Softlogic Holdings - IPO review - june 2011

8/6/2019 Softlogic Holdings - IPO review - june 2011

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Analysts: Thilina Ukwatta: [email protected]

SOFTLOGIC HOLDINGS LTD - IPO

mailto:[email protected]






SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER

1

SOFTLOGIC HOLDINGS LIMITED

Softlogic Holdings Limited’s [SHL: LKR29.0] origin lies in the Information &

Communication Technologies (ICT) industry, where it started operations in

1991 as a small software development company by providing hardware and

software solutions to varying segments of the Sri Lankan market. Softlogic

Group has since expanded into six key sectors of the economy namely, ICT,

Retail, Automobile, Finance, Travel & Leisure and Healthcare. The main

contributors to Softlogic’s revenue and PBT as at 31st

December 2010 are

Softlogic Communications (32%) and Uni Walkers Distributors (27%)

respectively.

The proceeds from the IPO are to be utilized for debt retirement and to

partially fund the cost of the issue. SHL, having had aggressive ambitious

growth since initiation, can be expected to continue its success story

further as the IPO would open up avenues of funds due to minimal gearing.With its robust internally generated funds and leveraging on the group

balance sheet strength post IPO, Softlogic expects to commence the

construction of the Movenpick hotel in June 2011 on the group owned 90

perch prime land located in Colombo 03.The infrastructure drive and

telecommunication enhancement in the country also paves way for SHL to

further grow in the North, East and Southern regions. Hence, the group is

focusing on increasing its outlets from the current 75 stores, to 250 stores

island wide by the end of 2012.

SHL’s effective holding at 51.69% on Asiri Hospitals Holdings PLC will

strengthen the balance sheet by FY12.

Having this investment’s glory in mind coupled with the curbing debt levels

and consolidation of Asiri group results, we have forecast on a provisional

basis that SHL would report LKR2, 252.0 mn FY12E and LKR 2,524.3 mn

FY13E. Thus, the share would trade at a forward PER of 9.7X and 8.9X

respectively.

OFFER PRICE : LKR29.00 June 2011 SUBSCRIBE

ISSUE DETAILS IN BRIEF

Opening Date 9th

June

Earliest Closing Date 9th

June

Latest Closing Date 29th

June

Shares in Issue (Pre IPO) 640 mn

Shares to be issued 139 mn

Shares Post IPO 779 mn

Minimum Subscription 500 shares

Excess of min. will be in multiples in 100 to be

listed on the Diri Savi Board

MAIN SHAREHOLDERS

PRE(%) POST(%)

A.K. Pathirage 50.23 41.27

H.K. Kaimal 10.08 8.28

R.J Perera 9.12 7.50

H.U Gunawardena 8.91 7.32

% of Public holding post IPO – 17.8%

AREA OF UTILIZATION VALUE %

Debt Settlement 3,887.0 96.43

(Softlogic Holdings)

Debt Settlement 117.0 2.90

(Softlogic Int. Pvt Ltd)

Cost of the issue 27.0 0.67

Total (LKR mn) 4,031.0 100.0




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INVESTMENT SYNOPSIS………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... .

Softlogic Holdings Limited [SHL: LKR29.0], a strong diversified Sri Lanka Group, has announced its IPO of

139mn shares at an initial price of LKR29.0 per share, expecting to raise LKR4.031 bn.

The proceeds of the IPO will be utilized as follows :

Debt Retirement

BANK/INSTITUTION Interest Rate p.a VALUE (LKR MN) % OF THE IPO

PROCEEDS

Seylan Bank PLC 12% 250.0 6.2%

Hatton National Bank PLC AWPLR+1.5% 1,400.0 34%

Sampath Bank PLC AWPLR+1.5% 650.0 16.2%

Hatton National Bank PLC AWPLR+1.5% 375.0 9.3%

Sampath Bank PLC AWPLR+1.5% 925.0 23%

Sampath Bank PLC AWPLR+1.5% 287.0 7%

Seylan Bank PLC 12% 117.0 3%

TOTAL 4,004.0 98.7%

The balance LKR27.0 mn will partially fund the cost of the issue.

“Given the current stature of Softlogic Holdings dwarfed by much heavy weight conglomerates, the goal

may look ambitious, hence elusive. Nevertheless, if its meteoric rise in recent years as well as the high

growth potential of some of its core sectors in post-war Sri Lanka is factored in, SHL is certain to

challenge the giants in the corporate arena.”




3

ISSUE DETAILS ………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... . SHL has announced that a sum of LKR4, 013 bn would be raised through an IPO of 139.0 mn ordinary

voting shares priced at LKR29.0 per share. These shares are to be issued to the public starting from 09th

of June 2011 to 29

th

June 2011 unless fully subscribed prior to the closing date. These shares to be listedon the ‘Diri Savi Board’ of Colombo Stock Exchange. A minimum subscription of 500 shares (i.e. LKR14,

500) and applications in excess of these minimum subscriptions shall be in multiples of 100 shares.

