Sri Lanka's Hemas Holdings profitability seen improving: Fitch

ECONOMYNEXT - Fitch Ratings says Sri Lanka's Hemas Holdings profitability is expected to improve after earnings fell 20 percent in the June 2018 quarter due to a temporary dip in sales at Atlas, a stationery company it acquired earlier this year.

"The weakness in diversified conglomerate Hemas Holdings PLC's (Hemas, AA-(lka)/Stable) first-quarter financial results is temporary, and is mainly due to the cash flow seasonality of its new school stationary business," Fitch Ratings in a statement Tuesday.

The group with interests in healthcare, consumer goods and logistics acquired Atlas, a statationery manufacturer and distributor, earlier this year for 5.6 billion rupees.



The agency expects Hemas' performance to improve during the remainder of fiscal year to end 31 March 2019.

The stationary business tends to see a significant pickup in demand towards the later part of the calendar year as students return to school after the holidays, it said.



"We have maintained our expectations that the company will achieve revenue growth of 21 percent and EBITDAR margin of 13% for the full year," the ratings agency said.

Profits fell 20.2 percent from a year earlier to 554.3 million rupees in the June 2018 quarter.

"The decline in earnings is due to reduced interest income post utilisation of cash reserves to acquire stationery company 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," Chief Executive Steven Enderby told shareholders.

Earnings were 96 cents a share in the quarter, interim results filed with the Colombo Stock Exchange showed. The share last traded at 98.30 rupees.

Hemas was trading 4 rupees lower at 90 rupees on Tuesday.

Fitch Ratings' full statement:

The weakness in Sri Lanka-based diversified conglomerate Hemas Holdings PLC's (Hemas, AA-(lka)/Stable) first-quarter financial results is temporary, and is mainly due to the cash flow seasonality of its new school stationary business, Fitch Ratings says.

The agency expects Hemas' performance to improve during the remainder of fiscal year to end 31 March 2019 (FY19), and we have therefore maintained our expectations that the company will achieve revenue growth of 21% and EBITDAR margin of 13% for the full year.

Hemas acquired its school stationary business - Atlas Axillia (Private) Limited (Atlas) - in the last quarter of FY18. The stationary business tends to see a significant pickup in demand towards the later part of the calendar year as students return to school after the holidays.

Consequently Hemas' stationary segment was only able to break even on an operating profit basis in the quarter ended 30 June 2018, compared with Fitch's expectation that this segment will contribute around LKR1.2 billion to Hemas' FY19 EBIT, which is around 25% of the group's consolidated operating profit.

Operational challenges in Hemas' fast-moving consumer goods (FMCG) business in Bangladesh also played a part in the company's underperformance in 1QFY19, although we believe that earnings from this segment should also improve.

We expect the Bangladesh operation to benefit from Hemas' investments in the distribution network and product re-launches in the past few months. The segment's top line already reflects some of these benefits, rising 6% yoy in 1QFY19, compared with a 10% decline in FY18, when the performance was weighed down by issues with its distribution channels and intensifying competition.

As a result of the above, Hemas' EBITDAR margin fell by 140 bp to 10.2% in 1QFY19 from 11.6% in 1Q18, and compared with our FY19 forecast of 13%.

The company's lease-adjusted gross debt/ trailing 12 month-EBITDAR weakened to 2.0x at end-1QFY19, which is the upper limit for its 'AA-(lka)' National Long-term Rating, from 1.7x at FYE18, but we maintain our view that leverage will recover to 1.3x by FYE19.

The depreciation of the Sri Lankan rupee and regulated pricing in Hemas' pharmaceutical distribution business may threaten the group's profitability in FY19 unless industry stakeholders are able to negotiate a better cost pass-through mechanism with the regulator.

However, this could be partly offset by continued solid performance in the logistics and maritime segment and recovery in the hotel sector, in which occupancy levels and yields show signs of improving. (COLOMBO, 21 August 2018)