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Saturday May 18th, 2024

How Sunshine Holdings is Unlocking Value Opportunity Amid Economic Challenges

Hiran Samarasinghe, Head of Investor Relations of Sunshines Holdings

Sunshine Holdings has emerged as a paragon of adaptability, resilience and stability for investors searching for high-value investments.

The last four years have been the toughest on the economy. However, Sunshine Holdings has had an encouraging run. In the four years to the end of March 2023, the group’s revenue has grown 25.7% (CAGR) to Rs51.9 billion, and earnings are up 18.9% (CAGR) to Rs2.2 billion. EPS has grown 16% annually over four years to Rs47 as of March 31, 2023, while ROE has increased by 6.34% to 18.8%.

In this interview, Sunshine Holdings Investor Relations Head Hiran Samarasinghe deep dives into the company’s performance and shares insights into its vision for growth and investment strategies. He begins by explaining the attributes of Sunshine Holdings’ sustained financial performance success:

In a time, rife with economic fluctuations, political uncertainty, and societal challenges, Sunshine Holdings shines as a paragon of business resilience. Over the last four years, we’ve not only navigated these turbulent waters but have also flourished. This stellar growth rests on two pillars: organic development and judicious inorganic expansion.

Our unwavering focus on key sectors Healthcare, Consumer, and Agribusiness has been instrumental in this success. Central to our resilience is our dedicated workforce. Despite confronting numerous challenges, they’ve consistently delivered essential items, from life-saving medications to surgical gear, thereby epitomizing the impact of a devoted team overcoming adversity to deliver value.

Organic growth is the cornerstone of our success, but our journey has also been significantly shaped by astute inorganic strategies. We’ve undertaken targeted initiatives that have converted obstacles into growth opportunities. A prime example is our strategic capital reallocation to our core sectors. By divesting from non-essential areas like tea plantations and renewable energy, we’ve liberated capital and managerial bandwidth, subsequently reinvesting these in strengthening our foundational businesses.

The global pandemic showcased our adaptability. In 2020, we enriched our consumer portfolio by acquiring Daintee Ltd., a leader in sugar confectionery. Then, in 2021, we further solidified our healthcare sector with a game-changing merger with Akbar Pharmaceuticals. This not only broadened our reach in pharmaceuticals but also established our presence throughout the healthcare value chain.

In 2022, we diversified into tea exports, fortifying our consumer division and securing a foothold in international markets. The revenue from this venture reinforced our consumer segment and acted
as a financial cushion against supply chain challenges in pharmaceutical imports, guaranteeing uninterrupted access to vital medications.

Amid economic volatility and fluctuating capital costs, Sunshine Holdings has exemplified sound decision-making. Over the last year, we intentionally scaled back on merger and acquisition activities to focus on optimizing our existing assets and integrating newly acquired businesses. This strategic hiatus enabled us to maximize value from past acquisitions, ensuring seamless and effective integration. By remaining committed to our core sectors, executing thoughtful acquisitions, and emphasizing integration and synergy, Sunshine Holdings has emerged as a beacon
in the capital market ecosystem.

Can you briefly take us through the performance of your healthcare, consumer goods and agribusiness, their contributions to the growth of the group and the strategies behind their successes?

The group recorded a consolidated revenue of Rs13.4 billion for the quarter ended 30th June 2023 (1QFY24), up 14.1% year-on-year (YoY). Sector-wise revenue contribution from the healthcare, consumer and agribusiness sectors was 47.2%, 35.1% and 17.6% respectively.

The finance cost for the quarter increased to Rs536 million, including interest on lease liabilities of Rs34 million and exchange loss of Rs261 million, compared to Rs277 million during the last
year. The increase is owing to higher interest rates, higher facility utilization, and losses due to exchange rate movements. Thereby, group PAT reduced to Rs1.4 billion in 1QFY24 compared to Rs1.6 billion reported during the same period last year. Profit attributable to equity shareholders (PATMI) closed at Rs915 million for 1QFY24, a decrease of 12.2% YoY. In 1QFY24, the Healthcare sector’s
revenue grew by 8.2% YoY, propelled by strong sales in pharma manufacturing and medical devices. However, this growth was dampened by declines in the pharma and retail sectors, attributed to market disruptions and late-quarter price control adjustments. Despite this, the EBIT margin in healthcare improved due to increased sales of medical devices and manufacturing, although this was partially offset by weaker retail and pharma performance. In specialized segments, the pharma revenue contracted by 17.2% YoY due to lower consumer spending, whereas Lina Manufacturing saw an extraordinary 362.1% YoY growth, led by the Metered Dose Inhaler (MDI) segment. Healthguard Pharmacy experienced a 10.6% YoY revenue increase, fuelled by a 7.8% boost in customer footfall, although profits were hampered by a heightened focus on essential medicines over wellness products.