SHARE ALLOTMENT STRUCTURE

Category Number of Shares Issued

(mn)

% of IPO shares

Issued

Employees 27.8 20%

Retail Individuals 55.6 40%

Unit Trusts 13.9 10%

Non Retail 41.7 30%

In a situation of Under Subscription,

Under Subscription Category Priority of allotment of the under subscribed

shares

Unit Trust Retail Individuals

Retail Individual Unit Trust

Employee Category whichever oversubscribes

Non Retail Category whichever oversubscribes




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INSIGHT ………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... . Softlogic Holdings Limited [SHL: LKR29.0] is a robust Conglomerate based in Sri Lanka with over 29

companies under its control which had widened its reach touching Australia and Pakistan. Its interests

span over Information & Communication Technology, Retail, Automobile, Finance, Travel & Leisure andHealthcare. Development and many other sub sectors.SHL with its humble beginnings as a small

Software development Company with 12 employees and a modest investment of only LKR 1 mn has now

grown to a multi Billion rupee empire with an asset base topping LKR7.0 bn.

Sector Breakup:

Finance

Healthcare

Travel & Leisure

Information & Communication

Technology

Automobile

Retail




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SHL’S HISTORY AT A GLANCE ………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………...

After 20 years

Announced private

placement in 2009 andoffererd 139 mn sharesto the public in 2011 at

LKR 29.0 per share.

Ventured in to

the mobilephone sectorin 2007 with

Nokia

Inseption in1991 in the ICT

sector




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SHL’S HOLDING STRUCTURE WITH A CONTROL OF 29 ENTITIES………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… SHL, with its 27 subsidiaries and 2 associates amongst which it has diversified in to Pakistan and

Australia showing a considerable learning curve through acquisition:

Source :IPO Prospectus




7

SHL’S OPERATIONS IN DEPTH ……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………... .

The pie charts below highlight the major contributors to SHL’s business.

Courtesy : SHL Management

INFORMATION COMMUNICATION TECHNOLOGY SECTOR

SECTOR ANALYSIS

InformationCommunication

Technology Sector

IT SubsectorTelecommunication

Subsector




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IT Subsector

The IT Subsector Is handled by five separate entities within Softlogic Holdings.

Softlogic Information Technologies (Pvt) Ltd Was the pioneer within the group to provide hardware and

software solutions to the local market. Being a Microsoft certified partner the entity was involved in

advanced software development. The provision of IT solutions covers an array of industries ranging from

Finance, School Management, Health Care, Micro Finance and Freight forwarding.

The provision of ERP (Enterprise resource Planning) can be considered as critical success factor. Their

services range from design and development, multichannel solutions to integrating Softlogic systems

with legacy systems.

The company has strong ties with DELL Computers, CISCO, Microsoft, NOVEL/LIUX, MOLEX, HP/XEROX

(printers).Hence adding value to its PC marketing Function.

Softlogic Computers (Pvt) Ltd was incorporated in 1995 catering to market specific ICT solutions. The

99.99% owned company provides services to the retail, Hospitality, and banking/finance sectors

The entity is the sole distributor for reputed brands such as EPSON.

Uni walkers Office Automation was acquired by Softlogic in 2006 considering a 100% stake in

ownership. The company is focused on importing imaging and printing equipment consisting of

renowned brands such as NEC and XEROX

Garry’s Softlogic (Pvt) Ltd is a joint venture between Gerry’s group Pakistan and Softlogic. The company

is an authorized dealer of DELL personal Computers and Servers in Pakistan.

Softlogic Australia (Pvt) Ltd is a fully owned subsidiary of Softlogic which is incorporated in Australia.

The company develops markets, sells and implements its own software solutions in line with industry

requirements to an array of industries spanning from Food services management to job scheduling and

auditing.

Telecommunications Subsector

Softlogic International (Pvt) / (SIL) Ltd incorporated in 1997 consists of a formal partnership with Dialog

Axiata Plc. This partnership aided SHL in terms of providing greater local reach since Dialog had strong

growth potential and marketability.SIL also act as the regional distributor and warehouse managers for

NOKIA.

Softlogic Communications (Pvt) Ltd/ (SCL) a 99% subsidiary is also an exclusive distributor for NOKIA.

The company has a strong distribution network and 2200 retail outlets island wide in addition to 11

exclusive NOKIA stores.

Softlogic Communications Services (Pvt) Ltd (SCSL) is also a 99% subsidiary. Focused mainly on the after

sales services for NOKIA products.




9

Industry Overview- Information Communication Technology Sector

The government of Sri Lanka has shown considerable interest in developing the ICT sector. The apex

body formulating ICT strategy in Sri Lanka has launched ICT projects to achieve island wide penetration.The government policy document has set a target on achieving a 50% computer literacy rate within the

next 5 years.

The Local ICT industry is highly competitive where all leading brands such as DELL, HP, Lenovo and

Microsoft are available for consumers.

The boost in internet and mobile subscription within a very short time horizon has proven the market is

showing considerable interest towards the ICT sector as per the graphical illustrations below.


