Challenging 1Q for Softlogic; confident restructuring will deliver growth

Softlogic Holdings PLC has faced a challenging first quarter in the FY19, with group turnover up by only 5.4% to Rs. 16 billion, whilst after-tax profit was down 9% to Rs. 390 million. 

Pre-tax profit was marginally down to Rs. 657 million.  Gross Profit improved 4.7% to Rs. 5.8 billion. Better bargaining power led by Group synergies paved the way for margin improvement from 35.9% in 1QFY18 to 36.3% in 1QFY19. EBITDA for the quarter improved marginally by 1.5% to Rs. 2.6 billion during the quarter.

Softlogic Holdings Chairman Ashok Pathirage said the 1Q “continued to reflect many challenges due to economic slippage, high interest rates and a high tax regime, coupled with weakened Rupee which led consumer demand to significantly fall.” 

He said revenue growth of 5% was amidst subdued purchasing power of consumers. 

“The restructuring of the top performing sectors has given clarity in terms of resource allocation to intensify further its focus on growth imperatives. Softlogic’s future lies in the three core verticals – Retail, Healthcare and Financial Services – which accounted for 91% of Group topline in 1QFY19. The value creation is being consequently unlocked and the synergy being created under one unified platform is no doubt a step in the right direction,” Pathirage added.

The Retail sector witnessed an ownership restructure in March 2018. This resulted in the creation of a sector holding company, Softlogic Retail Holdings Ltd. This exercise aims to bring better clarity and focus in the retail sector. Softlogic Group reclassified its operating sectors under three prime business verticals -- Retail, Healthcare and Financial Services; while Leisure and Automobiles were classified as non-core. The IT companies will be transferred to the Retail sector in due course.

The core verticals emerged to be the top contributors of Group topline with Retail contributing 51%, Healthcare Services making up 20% and Financial Services with 19%. Contribution from our non-core businesses in Automobile and Leisure & Property were 2% and 3% respectively during the quarter.

Operating profit increased marginally by 1.7% to Rs. 1.9 billion during the quarter. Nonetheless, operating profit margins remained unchanged at 12% in the three months under review.

Operational expenses increased 3.5% to Rs. 4.1 billion.  Distribution and Administration expenses increased 3.0% and 3.6% to Rs. 688 million and Rs. 3.4 billion respectively in 1QFY19. Other operating income halved during the quarter to Rs. 196.4 million due to changes in accounting policy in the finance company and the reporting methodology thereof and one-off commission income reported in Softlogic Retail last year.

Pathirage said Group net debt has reduced from Rs. 57.2 billion in March-end 2018 to Rs. 54.3 billion in June-end 2018. This reduction was due to the rights issue of Rs. 3.9 billion that was utilised again to settle debt in April 2018. Interest cost savings resulting from reduction in debt will be reflected in the books in the upcoming periods.

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. 264.3 million during 1QFY19 as opposed to Rs. 237.2 million in 1QFY18.