Softlogic Holdings progresses in FY18 amidst challenging economic conditions

Following is Softlogic Holdings Plc Chairman Ashok Pathirage’s review of the company’s interim accounts for the financial year ended 31 March 2018.

Group Earnings Review 

Revenue

Business growth progressed amidst the inhospitable and challenging economic conditions following poor regime governance. The adverse weather conditions, high interest rate climate and ad hoc policy changes hampered consumer and investor confidence. Nonetheless, consolidated turnover for FY2017/18 reached Rs. 66 billion, registering a growth of 12.2% from last year. The quarterly Group revenue witnessed a 18.1% growth to Rs. 17 billion.

The key contributors to Group turnover for the year were Retail (32% contribution), ICT (26%), Healthcare Services (18%), Financial Services (17%) followed by the non-core sectors -- automotive and leisure.

Gross Profit

Gross Profit for the year improved 21.3% to Rs. 23.6 billion while registering a GP margin growth from 33.1% in FY17 to 35.8% in FY18. Quarterly Gross Profit also increased 17.9% to Rs. 6.0 billion. Stronger bargaining power, inroads made into new market segments and stringent cost-discipline assisted in improving the GP margins.

EBITDA

Other Operating Income reached Rs. 2 billion for the year (Rs. 994.4 million in FY17). This is a combination of one-off and recurrent income streams including disposal gains, other investment income, fees and commission which is inherent to a large conglomerate.

Distribution and administrative expenses increased 2.5% and 13.3% to Rs. 3.1 billion and Rs. 14.0 billion respectively during FY18 to sum total operational expenses to Rs. 17.1 billion (up 11.2% YoY). Operational cost margins declined from 26.1% to 25.9% during FY18. Quarterly distribution cost declined 21.6% to Rs. 607.9 million while administration costs increased 10.8% to Rs. 4.2 billion. Consequently, quarterly operational cost increased by a marginal 5.3% to Rs. 4.8 billion.

Group EBITDA reached Rs. 11.3 billion (up 57.6%) during the year while quarterly EBITDA grew 52.1% to Rs. 2.1 billion.

Operating profit for the year increased by a strong 68.5% to Rs. 8.6 billion reflecting an operating profit margin improvement from 8.7% in FY17 to 13.1% in FY18. The quarterly operating profit also increased 75.9% to Rs. 1.4 billion too witness a margin improvement to 8.6% in FY18 from 5.8% in FY17. Finance Income which primarily composes of Softlogic Life Insurance Plc’s investment portfolio’s performance, increased 23% to Rs. 1.1 billion during FY18 while the quarter registered a decline of 30.1% to Rs. 224.3 million.

Net finance cost increased 24% to Rs. 4.9 billion for the year while a 16% increase to Rs. 1.4 billion was noted during 4QFY18. The increase in interest rates in the wider economy added to the increased finance cost. However, with the equity infusion concluded in April, we expect the finance cost burden to ease.

Further discussions are underway to raise equity at the subsidiary level to support upcoming capital intensive projects.

The change in insurance contract liabilities, which is the transfer from the life insurance business to the policy holders’ account, showed a transfer of Rs. 1.4 billion during FY18 as opposed to Rs. 82.4 million in FY17. The one-off surplus of Rs. 798 million during 4QFY18 was as a result of the change in valuation of insurance contracts prescribed by regulation.

PBT and PAT

PBT grew by 129.8% to Rs. 3.4 billion during the year as the quarterly PBT reached Rs. 1 billion (loss before tax of Rs. 4.6 million reported in 4QFY17).

PAT recorded more than a two-fold growth to reach Rs. 2.6 billion during FY18 while a three-fold growth was witnessed in the quarterly PAT of Rs. 643.6 million.

Sectorial Review

Retail

Despite the slow economic conditions and adverse tax changes dragging down consumer spending, the colourful retail segment persisted in its growth momentum to report an annual revenue of Rs. 21.0 billion (up 7.5%) for FY18 with the quarter reporting a topline of Rs. 5.3 billion (up 23.3%). Odel and Consumer Electronics operations were the frontrunners of the sector for topline growth. Sector operating profit registered a 19.2% growth to Rs. 2.5 billion for the year. Sector PBT reached Rs. 534.8 million for the year before concluding the year with a PAT growth of 12.4% to Rs. 364 million.

During March, the retail sector witnessed a corporate restructure creating a new core vertical.

This process helped discover the hitherto hidden present value of subsidiary investments via rigorous independent valuations by Ernst & Young. From next year there will be four verticals of which three will be core in the reporting of the Group financial performance.

Softlogic Restaurants signed its third master franchise recently with France’s Delifrance S.A. to develop, open and operate Delifrance outlets in Sri Lanka with its trademarks. One outlet of this frozen and bakery foods operator is available at the Odel flagship store.

Baskin-Robbins ice cream opened an outlet at the Promenade in ODEL while further outlets were opened in Ja-Ela and Crescat. The ice cream business now has six outlets.

