Hemas Holdings PLC (HHL)

Transcription

1 4-Jan-16 4-Feb-16 4-Mar-16 4-Apr-16 4-May-16 4-Jun-16 4-Jul-16 4-Aug-16 4-Sep-16 Price (LKR) 4-Jan-16 4-Feb-16 4-Mar-16 4-Apr-16 4-May-16 4-Jun-16 4-Jul-16 4-Aug-16 4-Sep-16 Price (LKR) Volume (') Hemas Holdings PLC (HHL) Earnings Review BUY Rs.1.7 August 216 CASE FOR INVESTMENT Strong brand image: HHL is one of the strongest conglomerates in Sri Lanka engages in fastest growing sectors such as FMCG, healthcare, transportation and leisure. Market leader in distribution of pharmaceuticals: Hemas Holdings own 18% market share in the pharmaceutical market. Increase in occupancies at Hemas Hospital Chain: Increase in number of patients will improve the profitability, while there is interest to enter Bangladesh healthcare sector. Related investments: Acquiring one of the oldest pharmaceutical companies in Sri Lanka, J. L Morison Son & Jones (Ceylon) PLC will further reinforce the pharmaceutical and FMCG segments of Hemas Holdings. Business Expansions: Enhanced FMCG operations in Bangladesh would enable to strengthen the profitability and mitigate the external risks on business. Portfolio of strong and popular consumer brands: Hemas owns popular household brands such as baby Cheramy, Clogard, Velvet, Kumarika, Pro Sport, Gold etc. in Sri Lanka as well as in more than 1 countries in the world. Managing international hotel brands: The partnership with minor Hotel Group which enabled Serendib Leisure to be the sole Sri Lankan Hotel chain to manage the international hotel brands AVANI and Anantara will positively impact the segment s performance. Increase in tourist arrivals: This is a key performance driver for the transportation and leisure segments. Depreciation in domestic currency: This affects favourably to the export turnover and the leisure segments A Member of the Colombo Stock Exchange Key Data Foreign Broker-Dealer of Maybank Kim Eng Securities USA Inc. Sector Industrial CSE ticker HHL.N Bloomberg ticker HEMS SL Equity Shares in issue 573mn Public holding 35.4% 52wk High - Low LKR Annual Volume 33.5mn Current MPS LKR 1.7 Market Cap LKR 57.7bn Market Cap USD.4bn Major Shareholders 3 th Jun 216 A Z Holdings (Pvt) Ltd 15.85% Saraz Investments (Pvt) Ltd 15.9% Blueberry Investments (Pvt) Ltd 14.98% Amagroup (Pvt) Limited 14.98% HSBC Intl Nominees Ltd- JPMLU-Franklin Templeton 9.67% Investment Funds Top 2 shareholders 87.48% Foreign ownership* 28.97% *As at 5 th September 216 7, 6,8 6, 6, 6, 6, 5,8 5, 5, 5, Relative Share Performance Some of the well-known Hemas FMCG brands in Sri Lanka ASI HHL Price Volume Graph , 2, 1, 1, - HHL Page 1

