector’s revenue for the third quarter of FY 2013/ 14 neared Rs. 2 b growing 11.6% YoY whilst heaving the cumulative revenue to Rs. 5.7 b (up 10.9% YoY). The cumulative topline contributor position was led by Central Hospital Ltd. whilst the bottom line ranking was strong with Asiri Hospital Holdings and Asiri Surgical Hospital following suit. The hospital chain witnessed strong performance in line with their business peak period during the latter of the calendar year when corporate medical insurance claims also crystallise. Contribution to the Group Operational Profits also held firmly at 62% for the cumulative period ended 31 December 2013 to Rs. 1.5 b (up18.4%) whilst a growth rate of 31% YoY was reported during the quarter under review to Rs. 492.3 m. The sector’s profitability for the period ending December 2013 was Rs. 1 b, up 50.3% YoY whilst the quarter concluded with a 76% YoY growth to Rs. 363.9 m. Contribution from medical technology investments continued to improve margins. The management is quite confident of commissioning a bone marrow transplant unit at Central Hospital Ltd. during 4QFY14. Asiri Hospital Holdings acquired a 37.4% stake in the Central Hospitals Ltd. for a total consideration of Rs. 2.4 b from the hospital’s private placement investors. Asiri Hospital Holdings now holds 90% effectively in the Central Hospitals Ltd. This assuredly would lead to further enhancement of Asiri group earnings and, hence, the overall Softlogic Holdings earnings, in the upcoming periods. Future outlook With the interest rate regime held tightly, which is expected to continue in accordance with market dynamics and other macro-economic factors such as growth in tourism, the Group’s performance is expected to surge in the medium term notwithstanding the consolidation taking place across the sectors due to fiscal imperatives, and, for reasons of good commercial discipline, the streamlining of business operations based on capital return prerogatives, Pathirage concluded.