CEO’s Review Q3 2018/2019 : Hemas reports an operating profit growth of 46% as Atlas acquisition delivers on its peak season

The Group reported a consolidated revenue of Rs.48.0Bn for the nine months ended December 31, 2018, indicating a Year-over-Year (YoY) growth of 37.8%, primarily driven by our acquisition of Atlas. Group operating profit stood at Rs.4.3Bn, a growth of 45.8% over the previous financial year. The profit attributable to equity holders of the parent at Rs.2.5Bn is a YoY growth of 19.2%. HHL delivered year-to-date organic revenue growth of 15.7% and a recurring organic operating profit growth of 2.6%, excluding Atlas performance and the disposal gain arising from the Galle Hospital divestment. Organic profitability growth remains as a challenge due to unprecedented rupee depreciation coupled with price controls at Pharmaceutical distribution and Morison. Unrealised forex losses arising from the translation of foreign currency denominated loan at our Anantara Peace Haven Tangalle hotel made a negative contribution to operating profit of Rs.174Mn, 5.7% of recurring operating profit.

Overall, the macro environment was challenging during the quarter with significant currency depreciation impacting profitability and political uncertainty eroding consumer and business confidence. HHL achieved higher revenues and profit growth primarily due to the solid performance at Atlas, during its critical Q3 peak season. The quarter recorded a revenue and operating profit of Rs.18.0Bn and Rs.1.9Bn, a YoY growth of 46.8% and 92.6% correspondingly.

During the period under review, our consumer business recorded a revenue of Rs.20.3Bn, indicating a YoY growth of 73.0%. Operating profit of Rs.2.8Bn grew by 100.1% during the nine months ended December 31, 2018 compared to last year. Over 85.0% of the revenue growth was driven by Atlas, which performed well during its back to school season. We have seen sustained growth momentum in our domestic personal care segment year-to-date with many of our core personal care categories recording market share gains.  Further, we are also seeing the benefits of our profit improvement programme initiated last year improving operating margins. The performance in our Bangladesh personal care business is now stabilising with year-to-date revenues recording a modest growth of 4.4%. Profit growth continues to be a challenge due to new promotional campaigns to combat competition. Atlas has recorded a solid performance during Q3 with year-to-date revenues up by 13.0% over the same period last year. Atlas market share increased in its core categories and has also seen growth in its new back to school segment comprising of school bags.

Healthcare sector achieved a consolidated revenue of Rs.20.5Bn, a YoY increase of 23.6% while operating profit and earnings indicated a decline of 10.3% and 13.8% respectively. Hemas pharmaceutical distribution operation registered strong revenue growth stemming from the latest addition of new principals last year. However, the impact of price regulation and significant currency depreciation continues to compress margins. Additionally, the increase in interest costs from working capital funding added to pressure on earnings. Hemas Hospitals achieved an average occupancy of 57% across the two hospitals, Wattala and Thalawathugoda. Hospitals experienced a surge in channeling, surgical and inpatient volumes in the first nine months. Both EBITDA and EBIT margins have continuously improved from FY15/16 to date as a result of increasing market share and lean projects carried out at hospitals. During the quarter, hospital group divested the Galle hospital so that we can focus management on transforming Thalawathugoda and Wattala into super-specialty medical and healthcare. Group recorded a disposal gain of Rs.73.6Mn from the divestment. Our pharmaceutical manufacturing business, Morison posted a revenue of Rs.2.5Bn and operating profit of Rs.186.4Mn for the nine months ended December 31, 2018. Morison’s underlying revenue growth, excluding Alcon distribution business, which we exited during the latter part of FY2017/18, was 7.0%. Operating profit has been impacted by weaker performance in our OTC Pharma segment which has resulted in earnings recording a decline of 46.6% excluding the loss of Alcon distribution agency.

Hemas Leisure, Travel and Aviation (LTA) sector achieved revenues of Rs.3.1Bn, reflecting a growth of 19.3% for the nine months under consideration. Serendib Hotels recorded a strong quarter, with an average occupancy reaching 86% across its own managed hotels, 5% growth over same quarter last year. Similarly, profitability improved during the quarter over last year due to exchange gains and stringent cost controls coupled with increases in ARRs at Dolphin and Sigiriya. During the review period, Anantara Peace Haven Tangalle improved performance with occupancy at 53% although the exchange losses arising from the foreign currency loan was a drag on group profitability. Travel and Aviation grew steadily through the year and recorded a growth in revenue of 25.1%, driven by newly secured agents and contributed to a significant improvement in profitability. However, overall sector profitability remained a challenge, declining by 39.1%, due to the partial closure of Avani Bentota in Q2 for soft refurbishment, coupled with exchange losses attributed to forex loan at Anantara.

Hemas Logistics and Maritime sector recorded a revenue growth of 6.3% over last year with revenues of Rs.2.2Bn. 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. Year-to-date profitability of the maritime sector increased as a result. However, Q3 experienced a sudden drop in seasonal import cargo resulting from the rupee depreciation which impacted profitability. Our logistics business experienced a modest growth in 3PL and warehousing segments. The new logistics park facility is now up and running with newly secured customers moving in from August.

Our technology business, N*able reported significant growth in the third quarter with increased revenues over last year by 81.1%. However, profitability continues to be a challenge due to previously recorded losses during the first half of the financial year.

Our balance sheet has a significant increase in trade debtors primarily due to increased receivables from government and the seasonal impact of Atlas sales in Q3.

The group has performed robustly during a period of unprecedented currency devaluation and political uncertainty. We anticipate a challenging last quarter for our businesses as the full impact of devaluation hits cost structures. However, we continue to work hard to sustain our strong growth in the final quarter of the financial year.

Steven Enderby

Chief Executive Officer

February 07, 2019