Tough 2Q for Softlogic Holdings

For a consumer-driven conglomerate impacted by the systemic COVID-19 (C19) transmission, the Softlogic Holdings Group’s topline recorded a commendable growth of 9% to Rs. 21.8 billion for 2QFY21 which defied expectations with performance exceeding the two preceding negative quarters, Chairman of Softlogic Holdings PLC, Ashok Pathirage said in the SHL’s interim financial account released to the Colombo stock exchange.

“However, Performance of the 1HFY21 was severely affected by the two-month lockdown in 1QFY21 with the six-month turnover at Rs. 36 Billion,” Pathirage stressed.

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 C19 abates, while consumers adapt themselves to new realities. With growing optimism of the Pfizer and Sputnik vaccines, economic confidence is progressively being normalized with pent-up consumer demand showing signs of rebounding.

There was a fundamental shift in how decisions were made during the lockdown. The management prioritized liquidity, rationalized 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 C19 Renaissance programme.

Primary contributors to Group topline for the cumulative period were Retail (52% contribution), Financial Services (22%), Healthcare Services (20%), IT (5%) followed by the non-core sectors — Automotive and Leisure & Property.

Gross Profit for the quarter was Rs.7.2 Bn while 1HFY21 reached Rs.11 Bn.

Pathirage noted that expectations of significant revenue growth following our 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 consequence of an increase in aggregate turnover ensuring better bottom-line contribution.

Other Operating Income, which comprise recurrent and non-recurrent income such as investment income, fee and commission generated from retail and financial services, increased 58% to Rs. 213 Mn 2QFY21 while 1HFY21 recorded a 27% growth in other operating income to Rs. 416 Mn.

Stringent cost control measures executed during this phase resulted in distribution and administrative expenses declining 14% and 10% to Rs. 784 Mn and Rs. 4 Bn respectively during the quarter.

Total operational expenses declined 11% to Rs. 4.8 Bn during the quarter. Cumulative distribution cost declined 20% to Rs. 1.4 Bn while a 5% deduction in administration costs to Rs. 8.1 Bn was noted during 1HFY21. Total operational cost for the cumulative period reduced 8% to Rs. 9.5 Bn.

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

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

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 Bn compared to Rs. 362 Mn last year. The cumulative period recorded a transfer of Rs. 2.4 Bn with the comparative period recording a transfer of Rs. 769 Mn. This position may partly reverse when interest rates resume its upward push.

Finance Income was Rs. 342 Mn during 2QFY21 while 1HFY21 witnessed a 31% increase to Rs. 1.2 Bn.

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,” he said.

Given challenging business conditions, the Group reported a net loss of Rs. 936 Mn for the quarter.

Retail

“As Sri Lanka came under lockdown during the first two months of the period and consumers continued to shun human contact, the retail sector was badly affected. The Fashion Retail and Quick Service Restaurant (QSR) underperformed while Consumer Electronics along with Mobile Phone Distribution performed strongly. Our Fashion Retailing and QSR outlets at the airport were adversely affected by its closure for the past so many months which continues to date notwithstanding the import restrictions applied on branded apparel which was recently relaxed. The precautionary measures to control the spread of the C19 and forex controls amidst zero tourism directly affected the supply, demand and daily operations of the retail sector. However, we noticed a resurgence in local consumer demand during 2QFY21 when community transmission was almost non-existent.” Pathirage said.

“A strategic decision to shift our sales channel to online (Omni-Channel) was made and we allocated more resources in those potential segments. GLOMARK, Softlogic’s supermarket chain, seized demand opportunities arising from irrational consumer stock-piling during and after the lockdown. Our online sales platform, which gained momentum during the period, is expected to increase its contribution to topline further with consumers getting accustomed to ordering online,”  he added

Retail sector’s quarterly revenue increased 9% to Rs. 11.2 Bn as Softlogic saw demand picking up as people returned to their normal lives during 2QFY21. Sector revenue for 1HFY21 remained at Rs. 18.8 Bn.

Sector operating profit for the quarter was Rs. 560 Mn. Quarterly sector EBITDA improved 20% to Rs.849 Mn.

The Consumer Electronics segment witnessed a store rationalization during recent times whereby the segment focused on enhancing its retail space in regions of greater sales potential.

With its latest Hyper market opened in Mount Lavinia (including Glomark, Softlogic Max and ODEL) a few days ago, the Consumer Electronics division now operates 197 stores across the island with a total retail space of 341,500 sq. ft.

The smart phone business recorded high sales volumes during the period triggered by the side effects of C19 which resulted in distant learning and working.

“ODEL group, which occupies 117,000 sq.ft, in One Galle Face mall and Colombo City Centre, faced challenges with no tourist shopping and diminished local purchasing during 1HFY21. A resumption of store activities during a brief period in 2QFY21 when there was no community transmission helped revive retail sector performance while online sales continues to be a promising factor. We also carried out various online/store offers to encourage consumer spending at ODEL. Aligning to GOSL’s imperatives, we increased focus on ODEL’s local manufacturing unit. The Mount Lavinia Hyper market is ODEL’s 33rd outlet to be in operations,” he said.

“As the outbreak began, our supermarket business, were deemed essential services and remained open for business with scheduled doorstep deliveries. Mount Lavinia outlet is the 8 th Glomark outlet that was opened last week. We expect to open Glomark outlets in Malabe, Colombo-7 and Negombo shortly,” he added.