2 Financial Summary Investor Guide FY17E FY18E Revenue (LKR mn) 27,259 32,497 37,977 44,76 53,566 4% 19% 17% 18% 2 EBIT (LKR mn) 3,484 3,371 3,961 4,336 5,296 43% -3% 17% 9% 22% PAT-E (LKR mn) 2,49 1,927 2,653 3,62 4,578 45% -2 38% 36% 26% Gross margin 34% 35% 37% 37% 36% Operating margin 13% Net margin 9% 7% 8% 8% 9% ROE 18% 14% 13% 16% 18% ROA 8% 6% 7% 9% 11% EPS (LKR) NAV (LKR) PE (x) PBV (x) DPS (LKR) Dividend payout 18% 33% 3 22% 2 Dividend yield 2% 1% 2% 1% 2% Hemas Holdings was established in 1948 as a pharmaceutical company under the name Hemas (Drugs) Ltd, initiated by Sheikh Hasannally Esufally. In 1962 in collaboration with a French multinational, Esufally commenced production of toiletries. With the nationalization of industries and changes in the economic environment Hemas identified the need to diversify the business operations. Accordingly, in 197 HHL entered in to the blooming travel and tourism industry. In 1978 following the open economy concept, Hemas entered into the commodity export business. Expanding the product portfolio HHL launched Clogard toothpaste in 199 which currently enjoys a 35% market share locally. Hemas took major strategic decisions in periods, to divest the group s commodities business and re-enter into the apparel manufacture and the field of Freight and Logistics. In 1993 Hemas Drugs Ltd., was renamed as Hemas Holdings (Pte) Ltd. Hemas travel passed a key milestone in 1994 as Hemas Airline GSA Division being established through GSA for Malaysia Airlines was an important year for HHL as the group acquired controlling interest in Serendib Hotels Ltd., one of the largest leisure sector companies in Sri Lanka. In the same year the group launched Prime Destinations to focus on outbound tour operations and entered a strategic joint venture with Forbes and Walker Group to manage GSA for Emirates. Hemas obtained sole GSA status in Sri Lanka for Emirates Airlines in. Hemas entered into the power sector in in 3, by setting up Heladhanavi as a joint venture with Lakdhanavi Ltd to operate a 1 MW power plant. Several changes in the business took place in 1995 as HHL divested 7 of its apparel business, acquired Nimex paper business and entry into the food sector. In 8, further expanding the business HHL entered into maritime business with Far Shipping Lines Singapore and in the same year Hemas Hospitals in Wattala commenced the operations. Countries do Direct Exports The Maldives Lebanon Bangladesh Belize New Zealand Zambia Malaysia Pakistan Australia The Middle East FMCG brands that export Baby Cheramy Kumarika Clogard Goya Pro Sport In May 213, HHL acquired a controlling stake of J. L Morison Son & Jones (Ceylon). Hemas divested their controlling stake of Hemas power in December 214. HHL Page 2

3 1Q 2Q 3Q 4Q 1QFY17 LKR mn. Quarter Performance 1QFY17 Net earnings up significantly by 68%YoY on increase in revenue Hemas Holdings reported a profit of LKR 696mn with a growth of 68%YoY in June quarter 216 compared to LKR 415mn profit reported in the comparative year. However the profit declined marginally by 2%QoQ compared to the December quarter 215. The significant profit growth was driven by the increase in revenue. Healthcare segment and the FMCG segment were the largest contributors to the group s turnover. HHL has managed to reduce their finance cost by 16%YoY and 29%QoQ to LKR 14mn in the quarter Quarterly profit growth Finance income improved by 89%YoY and 6%QoQ to LKR 25mn in 1QFY17 mainly led by the notable increase in interest income. Profits margins have marginally improved in 1QFY17 compared to 1Q. Net margin improved from 5% to 7%. Gross and Operating margins also have improved from 36% and 8% to 38% and 9% respectively. PAT-E The share of loss of JV and associates increased LKR 35mn in June quarter 216 compared to a loss of LKR 1mn reported in the December quarter 215. It was a significant decline of 28YoY when compared to LKR 2mn profit reported in June quarter 215. Sector Review FMCG Segment FMCG segment reported a hefty PBT growth of 65%YoY in June quarter of 216 to reach LKR 677mn while earnings grew by 63%YoY to LKR 51mn. This segment is the main profit contributor to the group that contributes more than 7 of the total profits. Revenue composition - 1QFY17 The earnings were driven by the volume growth witnessed in major brands in personal wash, personal care, feminine hygiene and home care and in both general trade and modern trade sales channels. 8% 3% 2% 43% The company also expanded their product portfolio by introducing a new range of baby Cheramy diapers, strengthening their position in key product categories. FMCG segment reported revenue of LKR 4.2bn in 1QFY17 with a growth of 1YoY compared to LKR 3.8bn reported in the comparative year. This segment is the second largest revenue contributor to the total turnover. 44% FMCG Healthcare Leisure The Bangladesh operations also continued to perform well contributing a favourable revenue growth during the period. Transportation Other PBT margin has improved notably from 11% to 16% in June quarter of 216. HHL Page 3