Sri Lanka’s mobile industry has shown considerable progress displaying growth potential in penetration

and coverage. This is due to the downward pressure on mobile phone prices and heavy competition

amount the five licensed voice providers in the country fighting for market share. There by increasing

the market attractiveness to the local consumer




10

RETAIL SECTOR

The year 2009 witnessed the end of the 30 year conflict of the country which in turn opened the doors

of opportunity and further strengthened the per capita income of the country.

The key player within the group with regard to retail is Uni Walkers Pvt Ltd which is a 100% owned

subsidiary of Softlogic Holdings. Since SHL’s acquisition in 2006 it has been successfully adding value to

the conglomerate’s retail function.

Within the retail sector the company caters to Consumer Electronics, branded Apparel and Furniture

subsectors. The consumer electronics arm consists of Panasonic, Samsung, Cornel and Ignis. Levi’s,

Mango, and NIKE contribute to Branded apparel. The core brands for furniture are SB furniture, King oil,

Sheridon and Caroma.

Distribution

The current retail operation consists of 75 showrooms comprising multiple brands. Four of which

operate under the brand “Softlogic Max’ and 71 that operate under the brand “Softlogic”. Softlogic

showrooms which are of lesser floor area cater to the mid market, whereas Softlogic Max caters to the

high end consumers. Softlogic has a strong dealer base which is 160 strong.

When it comes to Apparel the company currently operates two Levi’s flagship stores in prime localities.

One down Dharamapala Mawatha and R A De Mel Mawatha.

Catering to the Furniture market is done by Uni Walker’s Pvt Ltd under its ‘life Styles arm, Retails ready

to assemble elegant bedrooms and other household furniture. The company also offers turnkey

solutions through its projects and interior division.

The flagship store in Kohuwela is over 20,000 ft and carries all its brands within the store. Other

merchants with inventory meeting the high standards have shop in shop displays of their products

within the store. The company also maintains a professional installation team.

Softlogic Solar (Pvt) Ltd a 99% owned subsidiary of Softlogic Holdings Limited. The flagship solution of

the company is the solar home system, Through which a large quantity of rural homes are able to obtain

electricity.

RetailSector

Own RetailOutlets

DistributionNetwork




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Industry Overview – Retail Sector

Growth in overall GDP per capita and consumer spending power and the general quality of life are

directly correlated with the growth in the retail sector. There has been an upward trend in these

indicators for the last 8 years as provided below.


Sri Lanka‘s demography is seeing a general upward shift as evidenced by the improvement in GDP per

capita. The upward mobility in the standard of living has resulted in a steady increase in the average

amounts spent per month on various items. The per capita has grown to US$ 2053 in 2009 an over 175%

increase since 2004 where it stood at US$870.


A key point to consider in this context is the quality of life following the end of the conflict. Hence there

is a clear increase in discretionary spending.

Low interest rates along with steady

inflation will also drive consumerpurchasing power upwards. The positive

impact in terms of credit growth and

positive signs towards growth of the retail

sector is a key value addition.

The reduction in credit card rates from

36% to 24% being made by the central bank

enhanced consumer spending power




12

AUTOMOBILE SECTOR

Softlogic’s automobile sector currently comprises of Daihatsu and Ford. Softlogic entered the sector in

2006 through the acquisition of Uni Walkers, through which it inherited Daihatsu Agency. The ‘Daihatsu

Drome’ was built targeting providing a better service for the local consumer base.

Uni Walkers (Pvt) Ltd currently the sole distributor for Daihatsu in Sri Lanka, Although globally Daihatsu

is under the wing of Toyota in the local market the two compete with each other. The Success of its

flagship product the Terios within Sri Lanka as the best selling Japanese SUV depicts sector performance.

Uni walkers have achieved consecutive sale records in the SUV in 2007 and in 2008 showing an increase

in performance of 7%.The achievement of the 1000 unit mark within 4 years in 2009, in a market of

reducing imports is a point to consider.


Future Automobiles (Pvt) Ltd is a subsidiary appointed by Ford Motor company USA. The entity is a

100% owned subsidiary with the core competence of distributing and marketing Ford Auto mobiles.




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Industry Overview – Automobile Sector


The government of Sri Lanka revised the duty structure on the imports of motor vehicles in June 2010.

Hence reducing the tax on vehicles by 50%.The government budget had a positive impact due to the

removal of the Regional Infrastructure Development Levy, reduced import duties and taxes on

passenger vehicles by 25%, reduced customs duties on motor vehicle spare parts and to remove VAT on

leasing to three wheeler operators, lorry truck operators and bus operators.

Currently it is important to notify that the government has revised the tax structure upwards. The

overall tariff has increased to 50%-100%, non hybrid cars below 1000cc are now taxed at 120% an

increase from 90%.the 1000cc-1600cc cars are seeing an increase to 128% from 119%.


The Sri Lankan automobile industry is

continuously dominated by motor Cycles

which account to 53% of the vehiclepopulation, of which 13% account for

motor tricycles and motor cars account

for 10%.

The overall composition of the sector

has remained unchanged over past

decade while the overall sector has

witnessed robust growth in 2010 backed

by the relaxation of monitory policy and

a favorable fiscal policy.

The government with the intention of spurring

development within the economy relaxed the

monitory policy.

