Macroeconomic crisis in Oct-Dec. quarter triggers Rs. 327 m loss at Softlogic

• But 9-month after-tax profit tops Rs. 2 b mark with 29% gain

A macroeconomic crisis-filled third quarter October to December 2018 has triggered a Rs. 327 million loss at Softlogic Holdings PLC, as against a profit of Rs. 953 million a year earlier, whilst for the first nine months the Group post-tax profit managed a 29% gain to cross Rs. 2 billion mark.

Softlogic Chairman Ashok Pathirage said the Group’s operating environment in the third quarter of FY19 was assailed by the sudden and steep depreciation of the rupee, particularly, affecting the retail imports and the leisure sector which has dollar-denominated borrowings. Furthermore, the 100% cash margin imposition, which affected the retail imports, and 200% margin for motor vehicles and motorbikes, disrupted cashflow timings leading to increased working capital requirements. 

“This coupled with increasing interest rates triggered by poor market liquidity and rising Fed rates impacted cost of financing for the Group which dampened the quarter’s performance,” he said.

“Group diversity, scale of operations, and financial adaptability, however helped weather these macroeconomic shocks to a greater extent,” he added. 

Group revenue grew 8.4% to Rs. 53.6 billion during the first nine months of this financial year while quarterly revenue grew 7.5% to Rs. 19.7 billion.

Group’s core sectors which includes Retail (51% contribution to Group topline), Financial Services (19%) and Healthcare Services (18%) emerged as strong contributors to Group performance, while its non-core operations – IT, Leisure and Automobile – together made up 12% of Group topline.

Net profit attributable to holders of the parent however was down by 6% to Rs. 75 million in the first nine months, whilst for the third quarter it was a loss of Rs. 346.6 million as against a profit of Rs. 77 million a year earlier. In FY18, Softlogic’s bottom-line was Rs. 204.2 million.

Gross Profit increased 11.2% to Rs. 19.6 billion during the 1-3QFY19, indicating improvements in GP margin from 35.7% in 1-3QFY18 to 36.6% in 1-3QFY19. The quarter also witnessed GP margin improvements from 35.3% in 3QFY18 to 37.7% in 3QFY19 to report a Gross Profit of Rs. 7.4 billion (up 14.8%).

Distribution expenses increased marginally to Rs. 944 million (up 2.8%) during the three months under review. However, the cumulative period reported a marginal decline in distribution expenses to Rs. 2.5 billion (down 0.7%). Administrative expenses increased 21.3% to Rs. 11.9 billion during the nine months while an increase of 38.7% to Rs. 4.8 billion was noted for the quarter. This increase in administrative expenses is led by the Group’s increase in headcount, lease rentals and depreciation for strategic expansions. Consequently, cumulative operational cost margins edged up to 26.8% in 1-3QFY19 from 24.9% in the comparative period. Quarterly operational cost margin also witnessed an increase of 28.9% (23.7% in 3QFY18).

Other operating income declined 63.4% to Rs. 578 million during 1-3QFY19 (Rs. 1.5 billion in 1-3QFY18) while the quarter also witnessed a decline of 72.1% to Rs. 201 million. This decline primarily emerged from Asiri Group, which reported a one-off gain in the comparative period.

Cumulative Group EBITDA was Rs. 7.9 billion while quarterly EBITDA touched Rs 2.7 billion. Cumulative operating profit amounted to Rs. 5.8 billion while the quarterly operating profit reached Rs. 1.9 billion. 

Softlogic Life Insurance PLC’s investment portfolio is the prime contributor to Group’s finance income which reported Rs. 872 million for the nine months under review while an increase of 36.6% to Rs. 421 million was reported during the quarter.

Group foreign exchange losses for the period amounted to Rs. 335 million. This was particularly in the aftermath of the rupee depreciation in the retail and leisure sector.

