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Post  Melissa Pereira on Thu Aug 20, 2015 2:22 pm

The group’s equity holders’ profits dipped 44% YoY to LKR420.4 mn whilst revenue dipped c.39% YoY to record LKR5.9 bn due to Transport and Strategic Investments sectors not performing well. The key contributing Tourism sector to both revenue and net profit (c.48% and 58% respectively) saw its revenues decline marginally whilst profits dipped 32% YoY during 1QFY16 due to downturn in its key source markets in Maldives. Further the tourism sector saw an adjustment where SPEN’s Travels sub-segment is now being consolidated (as a controlling JV) and thus 50% of its profits being eliminated at bottom-line level. Meanwhile Strategic Investments reported a topline dip of c.75% YoY due to the ceased operations in 100MW thermal power plant during the period. The 10 year PPA (Power Purchase Agreement) with the CEB (Ceylon Electricity Board) expired on April 2015.

Being among the largest listed conglomerates on Colombo bourse and having penetrated some of the key economic areas within the local economy, SPEN has a competitive advantage to improve its performance in the coming years. In addition to being a pioneer in the hospitality industry having exposure in international markets and a dominant player in the cargo logistics industry, SPEN is seeking further growth opportunities in both local and international arenas such as the JV with Spanish RIU Hotels to build a 500 room resort whilst continuing efforts made to capitalize on its fast growing logistics sector.

However due to the lagging performance seen in its two key sectors owing to capacity building and expansions which would likely to continue through 1HFY16E, in addition to the non-renewal in SPEN’s remaining 100 MW thermal power plant for the moment, we revise down our forecast profits for FY16E by c.6% to LKR3,792.2 mn (up 6% YoY) and FY17E net earnings by c.5% to LKR4,291.6 mn (up 13% YoY). Nevertheless developments in the Tourism sector with regard to opening up of new properties in Sri Lanka and India would benefit SPEN’s earnings from 2HFY16E onwards which have been included in our forecasts. Further the 2015 interim Budget which requires companies of LKR2.0 bn profits in 2013/FY14 to pay 25% as a one-off tax would impact SPEN’s FY16E net earnings. On recurrent basis, the share trades at 10.7x forecast FY16E net profit and 9.5x forecast FY17E net earnings whilst trading at 1.1X FY16E and 1.0X FY17E PBV, holding controlling rights in AHUN, Sri Lanka's leading listed resort chain accounting for a large property portfolio. Therefore we maintain our recommendation BUY.
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Melissa Pereira

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