Softlogic inflicted with tougher 2Q; Healthcare biz fairs well

• Group EBITDA improves 35% to Rs. 3.5 b in 2Q
• Suffers pre-tax loss of Rs. 873 m and negative Rs. 1 b bottom-line 
• Chairman confident of revival going forward

Softlogic Holdings PLC yesterday reported a loss in the second quarter as well as in the first half amidst challenging times arising out of the COVID-19 pandemic, but expressed optimism of a turnaround going forward. 

Second quarter pre-tax loss was Rs. 873 million, as against a loss of Rs. 197 million a year earlier, while the after-tax loss was Rs. 936 million, up by 115%. Net profit attributable to equity holders of the parent was a negative Rs. 1 billion, in comparison to a negative Rs. 762 million a year earlier. 

For the first half, pre-tax loss was Rs. 3.75 billion, up from Rs. 346 million a year ago, while after-tax loss was Rs. 3.8 billion in comparison to Rs. 912 million. 

Net loss attributable to equity holders of the parent rose to Rs. 3.58 billion from Rs. 1.5 billion in the first half of FY20. First half revenue was down 3% to Rs. 36 billion, whilst in the second quarter it rose by 9% to Rs. 22 billion. 

In the second quarter, the Healthcare sector saw its operating profit rise to Rs. 1 billion from Rs. 741 million a year ago, whilst revenue rose from Rs. 3.8 billion to Rs. 4.4 billion. IT segment reported lower profit. Other sectors such as retail and telecommunications, financial services, leisure and property suffered pre-tax losses. In the first half, Healthcare and IT reported lower pre-tax profit compared to a year earlier, whilst other sectors experienced losses. 

Softlogic Holdings Chairman Ashok Pathirage said, for a consumer-driven conglomerate impacted by the systemic COVID-19 transmission, the Group’s topline growth was commendable and defied expectations with performance exceeding the two preceding negative quarters. 

“However the performance of the 1HFY21 was severely affected by the two-month lockdown in 1QFY21, with the six-month turnover at Rs. 36 billion,” he added. 

Despite the depressed market conditions, Softlogic said it engaged in vertical integration plans, particularly, in the financial services sector for synergy and industry consolidation purposes. Investments, primarily in retail and healthcare, will translate to greater performance in the upcoming periods when the fear of COVID-19 abates, while consumers adapt themselves to new realities. With growing optimism of the Pfizer and Sputnik vaccines, economic confidence is progressively being normalised with pent-up consumer demand showing signs of rebounding.

There was a fundamental shift in how decisions were made during the lockdown. The management prioritised liquidity, rationalised employment and resources and focused on business recovery, while pruning down on all non-essential expenditure and obtaining favourable terms from suppliers for fixed costs such as rent waivers from mall operators. The banks provided loan moratoria to support liquidity, while providing working capital loans for the hotels under CBSL’s COVID-19 Renaissance program.

Gross Profit for the quarter was Rs. 7.2 billion, while 1HFY21 reached Rs. 11 billion, down by 13% from a year earlier. 

Softlogic said expectations of significant revenue growth following recent investments, particularly in the retail sector, would have been achieved if businesses had operated under normal circumstances. The implications of all this, despite the increase in cost of sales, is that the gross profit margins would have further increased as a consequence of an increase in aggregate turnover ensuring better bottom-line contribution.

Operating profit for the quarter increased 36% to Rs. 2.5 billion, amidst the setbacks witnessed during the 1QFY21. This clearly signals a return to normalisation when the environment improves.

Group EBITDA improved 35% to Rs. 3.5 billion during the quarter, while cumulative EBITDA for 1HFY21 was Rs. 3.8 billion.

The change in insurance contract liabilities affecting profitability is due to the interest rate decline for contracts with guaranteed return and the shortfall of the life fund to meet actuarial liabilities. The quarter witnessed a transfer of Rs. 1.7 billion compared to Rs. 362 million last year. The cumulative period recorded a transfer of Rs. 2.4 billion with the comparative period recording a transfer of Rs. 769 million. This position may partly reverse when interest rates resume its upward push.

The interest rate was adjusted accommodative to historic lows as a monetary tool to stimulate growth during this economic depression. This proved to be beneficial to Softlogic with considerable savings on finance cost. “We saw the AWPLR slip 293 bps from 9.35% in March to 6.42% in September. Net finance cost was at Rs. 1.7 billion for the quarter, while Rs. 3.3 billion was incurred during 1HFY21.

Pathirage said the pandemic has no doubt disrupted ordinary life at every level of society and hence businesses have increasingly come under greater scrutiny for optimisation of resources and efficiency to survive the systemic risks of an unknown future. “However, we are optimistic that while ‘all things shall pass’, businesses will become stronger because of the determination to navigate intelligently through the pandemic,” he added.

It was pointed out that seeing as the country’s COVID-19 incident ratio was low, Sri Lanka could regionally become one of the chief beneficiaries of stability and could garner tourism, exports and investments as a reliable destination.

“Having said that, Softlogic with its mixed customer-centric portfolio – Healthcare, Financial Services, Retail, Leisure and ICT – can become considerable cash generating models with its unrivalled customer base, when the external environment normalises again.

“With regard to Asiri Kandy, the scope for generating greater profits in the Healthcare sector would increase when the environment normalises. Retail & QSR will also witness an uptick in performance going forward,” he added.

“In this regard, the Government with its accommodative policies are making every effort to ensure that all sectors of the economy are safeguarded, and they will benefit when the negative sentiment of COVID-19 is overturned, thus ensuring greater GDP traction. This will help the Group return to profitability in the ensuing periods, especially 3QFY21, as consumers adapt to the new normal under these difficult circumstances,” Pathirage opined.

“Suffice to say, our investments in brick-and-mortar have been for the long-term, something which is essential for the country’s development objectives, where the retail infrastructure and the hospital chain are intrinsic value additions for tourism to bloom.

“Although, there are setbacks in the short-term, when these hurdles are overcome, our business model would generate strong returns as it is aligned inextricably with the growth of the economy. In these extraordinary times, we need to have extraordinary vision to charter the COVID-19 waves with courage and resilience, always keeping in mind that the customer comes first,” Pathirage added.