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Analysts: Thilina Ukwatta: [email protected]
SOFTLOGIC HOLDINGS LTD - IPO
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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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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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.”
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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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
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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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.
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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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.
Source :IPO Prospectus
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
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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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.
Source :IPO Prospectus
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.
Source :IPO Prospectus
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
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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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.
Source :IPO Prospectus
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
Source :IPO Prospectus
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%.
Source :IPO Prospectus
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
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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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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.
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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
Source :IPO Prospectus
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
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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
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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
Source :IPO Prospectus
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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.
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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”
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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.
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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.
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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.
Source :IPO Prospectus
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
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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.
Source : SHL Management
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
Source : SHL Management
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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.
Source : SHL Management
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
Source : SHL Management
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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.
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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.
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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]
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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.
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SOFTLOGIC HOLDINGS LTD – INITIAL PUBLIC OFFER
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
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