The decreasing level of borrowing has resulted

in more affordable costs of financing of motor

vehicles.




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Dual purpose vehicle segment

The segment is of immense importance to Softlogic Holdings as the company is the agent for Daihatsu

and Ford and predominantly imports motor vehicles. 2010 was a considerably good year for this sector

due to massive sales inflow especially from the Ford Double Cab.

The environment currently is favorable towards its sector based on the positive investment climate and

reduced vehicle prices. The enhanced per capita income and the quality of life add further value.

Industry risks arise from sudden changes within each industry. These could be driven by new customer

trends and as entry of new or alternative products into the market. With a view to minimizing these

risks, the group closely monitors developments in its business domain including competitor strategies

and promptly develops counter strategies as necessary.

Source :IPO Prospectus Source : Asia Wealth Management Research




15

FINANCE SECTOR

Capital Reach Holdings Ltd (ownership 53.42%) was acquired in August 2010 by Softlogic Holdings as an

entry rout in to the finance sector. The sector provides fund based and fee based products for a wide

range of clientele where the primary focus is on retail and SME clients servicing.

The structure of the sector:

Capital Reach Leasing (Softlogic Finance PLC ) was incorporated in 1999 and licensed by the central bank

of Sri Lanka. The entity specializes in:

Leasing and hire purchasing Fixed deposits and savings accounts

Personal loan

Business and working capital financing

Gold Loans

The company recently reported nine months profit before tax in December of Rs.70.2mn and has one of

the lowest risk ratios in the industry. With nonperforming loans at 1.9%. Advances were recorded at Rs.

2.9bn and total assets at Rs. 3.7bn.Total financial services group assets were Rs. 4.7bn. The company’s

rights issue in 2010 boosted its capital adequacy to 20.5%, providing a strong business platform.

Softlogic Credit Ltd (Capital reach credit Ltd) was incorporated in 1999 to engage in factoring and small

micro lending activities. The company was licensed in 2007. It is focused on Leasing and hire purchase

financing as well as group personal loans and gold loans for micro business financing.




16

Dai Nishi Securities (Pvt) Ltd is fully owned subsidiary of Uni Walkers (Pvt) Ltd. The company is currently

inactive with no commercial activities.

Capital Reach Business Development (Pvt) Ltd is engaged in trading of Electronic home appliances,

office equipment, Exercise machines, motor cycles and three wheelers.

The Finance sector is governed by the Central bank of Sri Lanka and is made up of Licensed Commercial

Banks, Specialized Banks, Registered Finance Companies, Specialized Leasing Companies, Insurance

Companies, Primary Dealers, Pension and provident Funds, Rural Banks and etc.

Industry Overview – Finance Sector

Source : CBSL


There are 36 registered finance

companies operating within this sector,

and 21 specialized leasing companies as

per the central bank reports. The

industry commands Rs. 350bn total

assets and Rs. 240bn in total lendingand Rs.137 bn in total deposits.




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Sri Lanka is at an important juncture in its long history, being in the post war phase. A new era has

dawned in the country where the importance of the banking and finance sector has been unveiled. The

economy is expected to record a staggering growth exceeding 8% and this growth is highly correlated

with the growth in the finance sector. Therefore, an 8% growth in GDP in 2011 will result in a circa 16%

growth in finance sector assets.

The sector prospects

The Finance sector is expected to grow in leaps and bounds consequent to the development plans in the

economy. Therefore a sound financial system is a prerequisite to fuel the economic development. Thus,

as a consequence regulatory bodies have placed emphasis on strengthening the sector.

Central Bank intervention

The Central Bank has relaxed its monetary policy by continuously reducing the repurchase rates and

reverse repurchase rates. This signals to the market the need of low market interest rates to facilitate

the expansion of credit to the private sector.

Finance sector has benefitted from falling interest rates which has increased margins due to deposit

rates falling faster than rates on loans and advances. AWPLR for the FY2010 witnessed a CAGR of circa -

1% while AWDR dipping more steeply with a CAGR of -2%. Low interest rates are expected to induce

credit growth fund mobilization in the economy. Improvements in margins, coupled with rapid

expansion in loans and lower provisioning resulted from improved asset quality resulting in a healthy

growth in the bottom line of the sector.

The government has granted capital allowances on equipment for leasing companies as a budgetary

concession for the industry, which will come in to effect from 1st of April 2011. The depreciation rate

earlier stood at 12.5% for eight years and today it is 33% for three years. This will encourage leasingcompanies to further extend its leasing facilities for industrial equipment and agricultural machinery.

Therefore, new regulations would enhance the base for leasing companies to grow and it is expected

that the leasing sector will register a remarkable growth.

Further, it is noteworthy to mention that the banking and finance sector will benefit from the reduction

in the VAT from 20% to 12% and corporate tax rates from 35% to 28%.

Source : Asia Wealth Management Research




18

LEISURE AND TRAVEL SECTOR

Leisure

A management agreement has been signed in order to operate the Movenpick Hotel Colombo. The

hotel will be a part of the hotel chain “Movenpick Hotels and Resorts”. Construction of the hotel is to

commence in June 2011 on a group owned land in Colombo 3.The hotel will consist of 224 rooms and be

5 stars rated.

