With continued expectations of strong Healthcare and Consumer earnings, we maintain our sum-of-the-parts valuation based TP at LKR 98.50/share. Including a dividend of LKR 1.50/share for FY21E, we derive a total return of +37.9% and maintain our BUY rating. The stock is down ~12.0% YoY and is trading ~35.0% below its 3-yr trading average, providing an apt entry point. HEMS reported a 3Q FY20 net profit of LKR 975mn beating our estimates, and excluding a one-off item in 3Q FY19, earnings were up 2.4% YoY. The result was led by the earnings recovery at hospitals, MORI pharma and Atlas in particular. The local FMCG business has now recovered to the pre-April 2019 levels and we expect further improvement in volumes amidst salary revisions, price reductions and improved sentiments heading into the general elections. Looking forward, recovery in Bangladeshi operations, Mobility and Leisure will be key. In addition, we note that should the proposed corporate tax changes pass through, lower taxes at hospitals and FMCG manufacturing will add LKR 0.55-0.60 to our FY21E EPS estimate.
Earnings recovery in hospitals and MORI aids Healthcare bottom-line
Segment net profits came in at LKR 395mn, up 38.6% YoY, driven mainly by earnings improvement at hospitals and MORI. Post price increases in May 2019, pharma distribution continues to contribute to margin improvement. Looking forward, we estimate segment profitability to continue to improve due to 1) growth in hospital earnings and MORI operations, 2) margin recovery at pharma distribution due to price increases and 3) a relatively stable currency vs 2019. This will be offset to some extent by expenses for the ‘Route to market’ project, higher interest expenses from the new MORI plant, and startup losses.
Local home and personal care demand recovery has begun
The Consumer segment reported a net profit of LKR 773mn in 3Q FY20, down ~21.0% YoY. The quarter saw the local FMCG business run at prior-year sales levels while Atlas came in above 3Q19 results. Over the next few quarters, we expect to see a stronger growth in local FMCG volumes amidst salary revisions, price reductions and improved sentiments heading into the general elections. However, some of these gains will be offset by a slow earnings recovery in the Bangladeshi operations, and investments in new product launches.
Leisure recovery sees another setback amidst COVID-19 threat
Leisure reported a net profit of LKR 3mn compared to LKR 48mn in 3Q FY19, with SHOT recording an average occupancy of 73.0% vs 86.0% in 3Q FY19. With arrivals slowing down amidst the threat of the COVID-19 virus, we expect segment recovery to be delayed to 2Q FY21E. Till then, we expect SHOT to offer steep discounts in order to drive occupancies.
We maintain our BUY rating and target price at LKR 98.50/share
The stock is down 9.4% YTD and down 11.7% YoY while trading at 12.0x our FY21E earnings, ~35.0% below its 3-yr trading average, providing an apt entry point. We maintain our sum-of-the-parts valuation based target price at LKR 98.50/share. Including a dividend of LKR 1.50/share for FY21E, we derive a total return of +37.9%. BUY.