Net finance expenses increased 15.7% to Rs. 1.5 billion during the quarter while the cumulative period witnessed a marginal increase of 7.5% to Rs. 3.8 billion. A transfer of Rs. 1.5 billion to insurance policyholders was witnessed during the cumulative period as opposed to Rs. 1.3 billion in 1-3QFY18 while the quarter witnessed a change in insurance contract liabilities of Rs. 645 million (Rs. 455 million in 3QFY18).

Commenting on the future outlook, Chairman Pathirage said although these are challenging times, the Group expansion plans in core sectors will continue as “we are optimistic about future consumer demand.” 

“Sri Lankans are becoming more sophisticated and are aware of modern global lifestyle changes, and hence continued demand for premium brands is expected to grow in conjunction with the tourist influx,” he added.

With this in mind, Softlogic is making every effort to improve Group synergy, with a view to focus on cost-discipline, and plans are afoot to buff equity at subsidiary levels to support expansion plans. 

“With the stabilising of the Rupee at these levels, we expect the Group to consolidate its efforts with a view to enhance the existing synergies. We believe that Government policies would be calibrated to inspire the country towards becoming a tourist shopping destination given its strategic location,” Chairman Pathirage added.

Following is his review of the performance of core verticals.

Retail

Cumulative revenue of the retail sector grew 2% to Rs. 27.4 billion while the quarter reported a topline of Rs. 9.7 billion. This import-oriented sector was impacted by the depreciation of the Rupee (LKR/USD increased from Rs. 155.97 as at 29 March 2018 to Rs. 182.75 as at 31 December 2018). This sector was also clouded by various other macro-economic challenges including 100% cash margin imposition on imports of selected durables and other import restrictions on footwear and apparel. Tourist shopping, brand-conscious customers, accelerated migration of population to urban regions are the core drivers of upmarket retail trade in Sri Lanka. Our retail outlets at Colombo City Centre received strong customer response. As we are probably the only retailer with over 100 international retail brands, our presence as anchor tenants in the upcoming malls have become essential for a shopping mall’s value proposition for success. It is noteworthy that our calculated expansion of fashion and retail stores has not cannibalised revenue growth at our other existing stores.

We will be occupying around 110,000 sq. ft. at One Galle Face by Shangri La. We will be retailing Odel, Armani Exchange, Diesel, Love Moschino, Mango, Body Shop, Furla, Tommy Hilfiger, Mothercare, Toy Store, Charles & Keith, Aldo, Hallmark, Swarovski, Longines, Tissot, Adidas, Nike, Yamamy, Cotton Collection, Sketchers and Guess at this mall which is expected to open in June. 

Consumer Electronics business has an islandwide network of 211 stores with the latest store being opened in Kegalle in December.

We now have a total retail space of 325,500 sq. ft. in the Consumer Electronics business. The expansion strategy of this segment now focuses on ‘Softlogic Max’ and larger company-managed stores in prime cities and towns. These stores now retail a range of furniture manufactured in-house and fitness equipment in addition to top-of-the-line TVs, electric appliances, phones and computers.

Performance of Samsung and Nokia business progressed amidst numerous systemic challenges.

Our supermarket outlet, ‘Softlogic Glomark’, in Delkanda has attracted positive customer response with the outlet performance exceeding expectations. We will be opening in Kottawa, Mount Lavinia, Colombo 7, Negombo and Malabe. An essential outlet concept of around 2,000-3,000 sq. ft. is being developed to be set up at Asiri Central, Asiri Kandy, Orion City and in Kurunegala.

Sector’s operating profit was Rs. 2.2 billion during 1-3QFY19 while the quarter reported an operating profit of Rs. 624 million. Sector EBITDA was Rs. 2.8 billion for the cumulative period while Rs. 836 million was reported during the quarter. Sector PAT for the cumulative period was Rs. 181 million.

Healthcare Services

Performance of Asiri Group continued on a positive note as the hospital chain awaits the opening of its 190-bed multi-specialty facility in Kandy soon. This facility will provide a range of state-of-the-art medical solutions which would be the first for the region.

