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CEO’s Review Q2 2018/2019 : Hemas Holdings PLC’s operating profit up by 22.5%

The Group recorded a consolidated revenue of Rs.30.0Bn for the first six months ended September 30, 2018, a year-on-year (YoY) growth of 33.0% driven by our recent acquisition of Atlas and our healthcare sector. Group operating profit stood at Rs.2.4Bn, a growth of 22.5% over the previous financial year. Operating profit growth resulted from stronger performance in our home and personal care segment in Sri Lanka and the contribution by Atlas. Despite aggressive growth in revenue, we see a lag in operating profit primarily due to weaker performance at Morisons and N*able and margin compression at pharmaceutical distribution. The profit attributable to equity holders of the parent at Rs.1.5Bn is a YoY growth of 4.3%. The lower growth in earnings is due to increased net interest expense post utilisation of cash reserves to acquire Atlas in January 2018, higher working capital due to strong revenue growth in pharmaceutical distribution and the loan financing for our new logistics park. Excluding the first six months performance of Atlas, HHL recorded a consolidated revenue and operating profit growth of 16.1% and 2.3% correspondingly.

During the period under review, our consumer business recorded a revenue of Rs.12.2Bn, indicating a YoY growth of 57.7%. Revenue growth in the consumer sector excluding Atlas stood at 8.2%. Operating profit of Rs.1.5Bn grew by 54.3% during the first six months compared to last year. The Sri Lankan home and personal care market continues to be challenging, however we experienced growth from brand relaunches in our core personal care categories. Further, we are also seeing the benefits of our profit improvement programme initiated last year improving operating margins. Our Bangladesh business still continues to experience challenges where intense competition in a weak market environment has resulted in revenue growth of only 1.4% during the first six months of the financial year 2018-19. Profitability remains a challenge due to heavy marketing spend. Atlas performance has been on track in Q2 with revenues up by 12.4% over the same period last year.

Consolidated healthcare sector revenue for the first six months under review stood at Rs.13.4Bn, a YoY increase of 27.3% while operating profit and earnings indicated a decline of 8.3% and 12.6%. Hemas pharmaceutical distribution operation registered strong revenue growth. However, the impact of price regulation and significant currency depreciation continues to compress margins. Hemas Hospitals achieved an overall occupancy of 57%, with revenues and profitability improving significantly during Q2 compared to the first three months of the financial year and over last year.  The key driver of growth is the continued enhancement in surgical capability.  Our pharmaceutical manufacturing business, Morison posted a revenue of Rs.1.7Bn and operating profit of Rs.162.7Mn for the six months ended September 30, 2018. Morison’s underlying revenue, excluding Alcon distribution business, which we exited during the latter part of FY2017/18, was 1.8%. Operating profit has been impacted by poor performance in our OTC Pharma segment which has resulted in earnings recording a decline of 37.5% excluding Alcon.

Hemas Leisure, Travel and Aviation (LTA) interests achieved revenues of Rs.1.8Bn, reflecting a growth of 16.7% for the six months under consideration. Broader industry fundamentals remain favorable with tourist arrivals up during the year. Serendib Hotels reported a 10.2% growth in revenue due to an increase in average room rates and average occupancies across the group reaching 69% against 64% reported last year.  During the review period, Anantara Peace Haven Tangalle had a satisfactory performance in occupancy. Travel and Aviation segment indicated a growth in revenue of 22.1% driven by newly secured agents under inbound travel. However, overall, profitability remained a challenge, declining by 12.5%, owing to ongoing soft refurbishment at Avani Bentota and Hotel Sigiriya coupled with exchange losses attributed to forex loan financing at Anantara.

Hemas Logistics and Maritime recorded a revenue growth of 10.9% over last year with revenues of Rs.1.4Bn. During the period in review, Port of Colombo was ranked as the world’s fastest growing port with a growth of 15.6% in container handling during the first half of 2018, fueled by 20% growth in transshipment volumes. Profitability of the maritime sector increased as a result. Our logistics business saw 3PL and warehousing segments make a notable contribution to profitability. The new logistics park facility is now up and running with newly secured customers moving in August. However, with the hike in fuel prices there was pressure on operating margins.

Our technology business, N*able witnessed a gradual improvement in the second quarter with increased revenues over last year by 31.7% However, a significant drop in revenue due to delays in project completion during the first quarter continues to have an impact on year to date profitability.

While we have grown revenues strongly in the first six months we have had mixed performance in the profitability in our core sectors. The business environment remains challenging with significant and ongoing currency devaluation through September and October and political uncertainty impacting the domestic economy the source of our major business activity.

Steven Enderby

Chief Executive Officer