The project is expected to end within two and a half years from the date of commencement. The project

will be handled by Softlogic Properties (Pvt) Ltd. Funding will be from internally generated funds.

The only hotel currently owned by Softlogic is the Ceysand Hotel Property in Bentota. The hotel is

currently under renovation hence is unlikely to generate revenue till the renovation is completed.

Travel

Abacus International Lanka (Pvt) Ltd is a joint venture between Abacus International (Pte) Ltd in

Singapore and Softlogic Holdings. The entity provides travel solutions and services. Abacus has strong

relationships with regional airline, giving it a comparative advantage.

The leisure sector has seen considerable growth over the post war period. Tourist arrivals in 2010 were

654,476 which is a 41% increase in comparison to 2009.As a result the earnings growth was 62.5% YoY.

The major constraints faced by the local player are the lack of capacity to accommodate tourists during

peak periods. The current availability of rooms is only 14,461 the occupancy levels touched 80% in 2010

suggesting the sector needs further investment.

Industry Overview – Leisure and Travel Sector

The end of the three decade old war looked promising on

the tourism sector of Sri Lanka. The economic discussions of

the country were all centered on tourism, as tourism was

seen as the engine for economic growth of the country. The

National Geographic Adventure ranked Sri Lanka as thesecond best new trips for 2010 out of 25 countries,

accrediting the country as the “Wonder of the World.” While

the New York Times ranked Sri Lanka as the number one

destination in its list of “31 places to go in 2010”.




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The tourist arrivals in the country grew by a staggering 46% YOY going beyond the anticipated 600,000

million tourist arrivals for the year 2010. However the largest number of tourist arrivals during the year

ended was recorded from India (126,882) hence followed by UK (105,496) and Germany (45,727). Going

forward an influx of 2.5 million tourist arrivals to the country by 2015 is anticipated by the Sri LankaTourism Development Authority. However to achieve this targeted levels it is stated that a 23% monthly

growth in tourist arrivals should be witnessed.

The current accommodation capacity of the country is circa 15k rooms with a total of 249 hotels. Circa

21% of these available encapsulates of the 5 star category hotels. However going forward with the

expected influx in the tourist arrivals, the hotel industry is bound to experience a supply deficit.

Therefore the existing hotels in the country are propelled to benefit in the short to medium term as the

new investment projects to the industry would have a lag of at least 2 to 3 years.

The overall occupancy levels for year 2010 stood at circa 70% from the circa 48% occupancy rate the

preceding year. The highest occupancy levels were witnessed by the 5 star category hotels which

maintained an upward edge over the industry average. The

top cluster of hotels in the country witnessed an occupancy

level of circa 94% during the month of December, which is the

highest occupancy level recorded for the year.

Source : Asia Wealth Management Research




20

HEALTH CARE

Softlogic Holdings footprint a stake in the Healthcare sector through its Holdings in Asiri Hospitals

Holdings PLC, its stakes as at 27th May 2011 are as follows;

A Graphical Illustration





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Asiri Hospital Holdings PLC can be considered as the largest investment made by Softlogic Holdings. The

healthcare giant has made its presence been felt in Colombo with a whopping 530 beds, in Matara with

71 beds, the group also has a combined operating theatre network of 27.

Asiri group has shown growth in being the leading and most advanced medical Laboratory in thecountry. Computer guided instruments as well as satellite lab equipment enables the hospital to carry

out 12,000 tests on a daily basis. Asiri has the largest market share amounting to 65% for tests and

investigations in the country.

The Asiri Laboratories command a monopoly in 150 types of testing. While having branched out into

many different departments including genetics, histopathology and microbiology. The Flow cytometry

department is the only one of its kind in the private health sector in Sri Lanka.

The acquisition by Softlogic of Asiri Hospital has brought about increased investment within the group:

The investment on Central Hospital which is the largest in the group is a prime example.

The establishment of a 32 bed general hospital by Asiri in 2007.

The acquisition of the Matara Medi House.

The acquisition of Digasiri medical services LTD.

Asiri Hospital Holdings PLC (AHL)

Comprises of 110 beds and 3 operating theaters along with CT scan diagnostic facilities. The Hospital

boasts an occupancy rate of 90% mainly a result of its efficiency with regard to performing tests (7000 to

8000 tests on a daily basis).Asiri Hospitals has also become the health hub for OPD services as well

channeling services with most well known consultants of various specialties patronizing the hospital. The

Neo-natal unit of the Asiri Hospital is equipped with state of the art medical equipment to care for new

born babies.

Asiri Surgical Hospital PLC (ASHL)

With facilities such as a 14 story hospital with a total of 156 beds and 9 operating theaters, the hospital

is one of a kind. The hospital provides cosmetic, urological, renal, and orthopedic as well as general

surgery.

Central Hospital (Pvt) Ltd

Central Hospitals is the operational successor for Asiri Central Hospital becoming the latest addition to

the group. The hospital has a capacity of 264 beds, 3 dedicated operating theaters.




