Softlogic Chairman reviews 1Q performance

Softlogic Holdings Plc on Friday released its first quarter results for the financial year 2014/15. Here is the review by Chairman Ashok Pathirage:

Consolidated revenue increased 14.6% to Rs. 8.0 b with strong performance reported across all business segments. Healthcare Services maintained its leading contributory position followed by Retail, Financial Services, ICT and Automobiles. This uptrend is expected to bolster further in the upcoming quarters with fresh revenue generation from our most recently opened, Centara Ceysands Resorts & Spa. The peak season for the leisure sector, which is November to March, has now been added to our normal peak calendar: retail (April and December) and Insurance (December and March).

Consolidated gross profit increased 14.4% to reach Rs.2.5 b during the first three months of the financial year. Operational expenses increased 32.9% to Rs. 2.1 b consequent to the increase in operating cost margins to 26.6% from 22.9% in the comparative quarter. Distribution costs increased to Rs. 420.0 m while administration costs also increased 29.9% to Rs. 1.7 b for the period under review. This increase was attributed to the Group’s increasing revenue generating activities.

Finance Income, which registered an exceptional 103% growth to Rs.422.6 m (Rs. 208.2 m in 1QFY14) during the three months period under discussion, was primarily triggered by investment portfolio gains, both fixed and equity investments, at Asian Alliance Insurance PLC. Nonetheless, finance expenses declined marginally to Rs. 625.6 m as opposed to Rs. 677.8 m in the comparative period. This was in light of the favourable macro-economic conditions where interest rates continued to decline allowing the absorption of the rapid capex growth of the Group.

Average interest rate of the Group declined to 9.67% from 11.4% in the comparative period. Exchange rates stabilised at Rs.130.5/USD levels during the quarter further assisting the import oriented segments – Retail, Automobiles and ICT.
Group PBT improved 36% to Rs.294.9 m during the quarter against Rs.216.8 m in 1QFY14. Profit for the period during the first three months of FY2014/15 amounted to Rs.225.3 m (up by a strong 21.9%).

Non-controlling interest’s share of profit was 81.9% to Rs.184.6 m (up 26.6%).

Information & Communication Technology 

Information & Communication Technology continued to improve its contribution to Group Revenue with the quarter recording 21.8% (Versus 20.8% of Consolidated Revenue in 1QFY15). The sector recorded a strong improvement in its topline by 20.2% to Rs. 1.7 b (Rs. 1.5 b in the previous period). This was secured by the progression of the IT B2B segment which recognised revenues from some of the IT infrastructure projects. The division continued to strengthen as a fully-fledged IT solutions provider looking beyond end-user computing to data centres, security and intelligent infrastructures.

The Communications division continued to see strong sales of its Smart phone and maintained leadership in the lower-end range amidst challenges of the grey market and tough competition. The company is now contemplating expanding its handset brand range where new mobile brands would easily succeed given its strong retail network.
This segment’s Operating Profit improved contribution to the Group accounting for 41.9% (20.5% contribution during the comparative period) adding in Rs.207.6 m for 1QFY15. Sectoral PBT doubled to Rs.137.6 m (Rs.68.7 m during 1QFY14) improving its contribution to Group PBT to 46.7% from 31.7% last year. ICT sector PAT increased 73.2% to Rs.109.3 m with 48.5% of that amount going directly to Group PAT.

Retail
Retail sector contributed 25.6% to Group turnover registering a 10.7% growth to Rs.2.1 b during the period. This growth was led by growing footfall rates of existing showrooms coupled new brands, store expansion, and increased product sales. Operating profit reduced 39.9% to Rs.154.7 m in comparison with Rs.257.5 m in 1QFY14. The decline in operating profit was as a result of operational expenses led by increasing outlets (pre-operational costs and costs associated during the familiarisation period). Consequently, Operating profit contribution to the consolidated number declined to 31.2% from 37.7% in the previous year. Sector’s finance cost was maintained at Rs. 125 m during the quarter despite the increase of the sector’s borrowing status applied mainly to fund the Hire Purchase initiative aside from the increases seen due to business expansion.

Retail sector has had an upswing during this period with the continuing strategic expansion of this sector. Softlogic Retail added ‘Acer’ laptops and desktops to its retail range during the quarter. We also launched our e-Commerce portal to market consumer durables, fashion brands and furniture – www.mysoftlogic.lk. This platform has been well sought after by online shoppers in Sri Lanka for local delivery as well as those residing abroad.

We applaud the Government’s investment initiatives in the development of high-end shopping malls in Colombo. The expected growth in income levels (per capita to reach $ 4,000 by 2015) which has been triggering the wish list of consumers’ preference for authentic and aspirational products has set the platform for the sector’s growth potential. Suffice it is to say, tourist shopping has added to the growth story. We now occupy nearly 40% of the recently-opened luxury shopping complex, Arcade – Independence Square. We have housed ‘Nike’, ‘Levis’, ‘Girodano’ and ‘Charles & Keith’ of the Branded Apparel division while also introducing a luggage corner with ‘VIP’, ‘Carlton’ and ‘Samsonite’ and saw the launch of Tommy Hilfiger.

