Equity Analysis /
Sri Lanka

Hemas Holdings: Leisure and consumers to dampen FY 20 earnings; downgrade to Hold

    Asia Securities
    6 June 2019
    Published by

    HHL reported Q4 FY 19 recurring net profit to equity holders of LKR723mn (+31.3% yoy) with revenues up 6.8% yoy and EBIT margins of 6.9% (-1.1ppts). Top line growth came from consumer and healthcare, while margins across the Group were impacted by: 1) results at Atlas, 2) higher opex in domestic H&PC, 3) low profitability in Bangladesh, 4) price regulations in Pharma, and 5) higher opex at Mobility. While we expect more stable margins in healthcare in FY 20e due to drug price increases, the negative impact on consumer and leisure businesses from April events result in downward revisions to our estimates. Hence, our SOTP-based target price moves to LKR70.50/share (previously LKR123.00/share). Including a forecast DPS of LKR1.50, we expect a TSR of +5.9%. As such, we revise our rating to Hold from Buy.

    Drug price increases to help stabilise profitability in healthcare in FY 20. Healthcare revenues were up 11.8% yoy while EBIT was up 9.4% yoy in Q4. EBIT margins contracted, albeit at a slower pace than before. In end-May, the government increased prices of 48 drugs which were under price control since October 2016. We expect the segment to record a margin recovery in FY 20 from: 1) the recent price increases, coupled with a less volatile currency, 2) stronger margins at hospitals due to growth in surgical volumes, and 3) MORI business normalising post-Alcon, 

    Consumer revenues were up by 10.4% yoy while the segment reported an operating loss of LKR 37mn compared with a profit in Q4 FY 18. The loss was mainly from Atlas and from higher marketing expenses. Looking ahead, the key concern is the slowdown in consumer spending after the terror attacks in April. While there was panic buying then, reordering levels, especially from the general trade, has slowed down as consumers prolong replenishment. Also, we estimate income levels of 38.0% of the working population across leisure, consumer, agri and transport sectors to be pressured leading to a cautious consumer environment in FY 20e.

    Segment revenues up by 19.5% yoy while operating profits declined by 4.7% yoy. Serendib Group’s average occupancy in Q4 was flat at 91.0% yoy while for FY 19 it was up 4.0ppts to 79.0%. However, the recovery will now be set back by the expected downturn in arrivals to the country post the terror attacks. Arrivals were down 60.0% yoy during the initial weeks, and we forecast arrivals to be down c27.0% yoy in 2019. While many countries recently downgraded their warnings, any risk of further communal violence and elections being held in December will create caution for travelers.

    HHL is down 20.6% YTD and down 42.7% yoy and is trading at 16.0x our FY 20e earnings. With downward revisions to our estimates, our SOTP-based TP goes to LKR 70.50/share (previously LKR 123.00). Including a forecast DPS of LKR1.50, we derive TSR +5.9%. Hence, we revise our rating to hold from Buy.