22

Healthcare Industry Analysis

Currently oligopolistic structure exists in private healthcare industry. Nevertheless potential entrants

have shown interest in penetrating into the market. The future of the industry would depend on how

each hospital position itself based upon specialization and technological advancements. Looking forwardthere would be a bridge among tourism and health sector. Private sector health expenditure has

increased by CAGR of 15.6% during 2006-2008 and accounted for 57% of overall health expenditure in

2008 as compared with 54% in 2004.

Private insurance expenditure has grown in line with

private sector growth with the insurance expenditure

accounting for 9.0-9.6% of the private sector

expenditure during 2004-2008. Higher private

insurance is perceived to have had appositive effect

on overall demand for healthcare services.

Over 3,000 years of medical tradition in South Asia

has drawn on natural ingredients going into potions

and mixtures as medication for the ills of the day. At

its core, the Ayurveda method of treatment and

health care is based on the use of natural plants,

herbs and oils as well as diet.

Health tourism is one of the fastest growing

segments in the tourist trade. In Sri Lanka, the health

tourism sector is growing in popularity, especially

with Western tourists, who look to treatments, such

as the ancient Ayurveda methods of herbal medicinesand massage, as a way to recover from their fast

paced life back home.

“We could offer specialized services as the country has international standard hospitals and medical

staff. Not only Ayurveda treatment but western medication could be provided for the foreigners thereby

earning foreign exchange,” he said. The focus should be to become a treatment centre similar to

services offered by Singapore.

Source: IPO Prospectus

“Ashok Pathirage- Chairman Softlogic Holdings-Daily News”




23

Financial Performance

* Information unavailable to calculate ratios

ProfitabilityPersistent earnings, increase expectations and tighter cost control expect to contribute towards the

profit margins. In addition debt repayment resulting lower gearing and fall in finance cost expects to

lever PAT margins at 11.0% levels.

LiquidityBoth current and quick ratios are marginally below to the respective norms, despite, the expectations

are positive due efficient post IPO working capital management. Thus a muscular cash position (due to

lower finance cost) and reduction in debt should maintain the current ratios at 1.0 and 1.2 in FY12E and

FY13E respectively.

EfficiencyThe expected negative operating cycle of 135.7 days FY11 and 77.9 days FY12E, depicts the efficient

working capital management. Prompt payment to creditors to maintain strong trade relationships

together with efficient debtor collection would reduce the dependency on future short term

borrowings. This in turn would result in a high interest cover of 5.5X FY12E.

GearingRepayment of circa LKR 4.0 mn debt creates a substantial reduction in gearing. Hence the optimism

creates a green light to the investors paving way towards ROE of 27.0% FY12E and possible dividend

payments.




24

DuPont Analysis

Equity Multiplier

The asset equity ratio determines the proportion of debt in SHL’s capital structure. Throughout the five

year period the financial leverage on fluctuating in leaps and bounds. This has been due the exorbitant

debt levels to fund group expansion. Nevertheless since 99.3% of IPO proceeds are to be utilized on debt

repayments, this together with increased retained earnings expects to be curbing the equity multiplier

in the next financial year bringing in benefits of low finance expense to a healthy bottom line.

Asset Turnover

Higher asset turnover depicts the efficient utilization of group resources to generate sale revenue. This

has been affirmative with the rapid growth in revenue superseding the growth in total assets in FY08.

Nevertheless the strategic acquisitions in the subsequent periods have increased the level of non -

current assets leading to marginal dips in asset turnover ratio.

Net Profit Margin

A gradual increase in the percentage of tax burden to 61% in FY10 implies escalation in pre-tax profits by

123.9% to LKR 154.7 mn. Strong operating profits have countered high interest cost, which has created a

rise in interest burden in FY10. The EBIT margins have increased to 21.4% FY10 compared to 8.1% FY06.

ROE

When compared to FY08, ROE has transformed into a positive in FY09 primarily due to improved

margins couple with asset efficiency and financial leverage expects to further expand future earnings.

The future expectation is that despite of the dip in equity multiplier due the inflow of capital (IPO

proceeds); debt repayment teaming with improved EBT margins and the hospital giant (Asiri Hospital

Holdings) admitted as a subsidiary (with effect from FY12) expects boost up the prospective earnings,

thereby enriching the ROE.




25

SOFTLOGIC’S PROSPECTS…

As per the prospectus issued for the offer the company depends a great deal upon the per capita growth

as a wider distribution of GDP of the economy. As well as expecting political stability. The company

seems to be more strategically geared towards the healthcare sector, based on the fulfillment of allassumptions.


Retail

Expanding focus multi-brand and multi-channel

strategy via increasing its local footprint to 250 stores

from existing 75 by 2012.

After sales service to customers and better service

with global brands such as Nike, NOKIA, EPSON and

etc.

Cater to both local and tourist market segments.

The sector will exploit available synergies of

Softlogic Capital to enhance its local reach.

Focus will be on increasing tourist levels and

working in collaboration with thegovernment




26

Leisure and Travel

No. of Tourist arrivals

This sector will focus on construction of a new City

hotel aiming corporate travelers and refurbishmentof the existing Ceysand property in Bentota.