In the Consumer sector, revenue was robust at Rs4.7 billion, marking a 20.9% YoY increase and contributing to 35.1% of the group’s total revenue for the period. Brands like Zesta, Watawala, Ran Kahata, and Daintee continued to grow market share, particularly in the tea and confectionery segments. However, challenges in the export business led to a revenue drop of 22.1% YoY, contributing to an overall EBIT margin decrease of 6.8% from 9.4% in the previous year. The Agribusiness sector also reported gains, with a 27.3% YoY revenue increase mainly driven by palm oil volumes. However, the PAT margin declined due to higher tax rates and the imposition of the Special Commodity Levy. Watawala Dairy saw a notable revenue surge of 53.2% YoY, primarily from increases in sales volume and milk prices, but incurred a net loss of Rs44 million due to high feed costs.

What are the factors shaping the future of Sunshine Holdings? What are Sunshine Holdings’ plans for unlocking growth? Can you take us through your strategy for the next five years?

The essence of our strategy lies in continuity as we endeavour to uphold our identity as an emerging market consumer powerhouse rounded in three core sectors: Healthcare, Consumer, and Agribusiness. This commitment to a focused portfolio has been instrumental in propelling our growth trajectory thus far. Furthermore, our strategic vision is keenly fixed on the horizon of mergers and acquisitions within these core sectors, seeking opportunities that promise enduring shareholder value. Investing in digital technology is central to the company’s plan for enhancing efficiency and profitability consistently over the years. Yet, what sets Sunshine Holdings apart is our commitment to human capital. Acknowledging the challenges of talent retention, we prioritize developing a skilled workforce, an essential strategy for achieving our growth objectives.

What challenges and risks do you anticipate, and how would the group deal with these?

In addressing the challenges and opportunities in the current economic landscape, several key issues come to the fore. First, while the government has enacted bold reforms to stabilize and rejuvenate the economy, more reforms are essential. It’s important to acknowledge that some of these necessary changes will likely impose hardships on citizens. For corporations operating in the country, adapting to these shifts will undoubtedly be challenging. Second, the issue of policy stability remains a significant concern. Frequent changes in governmental policies make it difficult for companies to implement strategies that were initially designed based on a different regulatory framework.

In addition to economic and policy issues, talent retention presents another obstacle. The ongoing brain drain has made it increasingly challenging to secure the top-tier talent needed to execute long-term corporate strategies. As a response, we are investing heavily in talent acquisition and retention initiatives.

Lastly, the industry faces specific challenges such as ad-hoc price controls in the pharmaceutical sector. These controls, along with similar restrictions in energy and foreign exchange, have contributed to economic instability. Our industry advocates for a standardized pricing formula akin to the one used for fuel. This would allow drug prices to fluctuate according to global market conditions, ensuring a more stable and available supply in the local market.

The group is determined to maintain leverage below 40%, so how would you approach expansion and growth over the next few years (especially after finance costs rose 290% in FY23 due to the utilization of working capital funds, rising interest rates and investments in the new tea export business)?

In the complex world of capital markets, Sunshine Holdings stands out for its conservative approach to leverage, enhancing its profitability even amid fluctuating interest rates. Particularly in Sri Lanka’s volatile market, this cautious stance serves as a pillar of financial sustainability. The company has fortified its reputation over the past two years by avoiding debt moratoriums or restructuring, earning trust and ensuring continued access to capital in tight market conditions.

Recent finance cost increases were triggered by elevated interest rates and supply chain disruptions affecting working capital debt. Despite these challenges, the company, with its healthcare focus, remained committed to preventing product shortages that could impact lives. Looking ahead, we see positive signs as declining market interest rates and normalized working capital needs would positively impact future financial performance, and the company’s calculated financial prudence positions it as a stable and forward-thinking investment opportunity in an otherwise turbulent landscape.

Let’s talk about the valuation of Sunshine Holdings. Do you believe the current price-to-earnings ratio reflects the upside potential of the group?

Navigating capital markets requires skill in identifying valuable investment opportunities, and Sunshine Holdings offers a compelling case backed by promising indicators. Notably, the company trades at a 25-30% discount compared to its conglomerate peers, signifying untapped growth potential that presents a unique investment opportunity, especially given the company’s financial stability, which remains robust even after accounting for 2022’s significant currency fluctuations.

Furthermore, the company’s share price is currently underperforming relative to its recalibrated operational metrics. This disparity suggests an immediate valuation opportunity aligned with the company’s accomplishments. Looking ahead, Sunshine Holdings anticipates a 20-25% Return on Invested Capital (ROIC) driven by strategic initiatives in core sectors. As the cost of capital trends downwards; it positions the company well for long-term value creation, thereby offering investors a chance to capitalize on both immediate and future value, making it an attractive investment proposition.