Earnings Report /
Sri Lanka

Aitken Spence: Other business to offset leisure segment woes; downgrade to Hold for now

    Asia Securities
    15 August 2019
    Published by

    Including the impact from SLFRS 16, we revise our estimates and our target price to LKR51.20/share (previously LKR56.80). Including a dividend of LKR1.50, we derive a total return of +14.6%. SPEN reported a Q1 FY 20 recurring net profit to equity holders of LKR217mn (-17.1% yoy). While all other segments were able to offset the earnings loss from leisure, higher interest expenses from SLFRS 16 lead to the net income decline. Looking forward, we expect stable earnings in strategic investments, logistics and Maldives resorts to offset the negative impact from the Sri Lankan leisure business in FY 20e. However, due to SLFRS 16, we expect higher interest expenses. We note the interest expense impact will taper as the interest component is front loaded. Some relief should come from the sale of the Raafushi Island in Maldives, the proceeds from which we believe would be directed towards debt-repayment and refurbishments in FY 20/FY 21.

    Maldives key for leisure segment recovery; SLFRS 16 to weigh in FY 20

    For the quarter, the leisure segment reported a net loss of LKR512mn, as expected given the impact on the overall industry in Sri Lanka after the Easter attacks. Sri Lankan sector net revenues were down 26.6% yoy while the South Asian and Middle Eastern segment was up 9.0% yoy. As expected, expansion in Maldives helped offset the impact from Sri Lanka, leading to a better-than-expected EBIT result. AHUN is also expected to sell Raafushi Island in Maldives, and we expect proceeds from this to be directed towards debt-repayment and refurbishments in FY 20/FY 21. However, we remain cautious of AHUN’s medium-term cash position and earnings outlook amid planned refurbishment closures, which could result in downward revisions to our estimates.

    Maritime and logistics benefit from strong trade volumes

    Segment net earnings were up 27.4% yoy, driven by a 21.8% yoy growth in revenues and a 1.8ppts expansion in EBIT margins. Following from strong earnings in Q4 FY 19, we believe SPEN benefited from growth in external trade and transshipment traffic. In addition, we believe SPEN’s port management business in Fiji also contributed to earnings.

    Power generation continues to drive strategic investment segment earnings

    Segment net earnings were up 18.5% yoy in Q1, driven by its power generation business, in particular Ace Power Embilipitiya. With an ongoing drought in the Southern region, we believe the Government will continue to purchase power from SPEN. With more stable utilisation of the thermal power plants, segment earnings should remain less volatile compared to FY 19, and cushion the impact from declining plantation earnings and lower demand from FMCG clients in printing & packaging, driven by low consumer spending in the country.

    Revise target price to LKR 51.20/share and recommendation to Hold

    The stock has dropped 3.8% YTD and 2.5% yoy and is trading at 5.7x our FY 20 earnings. With revisions to our estimates due to the impact from SLFRS 16, our SOTP valuation-based target price moves to LKR51.20/share (previously LKR 56.80/share). Including a divined of LKR 1.50/share, we derive a total return of +14.6%. As such, we revise our rating to Hold from Buy.