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CEO’s Review Q1 2018/2019 : Hemas Group recorded a revenue of Rs.13.5Bn, a year-on year growth of 21.3%, led by higher contributions in our consumer and healthcare sectors

Hemas Holdings PLC (HHL) recorded a consolidated revenue of Rs.13.5Bn for the first quarter ended June 30, 2018, a year-on-year (YoY) growth of 21.3%, led by higher contributions in our consumer and healthcare sectors. The Group operating profit at Rs.895.7Mn in the first quarter of the financial year is an increase of 3.5% over the previous financial year. Operating profit growth has been impacted by losses at N*Able, our IT technology solutions business, coupled with a weaker macroeconomic environment with sluggish consumer demand as disposable incomes have been dampened by rising costs from Rupee depreciation and increased taxes. The profit attributable to equity holders of the parent at Rs.554.3Mn is a decrease of 20.2% in the corresponding period of the previous financial year. This is due to reduced interest income post utilisation of cash reserves to acquire Atlas in January 2018 and increased interest costs relating to higher working capital due to strong growth in Pharmaceutical Distribution and the loan financing for our new logistics park. All three of these investments should contribute to earnings from Q3. Excluding the first quarter performance of Atlas, HHL recorded a revenue and an operating profit growth of 10.9% and 1.5% correspondingly.

Our consumer business revenue stood at Rs.5.4Bn for the three months ending June 30, 2018, indicating a YoY growth of 36.2%. Growth in the consumer sector excluding Atlas stands at 6.8%. Operating profit of Rs.569.3Mn grew by 8.1% during the quarter. Market conditions domestically remain depressed with most market commentaries indicating low or negative growth in most major FMCG categories. Against this backdrop, our business has performed well.  Our Bangladesh business experienced revenue growth of 6.1% following the Kumarika relaunch last December. However, profitability still remains a challenge due to heavy marketing spend post launch.  Atlas performance has been on track in Q1 with revenues up by 8.8% over last year and break even in operating profits in line with its normal seasonal performance trend.

Consolidated healthcare sector revenue for the first three months under review stood at Rs.6.4Bn, a YoY increase of 24.7% whilst operating profit and earnings indicated a decline of 2.0% and 6.0%. Hemas pharmaceutical distribution operation registered strong revenue growth. However, managing the impact of price regulation and devaluations in the wake of depreciation of the rupee was a key operational challenge. Hemas Hospitals achieved an overall occupancy of 60%, recording a satisfactory performance. Revenues and profitability were flat compared to Q1 last year when occupancy levels were higher due to the dengue epidemic.  Morison posted a revenue of Rs.844.3Mn and operating profit of Rs.83.0Mn for the three months ended June 30, 2018. Morison’s underlying revenue, excluding Alcon distribution business, which we exited during the latter part of FY2017/18, was 4.2% whilst the earnings recorded a decline of 31.5% primarily due to increased operating costs.

Meanwhile, Hemas Leisure, Travel and Aviation business recorded a total revenue of Rs.792.4Mn, reflecting a growth of 16.2% for the three months under consideration. Overall, the country experienced an upward trend in tourist arrivals during the quarter. Serendib Hotels reported a 11.0% growth in revenue due to rise in average room rates and occupancies across the group. Anantara Peace Haven Tangalle too had a satisfactory performance during the year. Furthermore, Travel and Aviation segment indicated a growth in revenue of 17.1%. Overall the sector reduced operating losses by 30.0%, reporting a loss of Rs.140.2Mn despite the exchange losses incurred at Anantara Peace Haven Tangalle. The improvement is mainly attributable to the rebound in the travel and aviation segment.

Hemas Logistics and Maritime recorded revenue growth of 15.4% over last year with revenues of Rs.718.3Mn. During this period, the Port of Colombo witnessed a YoY growth of 15%.  Increased contributions from 3PL operations improved the profitability of the segment. Construction of the new logistics park facility is now almost finalized with our first customer moving into our new 3PL warehouse in early August.

Our technology business, N*Able got the year off to a slower start with revenue decline of 68.5% due to delays in project completion during the quarter in contrast to its strong start in FY2017/18.

Overall we have had a satisfactory start to the year in a difficult macro environment. Solid performance in our core Sri Lanka Consumer businesses supported by improvements in Leisure and Travel sector performance and the seasonality effect of Atlas, position us well to improve operating profit growth in the coming quarters of the financial year.

Steven Enderby

Chief Executive Officer