Earnings Report /
Sri Lanka

Softlogic Holdings: Retail & Leisure recovery to slow down again; cut TP

  • Q4 retail and leisure to be dulled by Covid-19 concerns; equity raising plans still intact

  • Pressure on Healthcare earnings to ease from early FY 21 onwards

  • We revise our target price to LKR 15.00/share; Hold

Asia Securities
25 February 2020
Published byAsia Securities

We revise our sum-of-the-parts valuation based target price to LKR 15.00/share (previously LKR 17.50/share). Including a dividend of LKR 0.50/share, we derive a total return of +9.2%. HOLD. SHL reported a recurring net profit to equity shareholders of LKR 52mn in 3Q FY20, due to a stronger than expected earnings recovery in Retail supported by Healthcare, ICT and Financial Services. Looking forward, we expect some pressure on Retail and Leisure earnings again over the next 1-2 quarters due to concerns of Covid-19. On a positive note however, SHL is in the final stages of the process to raise capital for the Retail segment. SHL plans to utilise part of the funds to reduce the debt burden which in turn will reduce high interest expenses in the segment, easing some pressure on earnings.

4Q Retail to be dulled by Covid-19 concerns; equity raising plans still intact

While Retail saw a string topline and EBIT improvement, the segment reported a net loss of LKR 99mn as a result of higher interest expenses due to working capital borrowings. Odel and branded apparel stores saw a recovery towards the latter half of 3Q, while QSR, electronics and supermarkets performed well throughout the quarter. Looking at 4Q, we see earnings dampened again due to concerns from Covid-19 as footfall to apparel stores have seen a notable drop. On a positive note, SHL is in the final stages of the process to raise capital for the Retail segment. SHL plans to utilize part of the funds to reduce the debt burden which in turn will reduce high interest expenses in the segment.

Pressure on Healthcare earnings to ease from early FY21E onwards

ASIR reported a 3Q FY20 net profit to equity shareholders of LKR 496mn, up 24.5% YoY. Average group occupancies were at 62.0% vs ~54.0% in 3Q FY19. We note however, that Colombo hospital occupancies were aided by influenza related cases during the quarter which will not be repeated in 4Q. As per ASIR, Kandy hospital is now expected to breakeven by 1Q FY21E. Galle hospital rebranding efforts have already been completed in 4Q as well. As such, we expect pressure on ASIR earnings from higher operational expenses to start easing from 1Q FY21E onwards.

Leisure occupancies sees recovery in 3Q; yet 4Q could be hurt by Covid-19

The Leisure sector continued to generate losses into 3Q FY20 with the segment recording a net loss of LKR 215mn. Average occupancies came in at 68.0% compared to 71.0% in 3Q FY19. The relatively better occupancy numbers came from Movenpick, which was aided by corporate bookings during quarter. While we could have seen an improvement in arrivals in 4Q, we believe arrivals will again face challenges with the impact from Covid-19. Hence, we believe occupancies and eventually earnings could remain pressured till 2Q FY21E.

We revise our target price to LKR15.00/share; Hold

The stock is down 9.4% YTD and down 23.4% YoY. Given our expectations for pressure on Retail and Leisure earnings again due to concerns of Covid-19, our sum-of-the-parts valuation derives a fair value of LKR 16.72/share. Applying a holding company discount of 10.0%, we derive a TP of LKR 15.00/share. With a forecast dividend of LKR 0.50/share, we arrive at a TSR of +9.2%. HOLD.