Asiri Health revenues steadily increased 10% to Rs. 9.9 billion during 1-3QFY19 while the quarter reported a topline of Rs. 3.4 billion (up 12.9%). The revenue was led by Central Hospital Ltd., (36.5% contribution), followed by Asiri Hospital Holdings PLC (30.7%) and Asiri Surgical Hospital PLC (25.6%). Sector’s operating profit declined 14.1% to Rs. 2.4 billion during the cumulative period while the quarterly operating earnings reported Rs. 825 million (down 35.5%). This decline is attributable to one-off gain reported in the comparative period.

Sector EBITDA was Rs. 3 billion during the period under review with the quarter reporting an EBITDA of Rs.1 billion. Asiri’s profitability for the period was Rs. 1.3 billion while the quarter registered a PAT of Rs. 443 million.

Information Technology

IT sector, which now comprises the B2B IT solutions business, saw its revenue for the cumulative period improving 12.3% to Rs. 2.9 billion while the quarter reported revenues of Rs. 1.1 billion. Quarterly operating earnings increased 38.7% to Rs. 89 million taking cumulative operating earnings to Rs. 208 million (up 42.5%). EBITDA of the sector moved up 52% to Rs. 108 million for the quarter while cumulative EBITDA reported a 31.3% growth to Rs. 266 million. Sector PBT was Rs. 54 million for the cumulative period while the quarter reported Rs. 18 million PBT. The sector concluded the nine months with a PAT of Rs. 41 million. 

Financial Services

Financial Services witnessed a topline growth of 24.1% to Rs. 10 billion during 1-3QFY19 as the quarterly revenue also improved 23.4% to Rs. 3.6 billion. Cumulative Operating profit was Rs. 1.4 billion while the quarter reported an operating profit of Rs. 521 million. Sector PBT for the quarter was Rs. 148 million while cumulative PBT reached Rs. 387 million. PAT of the sector registered a 160.2% growth to Rs. 2.6 billion during 1-3QFY19 while the quarter reported a profitability of Rs. 171 million. 

Softlogic Life Insurance holds the status as the fastest growing life-insurance company in Sri Lanka with Gross Premiums reaching Rs. 10 billion (up 32%) for its financial year 2018. The Company has produced a 6-year CAGR of 30.4%, consistently more than doubling the industry growth. Global Insurance Fund, Leapfrog Investments, purchased shares from FMO who previously held 19% of the company since 2012. This transaction which was over Rs. 2 billion was executed at a substantial premium to market.

Significant flows from foreign clients and local high net-worth clients enabled Softlogic Stockbrokers to retain its position as the No; 2 player in the Industry despite lacklustre market conditions. 

Softlogic Capital has commenced an initiative that will target Portfolio Management, Equity and Debt Capital Markets, Research and Corporate Advisory to address the vast market potential that is expected in the near future. Softlogic Finance’s assets was Rs. 22.5 billion as at 31 December 2018 while Customer Deposits was Rs. 16 billion. The uptick in interest rates has made credit more expensive, while restrictions on motor vehicle imports has dampened business zeal in this respect with several hurdles evident for the RFC.

Automobile

Automobile sector generated revenues of Rs.1.5 billion (up 21.9%) during the nine months of financial year end 2019. A contract to supply ambulances to the Ministry of Health, the delivery of which was completed in February.

Suzuki Motors is capitalising on Group’s financial strength and existing distribution infrastructure to support its aggressive expansion phase. The company now has 70 dealers (26 dealers at time of acquisition in 2017).

Leisure and Real Estate

Leisure sector topline increased to Rs. 1.9 billion (up 11.3%) during 1-3QFY19. Quarterly revenue rose 12.9% to Rs. 769 million in 3QFY19. Centara emerged to be the key contributor to the sector while Mövenpick is yet to contribute to earnings. Mövenpick’s performance was affected by unrealised forex losses resulting from the hotel’s dollar-denominated borrowings.