The company will leverage its strong balance sheet

and use internal funds for the construction of

Movenpick Hotel Colombo.

Source : SHL Management

Automobile

Hunt for future opportunities to be the dealer/agent

to many international brands.

Add renowned brands for the existing Ford and

Daihatsu portfolio.

Exploit the tax reduction on motor vehicles to supply

the mass market.


Health Care

Opening up a general hospital in Jaffna and construction of a 100 bed hospital in Kandy in 2011 to

complete by 2013.

Targeting the European market to offer medical tourism packages.

Private vs. Public Expenditure on Healthcare





27

Financial No and Value of Assets held by RFC’s (2002-2010)

The reduced interest and future economic growth

should stimulate private sector credit demand.

As interest burdens reduce, asset quality of RFC’s

and other financial institution should improve;

improving industry profitability.

This sector will increase its product portfolio via

peer companies to provide financial options and

gain synergies.


Information Communication Technologies

With the economy on top gear and the use of IT increasing accordingly, this segment is posed to grow.

Growth in BPO and KPO (CAGR of 31% during 2005-2009) operations are vibrant factors to the complementary

business such Softlogic IT.

Rise in GDP will increase corporate revenue which will demand for higher IT based services.

Cellular mobiles per 100 persons





28

SHL’s Challenges……

There could always be unforeseen circumstances that could hamper the growth of the economy that

will in general impact all businesses operating in the local market.

Despite of relaxed tariffs and levies’, there is a risk of Government unfavourable regulations

menacing the expansion of the Group’s growth plans to some extent. The financial services sector

which falls within the purview of the regulations of the Central Bank of Sri Lanka will benefit from

being in a regulated environment even if some may be interpreted as unfavourable to the growth of

the sector.

The Leisure sector is dependent on the number of tourists expected in Sri Lanka for its long term

growth. This can be hindered by any calamitous event in the country. For Softlogic, the Movenpick

Hotel will be depending on the business travellers and Ceysand on leisure travellers. The Retail

sector too depends upon on the tourists expected to make Sri Lanka a shopping destination.

As with any other business, the threat of competition entering the market is a risk that Softlogic

Group will have to face in many of its businesses/sectors. Given that the country is headed towards

growth in the years to come, the Group companies will face a profusion of new entrants. However,

especially in the retail sector, the distribution network which is the moral fibre of the sector will be

strengthened in order to achieve growth targets and as a barrier to entry for new comers.

Market Risk is specific to the financial services sector. This is an area where operations are exposed

to market risks that will include liquidity risk, interest rate risk and equities price risk.

There are innate operational risks in the financial sector such as processing of financial services

transactions that tend to be both high value and high volume. With the Group having its roots in IT,the objective will be to use this competitive advantage to develop competitive solutions that will

process transactions efficiently and accurately.

The Health Care sector will have to face the risk of securing consultants; other medical and

paramedical staff etc when expanding services outside of Colombo.

The Hotel subsector will be faced with fluctuating construction costs and the hiring of appropriate

qualified staff for the new hotel developments.




29

Private Placement Briefing

The Private placement agreement which concluded in April 2011, has taken up severe investorattention. The private placement was a fresh issue of shares to institutional and individual investors. It is

to be noted that the fresh issue of shares indicates fresh funds for the company.

The management made it clear that the private placement was due to the need for quick investment

plans to further strengthen competitive powers, to retire debt and also to avoid opportunity costs

relating to the delay of investment plans, SHL saw its IPO plan in action.

The private placement involved a parcel of 14 mn shares sold off at LKR72.0 which later split in the ratio

of 1:10 to 140 mn shares bring the cost per share down to LKR 7.2 (302.8% discount to the IPO price).

The key buyers at the placement included :

Further details of the transfer is as follows :

*The share split has reduced the purchase price under private placement to Rs. 7.2 per share.




30

Below is the quote of the Chairman with his view on the company :

Why IPO pricing holds over 300% premium compared to the Placement cost?

The valuations to derive at the private placement price were based on their forecasts for FY11E with a

discounted multiple to the market. Having performed beyond its expectations in FY2011, the IPO price

was determined based on their forecast for FY12E, but adjustments were made in view for the liquidity

and the marketability of the share, although the share price records a difference of LKR21.8 in absolute

terms.

We believe that investors will not act by the wrong mentality but instead focus on the stock with its

attractive valuation as it is strong IPO and another sturdy addition to the diversified basket of CSE.

Ashok Pathirage (Softlogic) – “I feel Softlogic is in the right sectorswhich are most exciting and rewarding at present and in the

future to become what we want to be.”

“Aggressiveness is in our genes. We are hands-on, focused and

flexible when required to constantly seek opportunities for

organic growth as well via acquisitions.”

[Daily FT]




31

VALUATION

Forecast FY12E earnings are in line to projected earnings of LKR 854.0 mn for FY11. We remain our forecast after

incorporating Asiri Hospital Holdings into group performance. With the growth in per capita income and

improvement in private health care, we expect Softlogic Communications and Asiri Hospital Holdings to contribute

42% and 46% to the top line respectively.

