Softlogic Holdings FY14 profit forecast revised upwards by 22%

CT Smith Stockbrokers has revised upwards the net profit forecast of Softlogic Holdings Plc (SHL) for the financial year 2014 consequent to the sale of a 38% stake in Asian Alliance Insurance (AAI) Plc.

“Given that the divestment will be taking place in early 4Q13E, we expect a material bottom line contribution to be only for FY14E. Consequently we have broadly maintained our FY13E net profit forecast for SHL at Rs. 281 million (down 16% YoY), which excludes the estimated non-recurrent gain of Rs. 100 million, whilst we have revised up our FY14E net profit forecast by 22% to Rs. 599 million,” CT Smith Stockbrokers said.

“The revision is largely due to the estimated finance cost saving of Rs. 250 million adjusted for the reduction in consolidated share of profit AAIC,” the broking firm added.

SHL, in an attempt to reduce the burden of its high debt position, last week announced that it will divest a 38% holding in Asian Alliance Insurance (AAIC) for a total consideration of Rs. 1.8 billion. The transaction would result in an estimated capital gain of Rs. 100 million. The stake reduction would also result in SHL’s direct holding in AAIC declining from 95% to 57%, with SHL’s effective stake in AAIC falling from 74% to 41%. Management meanwhile stated that no mandatory offer would be required on the part of the buyers.

The two foreign buyers involved in the transaction are Germany’s development finance institution DEG and Dutch State-owned development bank FMO. Subsequent to the completion of the transaction, which is subject to certain conditions being fulfilled, both foreign parties would nominate a director to the Board of AAIC.



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Initially SHL and 72% owned subsidiary Softlogic Capital (SCAP) together acquired 73.5% of AAIC at Rs. 120 per share in August 2011, whilst a mandatory offer was made thereafter to the shareholders of listed conglomerate Richard Pieris (RICH) who owned a further 25.0% of AAIC and accepted the offer.

Subsequent to the mandatory offer, SHL and SCAP owned 37 million shares representing 98.6% of AAIC, for a total investment of Rs. 4.4 billion. In September 2011, however, SHL disposed of 1.5 million shares (4.0%) of the insurer at Rs. 121 per share.

CT Smith said SHL’s high level of debt has led to a deterioration of recent earnings: While 1H13 EBIT fell 21% YoY to Rs. 1.525 million, the decline in 1H13 PBT was a steeper 78% YoY to Rs. 241 million. Net finance cost has risen 52% YoY to Rs. 1.295 million in 1H13; this is mainly due to the group increasing its interest bearing borrowings to Rs. 21,982 million as at 30 September 2012 (vs. Rs. 19,559 million as at 30 September 2011) and higher interest rates; effective interest rate paid rose to 14.7% in 2Q13 (vs. 11.8% in 2Q12 and 13.1% in 1Q13). The group’s net debt: equity ratio was 139% as at 30 Sep 2012 while its net debt: EBITDA was ‘12.0X and 2Q13 interest cover was 1.0X.

Assuming SHL utilises the entirety of the Rs. 1.8 billion proceeds to retire debt, CT Smith said it estimates the group’s net debt to fall to Rs. 16.5 billion as end 4Q13E down from September 2012 net debt of Rs. 18.3 billion. Using an effective interest rate of 14% in FY14E, the consequent pre-tax finance cost savings from the proceeds is estimated at Rs. 250 million.

AAIC reported a net loss of Rs. 128 million in 2011 (vs. a net profit of Rs. 368 million in 2010), amidst a steep decline in stock market related investment income. It however reported a lower net loss of Rs. 26 million in 1H2012 (vs. a 1H2011 net loss of Rs. 172 million), with stock market related provisions of Rs. 236 million being shown within other comprehensive income. Its book value per share as at 30 September 2012 was Rs. 22.9 per share.