4 ' FY12 LKR (') Future outlook FMCG segment may continue the growth momentum in FY17E to record a revenue growth of 21%YoY to reach LKR 17.2bn (FY18E LKR 2.9bn, +22%) underpinned by the overseas revenue, mainly in Bangladesh and strong domestic demand. 2, 1,8 1, PBT growth - FMCG 6 5 The expansion of the product portfolio in baby products, personal wash, personal care, feminine hygiene and home care products may drive the segmental revenue. of FMCG segment PBT in FY17 is estimated to be 33% YoY to reach LKR 2.4bn; backed by the strong revenue growth. FMCG segment may report a net profit growth of 31%YoY to LKR 1.9bn in FY17E driven by strong top line performance and lower income tax rates. 1, 1, 1, The depreciation in rupee would improve export revenue of FMCG segment while the innovative product portfolio would strengthen the growth prospects of the segment. PBT Healthcare Segment Healthcare segment positioned as the market leader in pharmaceutical distribution business is the main revenue contributor to the group. The segment reported revenue of LKR 4.3bn in 1QFY17 (+18%YoY) and a PAT of LKR 241mn (+13%YoY). Revenue growth in healthcare segment was driven by the growing therapeutic segment and the recovering pharmaceutical market. HHL launched their new addition to the pharma portfolio, Jenburket Pharma in May 216 Pakistan Sri Lanka Bangladesh Healthcare expenditure as a % of GDP India Nepal However, hospitals showed mixed results during the quarter as a result of the introduction of VAT for healthcare services. The introduction and subsequent removal of VAT created market confusion among patients and healthcare providers. The Rx Pharma also continued to perform well in the quarter backed by new product launches. Over the counter and consumer segments also have contributed positively to the overall segmental performance. Vietnam Source -: World Bank PBT margin remained unchanged at 8%. Population - 55 years and over Future outlook Healthcare segment net profit in FY17 is estimates to grow at 11% YoY to reach LKR 1.3bn. 4, 3, 3, 2, Revenue is expected improve by 18%YoY to LKR 18.9bn in FY 17E (FY18E LKR 22.6bn, +19%YoY) underpinned by increasing volume. 2, 1, Sri Lanka is one of the fastest growing ageing population countries where approximately 12.4% of the population was above the age of 6 years, according to central bank data release at end-215. This is likely to double in the future, and the public sector alone has insufficient capacity to handle the growth. 1, The private sector accounted for only 27% of the countries hospitals and 7% of bed capacity by end of 214. This will have a clear growth potential of expansion in private healthcare sector with the growing ageing population. Source -: CBSL HHL Page 4

5 FY12 LKR (') USD Mn. FY12 LKR (') Furthermore, the increase in per capita income would improve consumer spending on Private healthcare services. PBT growrh- Healthcare Hemas Hospitals have launched three new laboratories in Akuressa, Tangalle and Moratuwa in, which will continue to make revenue in coming years. Moreover the hospital expanded bed capacity in adding 27 new beds to the existing capacity. This capacity expansion project is expected to be completed in FY17E including the centre of Excellence in Orthopaedics and Gastroenterology. The investments made in 3-bedded High Dependency Unit and a laser lithotripsy machine to build the surgical procedure capability in Urology will continue to be productive in forthcoming years. 1,8 1, 1, 1, 1, Furthermore, Hamas Hospitals also have signed a Memorandum of Understanding with the government-owned National Insurance Trust Fund in to be the preferred hospital for its members. PBT Newly launched Jenburket Pharma product range also will contribute positively to the segmental earnings. Earnings from tourism Hence, considering all the potentials we believe that the segment may continue its growth momentum in the forthcoming years. 3, 3, 2, Leisure Segment 2, The segment reported a net loss of LKR 33mn for the June quarter 216 compared to a profit of LKR 45mn reported in the comparative year led by the losses incurred by the joint ventures and associates. 1, 1, Revenue was LKR 776mn with a growth of 8%YoY in 1QFY17 compared to LKR 717mn recorded in 1Q. - Serendib Hotels, a subsidiary of HHL posted a marginal revenue growth of 5%YoY to LKR 311mn during the quarter with traditional market performing. Nonetheless the markets were performed merely below the expectations during the quarter. However, occupancies at AVANI Bentota and Club Hotel Dolphin declined during the quarter amid the usual low season for the leisure industry which slowed down the revenue compared to the comparative year performance. Free fall of the Euro owing to BREXIT affected for the segmental results as it adversely affected the traditional earnings from German, UK and France markets. PBT growth-leisure 3 The Travel and Aviation segment showed mixed results in June 216, and as a result of it the segment reported a revenue growth of a marginal 4%YoY Future outlook The leisure segment is expected to report revenue growth 16%YoY to LKR 3.9bn in FY17E and LKR 4.6bn, +17%YoY revenue in FY18E. The segment may report a PAT of LKR 83mn in FY17E The first international 5 star brand hotel namely Anantara, Peace Haven, Tangalle commenced its operations on 1st December 215 and the second hotel Anantara PBT HHL Page 5