The Consumer Electronics network stands with 219 stores around Sri Lanka with the latest store being opened in Kundasale in the Anuradhapura District. We now have a total retail space of 292,000 sq. ft in the Consumer Electronics business. Odel is awaiting the opening of Colombo City Centre (CCC) in August 2018 with eager anticipation. Its 51,000 sq.ft mall space in CCC will retail a host of international brands such as Aldo Clarks, Mango, Charles & Keith, Swarovski as well as its own Odel brands. Softlogic is also the anchor tenant at the Mall – One Galle Face at Shangri-La where a total retail space of 110,000 sq.ft will similarly see fruition in 2019. The Odel Mall project is also being constructed at Alexandra Place to be opened in 2020.

Healthcare Services

Asiri Health topline continued to remain undisrupted as a growth of 15.9% to Rs. 12.0 billion was registered during the year. Quarterly revenue of the sector moved up by 9.5% to Rs. 3.0 billion. The annual revenue contribution continued to be led by Central Hospital Ltd. (36.2% contribution), followed by Asiri Hospital Holdings Plc (30.1% contribution) and Asiri Surgical Hospital Plc (26.4% contribution).

Sectorial operating profit grew by 60% to Rs. 3.4 billion during the year before taking the PBT to 2.6 billion (up 95.8%) to conclude with a PAT of 1.9 billion (up 64.2%).

Patient confidence driven by state-of-the-art facilities and renowned expertise continued upbeat despite macro challenges for Asiri. Asiri Hospital Kandy, the first 180-bed private hospital equipped with state-of-the-art medical technology and expertise in the Central Province is also expected to win market share from the Northern and Eastern Provinces by patients who presently travel to Colombo for medical treatment. The hospital is expected to be operational by early 2019.

Financial Services

Financial Services saw a turnover growth of 26.2% to Rs. 11.1 billion during FY18 as the quarterly revenue also improved 37.2% to Rs. 3 billion. Annual Operating profit increased to Rs. 2.1 billion as opposed to Rs. 673.6 million in FY17 while a quarterly operating earnings of Rs. 417.3 million was reported (Rs. 109.9 million in 4QFY17) during 4QFY18. Sector PBT for the year was Rs. 2.1 billion (up 98.7%) before completing the year with a PAT of Rs. 2.6 billion (up 130%).

Softlogic Life performed strongly with dominant leadership outshining the industry to achieve Gross Written Premiums of Rs. 8.1 billion for the 12-month period to March 2018. The company’s impressive growth has increased market share to 11%. 

Softlogic Life’s pace of growth has more than doubled the pace of industry growth, whilst market share has also more than doubled since the Softlogic acquisition of the company in 2011. Softlogic Finance PLC’s assets was Rs. 21.7 billion as at 31 March 2018 whilst Customer Deposits was Rs. 17.7 billion. Aggressive growth imperatives subject to prudent fiscal principles is a prerequisite for sustainable operations, and Softlogic Finance is recognising the important role it plays in the financial sector which is intrinsically vital for overall macroeconomic performance. 

Information & Communication Technology

ICT sector revenue for the year was Rs. 16.9 billion while the quarter reported revenues of Rs. 3.9 billion. Operating profit of the sector grew by a strong 41.6% to Rs. 976.2 million during FY18 as the quarter also saw a growth of 203.3% to Rs. 339.6 million. Sector PAT more than doubled to Rs. 526.1 million during the year under review. 

Samsung handsets continued to dominate the telco business at Softlogic while Nokia handset sales were on a slow recovery during most part of the year after the global disruption. However, the Nokia business witnessed a clear recovery during latter FY18. The B2B IT segment proved to be a prominent player during the year as numerous contracts were successfully concluded. The group already sees extensive retail points in its mobile distribution coupled with the consumer electronics business.

Leisure

Leisure sector revenues more than doubled to Rs. 2.6 billlion during FY18 as Movenpick Hotel Colombo completed its first full year in operation. The quarter witnessed revenue growth of 55.8% to Rs. 846.4 million. Occupancy levels were strong in both the resort and the city hotel for the Winter-peak. While the resort is outpacing the growth of its counterpart in the city, we reckon that many challenges need to be addressed in the macro economy for the leisure sector to benefit from its capital-intensive investment.

Automobile

Automobile sector revenue increased 72% to Rs. 2.4 billion during FY18 primarily led by ambitious revenue targets set for the sales team. King Long bus segment recovered sales volume during the latter part of the year while Ford Service revenue continued as expected.

Suzuki Motors Lanka, the importer and sole distributor of Suzuki motorcycles, has witnessed steady business growth since acquisition. The dealer network has grown to 72 (26 dealers at time of acquisition in August 2017). Group synergy has helped Suzuki with the progress.

Group Outlook

Prior to the conclusion of the financial year, Softlogic was successful in partnering Samena Capital, a Middle Eastern investor, to garner a private placement followed by a rights issue which saw an equity infusion of Rs. 7 billion. The twin benefit for the Group will be the saving to be made on financial costs by the corresponding reduction in debt and the strengthening of key capital ratios with the enviable effect of improving the overall gearing position. The private placement and the rights issue were priced above market value since shareholders and investors no doubt recognised that the Group was inherently more valuable than market sentiments.  There are other equity plans in the pipeline for the core verticals, and with this in mind, the Group will make its footprint across its various businesses become unrivalled in the industry.

As we champion the retail sector, investments in Supermarkets become a natural choice since customers could use the retail network to spend and burn points using a single loyalty scheme. We have a vision to become the largest retailer in Sri Lanka -- being in the right sectors with the right products, with the right price and with those investments being made at the right time.