CEO’s Review Q2 2017/2018: Hemas Achieves Revenue Growth of 11.6%

Hemas Holdings PLC (HHL) and its subsidiaries achieved a consolidated revenue of Rs.23.0Bn; a year-on-year (YoY) growth of 11.6% and profit attributable to equity holders of Rs.1.4Bn, a decline of 8.0% for the six months ending September 30, 2017. Year to date operating profit reached Rs.1.96Bn; a YoY decline of 5.4%. Despite consolidated revenue growing aided by higher turnover from the healthcare and mobility sectors, group earnings indicate a decline due to our Bangladesh personal care business, pharmaceutical distribution, leisure and travel all facing margin challenges. Further cost escalations were experienced as we invest in expanding our consumer portfolio and build new pharmaceutical and logistics facilities. Domestic consumer demand remains soft impacted by higher headline inflation, drought conditions persisting in parts of the country, and headwinds from currency fluctuations and VAT increase.

The home and personal care sector revenue of Rs.8.1Bn for the first six months ending September 30, 2017 indicates a decline of 2.6% over the previous financial year. Operating profits were Rs.968.7Mn, 16.4% YoY decline. Despite the challenging domestic macro environment, our Sri Lanka business reported steady growth in key personal care categories with market shares being maintained across most major categories. The decline in operational performance has been impacted by our Bangladesh operations where bad weather conditions during Q1, the restructuring of our sales and distribution network, increased competition and the expansion of our portfolio resulted in lower margins. We are now seeing signs of increased stability in our revamped sales and distribution network in Bangladesh and have introduced the first ever marbleised herbal-beauty soap “Kumarika Herbal Soap” in Bangladesh during August 2017. With regard to new markets, we incurred start-up losses in West Bengal as we commenced operations.

During the six months under review, our consolidated healthcare sector registered a revenue of Rs.10.6Bn, a YoY increase of 16.5% whilst operating profit and PAT grew at 8.0% and 18.0%. Our healthcare sector was the main contributor to Group growth year to date. Hemas pharmaceutical distribution operation registered strong revenue growth, increasing its market leadership position. However, profitability in the industry remains challenging due to price regulation and devaluations in the wake of depreciation of the rupee. As a result, pharmaceutical distribution profitability was negatively impacted. In order to drive future growth, Hemas Pharmaceuticals ventured into regional markets for the first time with its entry into Myanmar during Q2.

Our Hospitals have operated at high occupancy levels during the first six months of the financial year. In part, this has been due to the dengue epidemic. We are also seeing growth from increased surgeries as we continue to expand our services, push to higher levels of clinical excellence and generate improved performance from investments made in the sector.

We have now renamed and rebranded J.L. Morison Son & Jones (Ceylon) PLC (JLM) to Morison PLC. The company launched its new identity with the unveiling of its new logo, signifying the company’s strong focus on being a leader in technical excellence and innovation. Morison’s posted a revenue of Rs.1.9Bn and operating profit Rs.282.7Mn for this interim period. Morison’s underlying revenue and operating profit growth, excluding Agro, which we exited during the latter part of FY17, was 4.0% and 28.0% respectively. Growth against the previous year was primarily driven by pharma manufacturing and pharma distribution. Construction of the new manufacturing facility is ongoing.

Our Leisure, Travel and Aviation business recorded a total revenue of Rs.1.6Bn, reflecting a decline of 14.7% YoY for the six months under consideration. During Q1, overall arrivals to Sri Lanka witnessed a moderation in growth as a result of the negative publicity and travel warnings due to flooding and landslides in May. Serendib Hotels reported a 5.6% fall in revenue due to decline in occupancies and average room rates primarily due to increase in room inventory. During the second quarter, Serendib Group announced the acquisition of a 51.15% stake of the ‘Lantern’ Group for an investment of Rs.309.5Mn. This is a significant milestone in Serendib Leisure’s quest to grow in boutique luxury villas in Sri Lanka, enabling us to provide superior and diverse hospitality options to the discerning traveler. Travel and Aviation segment indicated a growth in revenue of 1.3%. Overall profitability of this segment continued to be below expectations stemming from travels and hotels. Anantara Peace Haven Tangalle performed comparatively better than last year, however losses incurred year-to-date has impacted Group profitability.

Hemas Logistics and Maritime recorded revenue growth of 54.0% over last year with revenues of Rs.1.3Bn. This growth has been driven by both our agencies and logistics. During the year, our logistics joint venture with GAC and Maclaren’s has shown improved results, mainly driven by the 3PL operations. Construction of our new logistics and container yard facility is ongoing and on track to complete by early FY 2019.

Our technology business, N*Able generated strong revenue growth due to the successful completion of three major projects during the quarter in contrast to its weak start in FY17.

The overall business environment appears challenging for the second half of the year. We have developed plans to drive improved profitability and address areas of weaker performance identified during the period to September 30, 2017. The team will continue to push hard to drive growth and efficiently manage emerging risks and challenges.

Steven Enderby
Chief Executive Officer

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