6 FY12 FY17E LKR () E Passenger FY12 LKR (') Kalutara, is scheduled to open by September 216. This may improve the top line and profitability of the segment. PBT growth- Transportation The government s continuous focus on improving the tourism sector will eventually impact favourably to the leisure industry. Removal of Tourism Development Levy (TDL) from the budget 216 will favourably affect to the segments profitability Transportation 1 The segment reported revenue of LKR 334mn with a growth of 63%YoY in 2Q. Revenue growth of 15%YoY to LKR 829mn recorded in 1H underpinned by the strong performance in logistics business. PBT -1 The growth of the logistics business was mainly driven by new projects, warehouses operating with full capacity and haulage business growing with the car carrier operations. In April 216, Hemas Maritime was appointed the exclusive shipping line agent of Evergreen Lines, which will enable the company to positioned itself strongly in the logistics and maritime sector. The domestic logistics operations coupled with warehouse operations witnessed strong performance levels underpinned by new customers and higher level of container handling activity during the quarter. 9% 8% 7% 6% 5% Annual growth in global traffic passenger demand % 5.7% 5.3% 5.2% 7.4% 6.2% Future Outlook 4% 3% Transportation segment revenue in FY17 is estimated to be LKR 2.1bn (+19%YoY) and LKR 2.4bn in FY18E (+18%YoY). 2% 1% Transportation segment may post a PAT of LKR 476mn with a growth of 19%YoY in FY17E. The company s Airline GSAs such as Emirates and Maldivian (Passenger & Cargo) and Ukraine International Airline, Druk Air and Alitalia Airline (passenger only) may maintain the strong growth prospects in forthcoming years. Source -: Statista/IATA Malaysian Airlines is recovering from the lost grounds after the tragic incidents happened to MH37 and MH17. However, the airline provided significant discounts and offers to attract passengers which resulted to increase in the traffic passenger demand. This is positive to HHL for the growth of the segmental top line. Further Emirates have become the world s best airline in 216 from the position of 5 in 215. The recognition coupled with substantial promotions has given the opportunity to experience heavy number of passengers using the airline. 2,3 1,8 1,3 8 Transportation sector revenue 55% 45% 35% 25% 15% The Government decision to remove restrictions on Global Logistics Companies, which have the scale, capacity, capital and knowledge to expand services using Sri Lanka as the hub where they should be able to invest, acquire and operate within a reasonable tax regime would be positively impacted to the logistic business of the company. 3 - Revenue 5% -5% However the increase in over flying charges of commercial planes by 2 may impact the GSA travel business. The government further plans to increase charge. HHL Page 6

7 FY17E LKR FY17E LKR Bn USD Bn. Passenger and cargo air traffic are estimated to increase the revenue passenger kilometres by about 6.2% and freight tonnes kilometres by around 1.9% by end of 216 according to IATA. This may help to improve the travel business of transportation segment. Recovering global economy may strengthen tourist arrivals which will boost the segmental turnover. However, decision of BREXIT which resulted to the weaken euro and GBP may merely affect the European tourist arrivals. The strategic investment on cargo GSA for Maldivian Airlines in Thailand will benefit the segments turnover in the further while easing the macro economic challenges faced by Hemas with in Sri Lanka. Future outlook of Hemas Holdings The group PAT in FY17 is estimated to be LKR 3.6bn; up by 36%YoY (LKR 4.7bn, +29% in FY18E) on increase in revenue and decrease in income tax expenses. 3 1 Worldwide revenue in passenger air traffic Source -: Statista/IATA 511 The government has reduced the corporate tax rate from 28% to 17.5%. Subsequently the effective tax rate also would come down as the company can benefit from the reduction. Revenue is estimated to increase by 18%YoY to LKR 44.7bn in FY17E, and +2 in FY18E to reach LKR 53.5bn. Net margin may remain unchanged in FY17E at 8% but it is estimated to improve in FY18E to 9%. Further, Hemas would benefit from the rupee depreciation on the export turnover in the FMCG business and the hospitality business Profit margins with turnover 4 35% 3 25% 2 15% 1 5% The group is vulnerable to forex losses on dollar borrowings. However, use of financial derivatives such as forward currency contracts to hedge foreign currencies mitigate this risk. Turnover Operating margin Gross margin Net margin Moreover, there are some term loans which are payable at an interest rate of EURIBOR. The quantitative easing programme of ECB will help HHL to reduce their finance costs. Trailing debt to equity ratio is at 26% while trailing return on equity ratio is at 13Further, trailing return on assets ratio stand at 7%. The trailing asset value stand at LKR per share. The increasing profitability of the company may translate to a CAGR of 14% in next 3-years. We believe that the company may maintain the same dividend level in FY17E at LKR 1.4 per share which translates to a dividend pay-out of 22% EPS, DPS vs. Payout 4 35% 3 25% 2 15% 1 5%. EPS DPS Payout HHL Page 7

