With FY 20e earnings depressed due to a number of external reasons, we value the stock on our FY 21e earnings, which we believe shows normalised earnings of the group. As such, including revisions to our estimates, our sum-of-the-parts valuation based target price goes up to LKR83.80/share (previously LKR70.50). Including a dividend of LKR1.50/share, we derive a total return of +13.6%. Hold. Excluding one-off items, HEMS reported a net loss to equity holders of LKR486mn for the quarter stemming from low profitability across all segments. While all segments are seeing a recovery, albeit at a slow pace, we believe FY 20e results in general will be subdued. We expect a meaningful recovery to come through only in FY 21e. Despite the short-term headwinds currently at hand, we believe the group’s fundamental growth story remains intact. As a result of the stock trading at discounted valuations, we believe it is an apt time to enter the stock for an investor looking for long-term returns.
Pharma distribution to cushion impact from low hospital and MORI earnings
Excluding one-off expenses, segment net profits came in at LKR234mn, down 31.0% yoy, mainly driven by hospitals and MORI. Looking at FY 20e, we expect the pharma distribution business to drive top line growth as a result of the recent price increases. However, segment profitability will be somewhat pressured due to 1) low profitability at hospitals and MORI, 2) additional expenses for the ‘Route to market’ project, 3) higher interest expenses from loans for working capital and MORI’s new plant, and 4) startup losses.
Consumer recovery slowly begins post-April events; spending recovery in H2
The consumer segment reported a net profit of LKR26mn in Q1 FY 20 (excluding one-off items), down from LKR 468mn in Q1 FY 19. We expect the FMCG business to be pressured in FY 20e due to 1) low domestic H&PC and MORI volumes as consumers prolong replenishment and remain cautious of spending on non-discretionary items. On profitability, a higher marketing spend at both domestic and Bangladeshi markets will add to margin pressure. While a number of consumer-friendly policies will be implemented from July 2019 onwards to kick start consumer spending in mid-FY 20, we believe meaningful recovery of Consumer earnings will come through only in FY 21e.
Leisure net loss as expected; winter bookings beginning to look promising
Segment net losses came in at LKR 85mn in Q1 with SHOT recording an average occupancy of 42.0%. Forward bookings for the winter season are beginning to pickup at a steady level, however, still lower than the previous winter season. Our key concern for FY 20e is any risk of further communal violence in the country with elections expected to be held during December 2019, which could deter travelers.
We revise our TP to LKR 83.80/share and maintain our Hold rating
With FY 20e earnings depressed due to a number of external reasons, we value the stock on our FY 21e earnings. As such, our sum-of-the-parts valuation based target price goes up to LKR83.80/share (previously LKR70.50). Including a dividend of LKR 1.50/share, we derive a total return of +13.6%. Hold.