Conglomerate, Aitken Spence PLC (SPEN) posted a net profit of LKR439.5 mn for 1QFY2011, up by a sharp 49.6% YoY mainly on the back of strong contribution from Sri Lankan leisure business and growing service sector.
SPEN has its major interests in hotels, travel and tourism, cargo logistics and power generation whilst having presence in printing, plantations and financial services. The company continuously seeks avenues to expand its presence regionally and globally whilst looking forward to partner in North and East development projects.
Further, the company along with China Merchant Holdings were the sole bidders to build and operate the first terminal of the Colombo South Harbour (Colombo Port Expansion project) and the government has decided to award the project to them. However this is still in the final phase of discussions which we believe would be finalized in another month's time.
Group revenue up by 12.0% YoY to LKR5,662.8 mn in 1QFY2011 . SPEN's consolidated gross revenue has increased by a moderate 12.0% YoY in 1QFY2011 on the back of increased tourism and cargo logistics sector earnings despite the dip in contribution from Strategic Investments.
The strategic investment sector; the highest contributor to the group's top line (47% of total revenue) has dipped by a marginal 2.1% YoY during 1QFY2011 whilst SPEN's tourism business has marked a sharp growth of 26.2% YoY (30% of total revenue) owing to reviving local tourism despite it being the off season in the world at large.
Group's Cargo Logistics operations which was negatively affected by low activity levels triggered by global recession has shown signs of recovery with revenue increasing by a sharp 28.6% YoY (16% of total revenue) where as the newly formed Services sector has recorded a 10.4% YoY growth in its top line (7% of total revenue).
Further it should be noted that the revenue mix of SPEN has changed considerably with increased contribution from tourism and cargo logistics sectors (4% and 2% increase in contribution to top line in 1QFY2011 compared with 1QFY2010) whilst the largest strategic investments sector recording a dip (6% in 1QFY2011 versus 1QFY2010) mainly on the back of comparatively lower tariffs offered by the CEB
for power generation.
Consequently, the group's net revenue has recorded a rise of 11.9% YoY in 1QFY10 to LKR5,578.4 mn.
Operating costs up 12.9% YoY in 1QFY2011. SPEN’s total operating costs have increased by 12.9% YoY to LKR4,892.1 mn in 1QFY2011 on the back of increased activity levels of the group (especially the hotel operations and cargo logistics) which have pushed up the direct operating costs by a significant 34.6% YoY and employee benefit expenses by 21.8% YoY.
SPEN records an operating profit of LKR714.4 mn for 1QFY2011. SPEN’s operating profit for the quarter in concern has recorded a marginal growth of 5.4% YoY to LKR714.4 mn owing to improved performance in tourism and services sectors of the group.
The company’s biggest profit contributor, Strategic investment sector (57% of the total operating profit) has recorded a dip of 14.7% YoY on the back of lower tariff rates offered by the Ceylon Electricity Board for power generation. SPEN’s tourism sector has converted its operating loss of LKR85.7 mn in 1QFY2010 to a profit of LKR12.7 mn in 1QFY2011 despite this quarter being the off peak for tourism coupled with poor performance in its Maldivian arm. The company’s Cargo logistics sector marked a marginal dip of 1.3% YoY despite the higher contribution to the top line owing to increased non cash expanses which has risen 214.1% YoY.
The services arm continued to grow its operating profits with an increment of 6.6% YoY in 1QFY2011 and a contribution of 23% to the total profits.
SPEN records LKR647.3 mn as pre tax profits for 1QFY2011. SPEN’s 1QFY2011 net finance cost has dipped by a sharp 57.1% YoY in 1QFY2011 on the back of 38.4% YoY increase in finance income coupled with 29.5% YoY dip in finance expenses driven by the fall in interest bearing liabilities and lower rates.
Further, the associate income has marked a two-fold rise owing to stronger performance of its hotel associates coupled with better earnings from plantations. Consequently, the company made a pre tax profit of LKR647.3 mn in 1QFY2011 versus a profit of LKR488.1 mn in corresponding period last year.
SPEN’s bottom line up by a sharp 49.6% YoY to LKR439.5 mn in 1QFY2011. The conglomerate has posted a bottom line of LKR439.5 mn for 1QFY2011, up by a sharp 49.6% YoY on the back of healthy earnings from tourism sector coupled with recovering cargo logistics sector and growing services sector.
Sectoral performance
The Tourism sector has posted a pretax loss of LKR8.9 mn in 1QFY2011 versus a loss of LKR188.7 mn an year ago. However the sector has recorded a postive operating result of LKR12.7 mn in the quarter (versus a loss of LKR85 mn in 1QFY2010) despite this quarter being the worst for tourism industry coupled with poor performance in Maldivian resorts.
SPEN, with primary interest in hotels and tourism has been in search of opportunities to expand its presence both in the country and the region. The company plans to invest LKR9 bn to expand its footprint in the South West Coast coupled with reaching new location such as Trincomalee (where they have 100 acres) Jaffna and
Kalpitiya. In addition, the company is refurbishing “Neptune” its first property in down south (Beruwela), into a wellness resort and a spa specialising in ayurvedic treatments which would commence operations in winter 2010 as “Heritance Mahagedara”. To fund SPEN’s expansion strategies, its subsidiary; Aitken Spence
Hotel Holdings (AHUN: LKR450.00) raised LKR2.5 bn by way of a rights issue in March 2010 and SPEN has invested LKR1.8 bn to retain its effective holding in the subsidiary.
The Cargo Logistics sector’s post tax profit dipped 21.4% YoY in the first three months of the year, despite the growth in top line. This could be attributable to the 214.1% YoY increase in non cash expenses in 1QFY2011.
The Strategic Investments sector has posted a profit after tax of LKR364.4 mn in 1QFY2011, down by 4.0% YoY. Power generation has been driving the sector earnings where its revenue has come down owing to the lower tariffs paid by the Ceylon Electricity Board as per the Power Purchase Agreements.
Furthermore, the gross margins of power generation would deteriorate in coming years as the power agreements of the three thermal plants are nearing expiration. However, the company is positive on its expertise in power generation and plans to enter the power and energy industry in neighbouring countries. Further SPEN has obtained a licence to build and operate a 3MW hydro power plant and plans to connect to the national grid in FY2011.
The Services sector comprising of elevators (OTIS), financial services (MMBL), Operations and maintenance of SPEN’s power plants and insurance businesses has recorded a net profit of LKR601.2 mn in 1QFY2011 (up 5% YoY). SPEN is looking forward to expand this sector in the future focusing more towards IT related services.
Forecast FY2011E earnings up by 18.5% YoY to LKR2,460.7 mn. We forecast FY2011E net profit to reach a conservative LKR2,460.7 mn (up by 18.5% YoY) backed by the turnaround performance in tourism sector coupled with improving cargo logistics business and project FY2012E net profit rise by 13.6% YoY to LKR 2,795 mn.
Fairly valued on 21.0X forecast FY2011E net profit. Share is fairly valued on 19.8X projected FY2011E earnings and 17.4X forecast FY2012E net profit whilst trading on 2.3X PBV. With the finalisation of Colombo Port project which would strengthen the company’s bottom line in another 2-3 years time coupled with SPEN’s strong management and diversified operations we rate SPEN a Long term BUY
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