8 Valuation Based on weighted average price calculated using the discounted cash flow method and the sum of the part method we have arrived to an attractive price valuation of LKR per share with an upside of 16%. The counter is currently trading at a PE of 19.1x and a PBV of 2.4x which are at a premium to the sector multiples. However the company s ROE of 13% is relatively attractive when compared to peers and the overall market. Considering the positive earnings prospects of each segment and attractive multiples we believe that the counter will perform well in the future. The strategic decisions of the company to make more investments in wellness, leisure and mobility segments will boost the profitability. Hence, we recommend BUY. 52wk Low Price 72. Historical PBV Price Peer PE Price Market Price 52wk High Price Historical PE Price Weighted Average Price Stock Market Performance 3M 6M 12M ASI 8% -1 HHL.N 1 24% 12% Relative Comparison PE PBV ROE ASI % Industrial Sector % HHL.N % HHL Page 8

9 Quarterly Earnings LKR Millions Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 QoQ% YoY% Revenue 8,815 9,596 9,875 9,69 9,886 2% 12% Cost of Sales (5,638) (6,13) (6,237) (5,951) (6,123) 3% 9% Gross Profit 3,177 3,493 3,638 3,739 3,763 1% 18% Other Operating Income % -16% Selling and Distribution Expenses (1,52) (1,16) (919) (892) (1,19) 33% 13% Administrative Expenses (1,542) (1,55) (1,586) (1,81) (1,689) -6% 1 Share of results of Joint ventures & Associates 2 (54) (44) (1) (35) 253% -279% Operating Profit ,173 1, % 35% Finance Cost (123) (117) (126) (146) (14) -29% -16% Finance Income % 89% Profit Before Tax ,226 1,224 1,1-17% 53% Income Tax Expenses (23) (294) (37) (334) (39) -7% 34% Profit for the period % 63% Attributable to: Equity Holders of the Parent % 68% Non-Controlling Interests % -69% Gross Margin 36% 36% 37% 39% 38% - - Operating Margin 8% 1 12% 12% 9% - - Net Margin 5% 7% 9% 9% 7% - - Total Assets 39,136 4,299 4,395 42,327 43,311 2% 11% Total Equity - Equity Holders 2,131 2,356 2,437 21,992 22,719 3% 13% Total Liabilities 16,816 17,726 17,73 17,674 17,976 2% 7% HHL Page 9

10 APPENDIX 1 Disclaimer This information and opinion contained in this report have been complied by our research department from sources believed by it to be reliable and in good faith, but no representation or warranty, express or implied is made as to their accuracy, completeness or correctness. All opinions and estimates contained in the document constitute the department s judgment as of the date of this document and are subject to change without notice and are provided in good faith but without legal responsibility. This report is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any securities. Capital Trust Securities (Pvt) Ltd. (the company) or persons connected with it may from time to time have an investment banking or other relationship, including but not limited to, the participation or investment in commercial banking transactions (including loans) with some or all of the issuers mentioned therein, either for their own account or the account of their customers. Persons connected with the company may provide or have provided corporate finance and other services to the issuer of the securities mentioned herein, including the issuance of options on securities mentioned herein or any related investment and may make a purchase and/or sale, or offer to make a purchase and/or sale of the securities or any related investment from time to time in the open market or otherwise, in each case either as principal or agent. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward looking statements. Capital Trust Securities expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. Exchange rate fluctuations may affect the return to investors. Neither the company nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained therein. Capita TRUST Securities (Pvt) Ltd, their respective affiliate companies, associates, directors and/or employees may have investments in securities or derivatives of securities of companies mentioned in this report, and may make investment decisions that are inconsistent with the views expressed in this report., it s directors, officers, consultants, employees, associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorney s fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. HHL Page 1

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