He further noted that QSR segment also undertook doorstep deliveries but financial performance of this segment were subdued, although, the growth potential, when the operating environment normalizes, is tremendous.

Healthcare Services

Healthcare sector witnessed an immediate resurgence in revenue after the lockdown was lifted as patients sought treatments and surgeries which were hitherto postponed due to the lockdown.

Asiri Kandy’s performance has continuously exceeded expectations due to the latent demand of the Central and North-Eastern Provinces materialising. Quarterly segmental topline increased 17% to Rs. 4.5 Bn while the 1HFY21 revenues reported a topline of Rs. 7.1 Bn.

Sector revenue was dominated by Asiri Hospital Holdings (includes Asiri Kandy performance) taking up 38% followed by a 28% contribution from Central Hospital. Asiri Surgical Hospital made up 22% of the hospital revenues. Asiri Hospital Galle, Asiri Matara and Asiri AOI Cancer Centre together contributed 11% of Group topline.

“Asiri Hospital Galle is witnessing a renovation programme at its Out-Patient and Emergency units while Asiri Surgical Hospital is undergoing an expansion of short-stay beds along with a renovation at its Emergency Unit. Another important plan on the horizon is Asiri Medical Hospital’s collaboration with Nova IVI Fertility, India’s second largest IVF chain, to offer Sri Lankans a range of the very latest fertility treatments and services. We expect this facility to be operational by end of this financial year,” he said.

Segment operating profit increased 37% to Rs. 1 Bn during 2QFY21. Segment EBITDA reached Rs. 1.4 Bn during the quarter (up 32%) while cumulative growth was at Rs. 1.7 Bn. Quarterly sector profitability recorded a near two-fold growth to Rs. 610 Mn.

Financial Services

Financial Services witnessed a revenue growth of 20% to Rs. 4.7 Bn during the quarter while the cumulative revenue increased 2% to Rs. 7.8 Bn. Softlogic Life Insurance continued to be the main contributor to segmental performance. Sector’s quarterly operating profit recorded a 96% growth to Rs. 1.1 Bn.

Softlogic Life Insurance achieved a Gross Written Premiums growth of 42% to Rs. 4.5 Bn for the quarter while the cumulative period recorded a growth of 22% to Rs. 7.4 Bn. The company’s phenomenal pace of growth ranks the company as the third top life insurer in the country.

In September, the company signed a USD15 Mn Tier II Subordinated Debt transaction with Development Financial Institutions, the Finnish Fund for Industrial Cooperation Ltd (Finnfund) and the Norwegian Investment Fund for Developing Countries (Norfund).

This landmark transaction was after the Financial Reinsurance transaction of USD15 Mn with Münchener RückversicherungsGesellschaft – MunichRe, a provider of reinsurance, primary insurance, and insurance related risk solutions in the world, in March. The funds would be deployed in potential business areas of integrated growth to maximize returns.

Softlogic Finance PLC has been strengthening its capital base in order to comply with the new regulatory requirements of Capital Adequacy Ratio (CAR) set by CBSL. As the second phase of capital infusion, the company will raise a sum of Rs. 1.9 Bn to address this requirement partly.

Softlogic Finance PLC’s assets improved to Rs. 21.5 Bn as at 30th September 2020 whilst customer deposits were Rs. 16.5 Bn

Softlogic Capital PLC, the holding company of financial services sector, announced a rights issue to raise a sum of Rs. 1 Bn. The proceeds of this issue would be invested at Softlogic Finance PLC.

In September, Softlogic Capital PLC announced its interest to purchase the majority stake of Abans Finance PLC (49.67%) for Rs. 995 Mn. Abans Finance will be merged with Softlogic Finance PLC with Softlogic Finance being the dominant entity. This acquisition and merger are subject to regulatory approval.

Information Technology

The hardware and software business witnessed an uptick in demand with increased digital engagement. A surge in demand for laptops, PCs and other devices were triggered by online schooling and work from home concepts which spiked up IT sector sales for the period.

The IT business revenues was Rs. 1.1 Bn for the quarter while the 1HFY21 reported Rs. 1.7 Bn. Cumulative operating profit reached Rs. 175 Mn while the quarter’s operating profit was at Rs. 108 Mn. PAT for the six-month period was Rs. 99 Mn.

Automobile

Automobile sector revenue for the quarter increased 28% to Rs. 318.7 Mn while 1HFY21 reported a topline of Rs. 458 Mn.

The import restrictions on passenger vehicles have affected performance of this sector. The companies have been selling existing vehicle stocks correspondingly settling its import dues with banks thereby saving interest costs. Meanwhile, Spare parts and Servicing has gained momentum as focus has increased in this business line.

Leisure & Property

Leisure & Property witnessed a de-growth in topline during the period to Rs. 115 Mn although Centara Ceysands witnessed a recovery during 2QFY21 triggered by local travelers when community transmission was controlled.

The extended closure of the Colombo Airport, restricted movement and social activities have severely affected the performance of the hotels. Complete closure of the hotels during the lockdown/curfew dragged down sector performance during the period.

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 said.

Given the country’s C19 incident ratio being low, SL could regionally become one of the chief beneficiaries of stability and hope garnering 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 said.

“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,” he added.

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