Earnings Report /
Sri Lanka

Aitken Spence: Leisure recovery prolonged; turnaround in 2H FY21E

    Asia Securities
    19 February 2020
    Published byAsia Securities

    With revisions to the Leisure sector estimates due to the impact from refurbishments in Maldives and Covid-19, our sum-of the parts valuation-based target price falls to LKR 52.00/share (previously LKR 60.00/share). Including a dividend of LKR 1.50/share, we derive a total return of +27.1%. BUY.  See our full report for our full valuation and financials.

    SPEN reported a 3Q FY20 recurring net profit to equity shareholders of LKR 787mn (down 37.9% YoY), below our estimates. Net earnings declined as a result of lower earnings at Leisure as expected, and Strategic Investments. In addition, higher interest expenses due to SLFRS 16 and high borrowings at AHUN also added to the group earnings decline.

    Looking at 4Q FY20E and 1H FY21E, we expect stable earnings at Logistics, yet remain cautious of earnings from 1) Leisure given the impact of Covid-19 and refurbishments in Maldives and 2) low earnings in Strategic Investments due to the investments in the printing business in Fiji. We expect earnings recovery to begin from 2H FY21E.

    Covid-19 affects Leisure in the short-run; long-term upside potential intact

    For the quarter, the segment reported a net profit of LKR 226mn compared to LKR 1.0bn in 3Q FY19 as expected given the impact on the overall industry post Easter attacks. Maldives offset SL woes with Heritance Aarah entering the books with ARRs of USD 1,000-2,000/night. Looking forward, we expect the impact of Covid-19 to result in lower occupancies and ARRs across both regions. However, in the long-run, once the ongoing refurbishments in the Maldives are completed (100 rooms), we expect it to have an upside to earnings, similar to that from Heritance Aarah.

    Maritime and logistics segment continues to aid overall group earnings 

    Segment net earnings were up 31.1% YoY. While revenues were down 6.7% YoY, EBIT improved by 13.1% YoY. The integrated logistics and maritime segments continued to perform well while the freight segment underperformed during the quarter as a result of strong competition in the space and lower yields. In addition, SPEN’s bottom-line also benefited from its port management business in Fiji, which continues to contribute positively to the group.

    Strategic Inv. to see pressure from investments in Fiji in the short-run

    Segment net earnings were down 87.2% YoY with net revenues down 16.2% YoY while EBIT declined by 64.7% YoY. Segment earnings for the quarter were hurt by investments in the printing business in Fiji, which is still ramping up. Ace Power Embilipitiya however, performed well and has received payments from the government on time on a continuous basis. On the plantation side, Elipitiya saw a net profit growth for the quarter as well. In the short-run, we expect segment earnings to be pressured till the Fiji investments gain traction.

    We lower our target price to LKR 52.00/share but maintain our BUY rating

    The stock has dropped ~10.0% YTD and YoY and is trading at 7.6x our FY21E earnings. With revisions to our Leisure sector earnings, our sum-of-the-parts valuation-based target price goes to LKR 52.00/share (previously LKR 60.00/share). Including a divined of LKR 1.50/share, we derive a total return of +27.1%. BUY.