We expect a continual future growth in EPS from LKR 1.3 in FY11 to a YoY increase of 130.8% in FY12E and 6.7% in

FY13E respectively. At LKR 29.0 the company is trading at 21.7X FY11 earnings and at 9.7X FY12E compared to the

market which is trading at 18.9X FY11 whilst the diversified sector PE at 23.0X FY11. With an expected growth rate

of 163.7% FY12E and ROE in 27.0% range the share is anticipated to outperform both the market and sector.

Therefore, with the rumble in the Sri Lankan economy, growth in per capita GDP, change in consumer trends,

improved private healthcare and influx tourist arrivals contributing to the overall earnings of the company. Thecounter believes to trade at a significant discount in FY12E and FY13E to the current diversified sector and market

FY11 multiples of 22.7X and 18.7X respectively . Thus, in light of the above, Asia Wealth Management recommends

investors to SUBSCRIBE.




Research...............................................................................................……………………

Saminda Weerasinghe Amali Perera

Head of Research Senior Analyst

(94-11)5320250 (94-11)5320256

[email protected] [email protected]

Corporates Economy Crishani Perera (94-11)5320251 Dhanusha Pathirana (94-11)5320257

Minoli Mallwaarachchi (94-11)5320360 Nuwan Pradeep (94-11)5320257

Nirmala Samarawickrama (94-11)5320253 Travis Gomez (94-11)5320000

Shehara Fernando (94-11)5320256

Dilan Wijekoon (94-11)5320253

Thilina Ukwatta (94-11)5320253

ales.............................................................................................……………………

STITUTIONAL SALES RETAIL SALES

ri Marikar (94-11) 5320224, 077 3576868 [email protected] Shiyam Subaulla (94-11) 5320218, 0773502016 shiyam@asiaca

shan Wijayakoon (94-11) 5320208, 0777 713645 [email protected] Gagani Jayawardhana (94-11) 5320236, 0714084953 gagani@asiacaaz Aboobucker (94-11) 5320213, 0777-727352 [email protected] Priyantha Hingurage (94-11) 5320217, 0773502015priyantha@asiacra Hedigallage (94-11) 5320211, 0777 713663 [email protected] Neluka Rodrigo (94-11) 5320214, 0777366280 neluka@asiacalaka Hapugoda (94-11-5320240, 0777 256740 [email protected] Subeeth Perera (94-11) 5320227, 0714042683 subeeth@asiacminda Mahanama (94-11) 5320223, 0777 556582 [email protected] n Bibile (94-11) 5320238, 0777 352032 [email protected]

ANCHESbathgoda Asian Alliance Building, No.04, Sirimawo Bandaranayake Mw, Kadawatha. Asiri Perera 011-5734773, 0773-692812 [email protected]

unegala Asian Alliance Building, No.254, Colombo Rd, Kurunegala. Asanka Samarakoon 037-5628844, 0773-690749asanka@asiacapita

ara Asian Alliance Building, No. 312,Galle Road Nupe, Matara. Sumeda Jayawardena041-5677525, 0773-687307sumeda@asiacapit

e Capital Reach Building, 2nd Floor, No. 16A, Gamini Mw, Galle. Ruchira Silva091-5629998, 0773-687027 [email protected] Wijewardena091-5676766, [email protected]

E Floor CSE, 01-04, World Trade Centre, Colombo –

1. Thushara Adhikari011-5735122, [email protected]

ombo Asia Asset Finance, 171/1, Station Road, Negombo. Uthpala Karunatilake 031-5676881, 0773691685uthpala@asiacapital

nnappuwa No.176, Negombo Road, Katuneriya. Sajith Iroshan 032 5673881, 077 3740208 [email protected] Sandun Athulathmudali 032 5673882, 077 2533331 sranga@asiac

RVICE CENTRESdy Capital Reach Building, No.165, Katugodella Veediya, Kandy. Nilupul Hettiarachchi 081-5628500, 0773-691816 nilupul@asiacapita

Radhika Hettiarachchi 081-5625577, 0777-810694 radhika@asiacapit

mbantota Hambanthota Chember of Commerce, Thangalle Road, Hambantota. Gayan Sanjeewa047-5679240, [email protected] Muthumali047-5679241, [email protected] Ranasinghe 0772378352 [email protected]

para 2nd Floor, T.K.S. Building, D.S. Senanayake Street, Ampara. Ravi De Mel 063-5679071, 0772-681995 [email protected] Madushanka Rathnayaka063-5679070, 0779-036577 shanka@asiaca

na 11-8, First Floor, Stanley Road, Jaffna Sutharshan021-5671800, 0772-39581 [email protected], 0778-449773 [email protected]

port has been prepared by Asia Wealths (Private) Limited. The information and opinions contained herein has been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and n

ntation or warranty, express or implied is made as to its accuracy, completeness or correctness, reliability or suitability. All such information and opinions are subject to change without notice. This document is for information purposes only, descriptions of any company or companies or

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Softlogic Holdings - IPO review - june 2011

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Transcript of Softlogic Holdings - IPO review - june 2011