EUR 6.84 For Business Accounts Only

JKSB Corporate Update_Softlogic Holdings PLC (SHL)_January 2017

Executive Summary

We reinitiate coverage of Softlogic Holdings PLC (SHL) with a HOLD recommendation for long term investors with a 3-4 year investment horizon. SHL has embarked on a series of successful debt funded acquisitions in recent years, creating significant post-acquisition value at the individual company level, reflected in the Group’s break-up value of Rs. 29.00 per share (does not take into account a prime land bank which adds a further Rs. 2.90 per share if incorporated). While value generation at the subsidiary level has not yet been reflected in Group earnings and cashflows, this is due largely to the overhang from historical debt funded capital infusions into subsidiary companies. We believe SHL could reduce its debt burden - and thereby see a multiple re-rating - through 1) divestment of loss-making/non-core businesses (auto & leisure); and 2) a swap of debt for equity at either the subsidiary or holding company level. Near term headwinds in the form of 1) VAT charges & drug price controls for the healthcare business; 2) rising interest rates; and 3) a short term earnings drag from the newly opened city hotel property, will cap FY17 earnings growth at low single digit levels. However, long term growth prospects for SHL’s core retail/ICT, healthcare and financial services businesses remain strong supported by favourable secular trends of increasing per capita incomes, an aging population, & rising aspirational lifestyle and fashion demand.

Core businesses should be prime beneficiaries of favourable secular trends

Rising disposable income levels, coupled with 1) increasing television/web/social media population penetration (driving aspirational lifestyle and fashion demand); 2) shortening replacement cycles; and 3) low penetration levels in selected white goods categories, should support healthy growth in demand in the consumer electronics and fashion retail markets over the medium term. SHL, as the dominant player in both the organised/branded fashion retail market and the fast growing smart phone market, and third largest player in the overall consumer electronics market, should be a prime beneficiary. Similarly, the Group’s healthcare business - the largest private sector hospital operator and market leader in diagnostics services - is, in our view, best positioned to benefit from a projected increase in private healthcare demand driven by growth in per capita income, a rapidly aging population, and the growing incidence of NCDs (Non Communicable Diseases) among middle and upper income earners. SHL’s life insurance business (fifth largest player) continues to grow market share - supported by above-industry growth in both renewal & new business premiums - in an under penetrated market (only 13% of the population owns a life insurance policy) which is expected to record double digit medium term growth amid rising affordability.

Increased FY18 contribution from fully owned subsidiaries should offset short term hit to healthcare

We project full year earnings of Rs. 751mn at Group level for full year FY17, +4% YoY, supported by strong contribution from the financial services and retail sectors, with Odel in particular expected to have had a strong 3QFY17 (stemming from increased footfall and transaction values during the festive season from both local consumers and tourists), while Softlogic Life Insurance PLC (AAIC) typically recognises a higher life surplus transfer in 4QCY16/3QFY17. While an increase in the corporate tax rate on healthcare (from 12% to 28%) will adversely impact sectoral profit contribution in FY18, our full year earnings to equity projection of Rs. 955mn for SHL in FY18 represents a YoY growth of 27% and largely reflects 1) our projections of strong profit growth for the fully owned ICT/retail segments and the life insurance business; and 2) reduced finance costs stemming from an expected retiring of short term debt at the holding company level. We project SHL to maintain last year’s DPS of Rs. 0.50 in FY17, translating to a ~52% payout ratio and a ~4% dividend yield. Key Group downside risk: a further rise in interest rates. Reiterate HOLD.