The Consumer Electronics opened its 179th showroom (an exclusive Samsung store) at the Arcade adding to its cumulative retail space which stads at 235,331 sq. ft. We are well in line with our target of 335,000 sq.ft by 2017E. The Branded Apparel Division continued to focus in acquiring top international fashion brands for Sri Lanka. We introduced ‘Dockers’, the casual garment and accessories brand from Levi Strauss & Co. The exclusive store for this renowned casual clothing line was opened at the Arcade and it will also be available in all Galleria outlets.
The success of the famous Quick Service Restaurant (QSR) business model was easy; Burger King opened its fourth restaurant at the outlet where consumer response has been very encouraging promising strong contribution in the upcoming periods accelerating the venture’s payback. The restaurant chain extended its menu to tailor-made dishes to suit the public taste. ‘The King Rice’, ’Spicy Chicken Burger’ and ‘Fish & Chips’ was introduced. Coffee range including ‘Lavazza’ along with ‘Frosty Boy’ milkshakes is now served at our four restaurants. We have already opened another outlet in Kandy City Centre. The latest outlet at the Arcade has been very impressive encouraging our expansion strategy.

Sector’s PBT declined 64.6% to Rs.60.4 m while PAT reduced 57.5% to Rs.85 m during 1QFY15. We view this segment on a medium term scale when contributions accumulate.

Healthcare Services
Healthcare Services continued its remarkable performance during the quarter with strong results across its three key hospitals; Central Hospital Ltd, Asiri Surgical Hospital PLC and Asiri Hospital Holdings PLC. The Sector added Rs. 2.1 b to Group topline (25.9% contribution), which is 12.2% growth from Rs. 1.9 b reported during the comparative period. Operating Profit of the sector was Rs. 541.6 m (up 9.9%) during the quarter taking PBT to Rs.397.4 m (versus Rs.325.4 m in 1QFY14). Segment’s dominant contribution to Group performance continued as it reported Rs.335 m for the quarter ended June 2014. Performance of the hospital is expected to improve further in the upcoming quarters with the consolidation of Asiri Hospital Holdings PLC’s ownership at Central Hospital Ltd.

A sales agreement to dispose one of the properties at Horton Place for a total consideration of Rs.2.6 b is expected to materialise. The sales proceeds would be used to reduce Group debt despite other expansion imperatives in the horizon. Asiri Surgical Hospital PLC introduced Sri Lanka’s first-of-its-kind digital mammography with new technology. This made Asiri the first private healthcare provider to offer the advanced three dimensional breast imaging for the earliest detection in breast cancer. The new techonology, which is tomosynthesis, is the gold standard in breast cancer screening and detection and builds upon the success of digital mammography.

Central Hospital Ltd. also launched yet another breakthrough state-of-the-art medical facility, the first-ever bone marrow transplant in June 2014. Patients treated particularly with haematological disorders such as thalassemia, receiving treatment abroad at phenomenal expenses, can now do so locally at this hospital at an affordable price. This state-of-the-art unit installed handles Allogenic Transplants, another first time treatment, treating blood and bone marrow related disorders, a big boon particularly for children diagnosed with thalassemia to whom a bone marrow transplant will in most instances be a definitive lifetime cure.

We would continue to invest in latest technology to ensure that Sri Lanka remains on par with the global medical world. Asiri Kandy would commence construction soon. This 125-bed hospital looks at a CAPEX of Rs. 3 b.

Financial Services
Financial Services segment saw a 14.1% growth in topline to Rs.2.0 b during 1QFY15 with its contribution to the Group revenue constituting 24.5%. The sector’s PBT recorded an achievement of Rs.14.4 b against a loss of Rs.84 m during the comparative quarter. Financial Services Sector had a good quarter overall with Asian Alliance Insurance performance being well ahead of expectations on the back of solid growth in Life premiums and an exceptional investment portfolio result, followed by Softlogic Stockbrokers who also rallied strenuously to achieve third position in the market. 

Softlogic Finance was impacted by impairment charges but resumed progress towards desired levels.

Asian Alliance Insurance improved its performance with PAT of Rs. 89 m versus a loss of Rs. 92 m in the previous period with premium income for the first half of the year at Rs. 2.3 billion, with Life growth at 21% and General at 3%, versus industry performance of 7.3% and 0.2% respectively. Softlogic Finance’s Total Assets rose to Rs. 18.2 billion recording a growth of 21% versus the previous year with customer deposits at Rs. 9.7 b and customer advances at Rs. 12.5 b with the Company being included in the A list Category in respect of the Central Bank NBFI consolidation initiative. Softlogic Stockbrokers have seen a complete turnaround with Rs. 27.8 m turnover recorded for the quarter and profits of Rs. 4.6 m. Overall the sector is well positioned and is looking towards contributing an increasing share of Group performance during this financial year.

Automobile
Automobile sector saw a strong recovery of 71.7% in revenue during the quarter chiefly led by sale of the ‘Ford’ vehicle range. However, the sector closed the first quarter with a marginal loss of Rs. 3.8 m Versus Rs. 19.8 m compared with the previous year. The gradual decline in the sector’s losses brings hope for the future of the sector which is working on a number of strategies to diversify into related operations such as rent-a-car, commercial and passenger vans, body repair and paint services which would cater to all vehicle brands. We also unveiled our 3S Ford facility in June. This Sales, Service and Spare parts unit of Ford is expected to add to the confidence of ‘FORD’ in Sri Lanka.

Leisure
Your Company’s first resort, Centara Ceysands Resorts & Spa, was opened for external guests in June 2014. Response and bookings have been surpassed expectations. Contributions would stream in particularly during peak November-March period. The construction of the 219-room Movenpick City Hotel has now completed Level 24 and is progressing as per the construction schedule with a view to open its doors in 4Q2015.

Future Outlook
While we are doing everything commercially right to ensure success of your company, it is also important to make forward thinking decisions with a view to ensure greater upside in the medium term. With the interest regime looking benign we will make opportunistic decisions to take this group to a new level of competency and become unrivalled in certain key areas of business activities.

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