Friday 30 March 2018

Sri Lanka to bring transitional provisions on new income tax law

ECONOMYNEXT - Sri Lanka will bring changes to a new income tax law effective this year to tide over practical difficulties encountered and also introduce transitional provisions in the change-over from the old act.

Finance Minister Mangala Samaraweera had proposed transitional provisions covering unexpired tax holidays and capital allowances which have to be issued as regulations, the state information office said.

Some directions of the new act also had to be changed to take into account practical difficulties encountered, the cabinet was told.

The cabinet had approved the proposals.

Sri Lanka 12-month Treasuries yield edges up to 9.69-pct

ECONOMYNEXT – The yield on Sri Lanka’s 12-month Treasury Bills edged back up 03 basis points to 9.69% at an auction Tuesday where bids for other tenors were rejected, the central bank’s public debt department said.

The central bank collected its total requiremnt of Rs25.5 billion rupees from the sale of 12-month Treasury Bills at the auction, the total for all tenors offered, although it offered only Rs13.5 billion worth of 12-month bills and got bids worth Rs35.4 billion.

Bids for 03-month and 06-month bills were rejected although Rs6 billion in each tenor were offered, generating bids of Rs12.5 billion and Rs9.3 billion.

Sri Lanka’s Hemas Holdings retains 'AA-(lka)' Fitch rating

ECONOMYNEXT - Sri Lankan conglomerate Hemas Holdings has retained its 'AA-(lka)' Fitch rating with a stable outlook, with its stationary firm acquisition seen boosting cash flows while strong logistics and drugs businesses offset a slowdown in consumer goods and hotels.

Fitch said in a statement it has also confirmed the National rating on Hemas's outstanding senior unsecured debentures at 'AA-(lka)'.

The full statement follows:

Fitch Ratings-Colombo-27 March 2018: Fitch Ratings has affirmed Sri Lanka-based conglomerate Hemas Holdings PLC's (Hemas) National Long-Term Rating at 'AA-(lka)' with a Stable Outlook. Fitch has also affirmed the National rating on Hemas's outstanding senior unsecured debentures at 'AA-(lka)'.

Hemas's rating reflects Fitch's view that the group's business risk profile has improved from the acquisition of Atlas Axillia (Private) Limited (Atlas), the largest domestic manufacturer and distributor of exercise books, pens, colour products and other school stationery, early this year. However, the benefits are offset to an extent by the operational pressures in its fast moving consumer goods (FMCG) segment that accounted for 40% of EBITDA in the financial year ended March 2017 (FY17) and its leisure business (12%), which we expect to persist in the next 12-18 months. The affirmation takes into account Fitch's view that significant expansion plans in the next couple of years could limit further improvements in Hemas's leverage, defined as adjusted debt/operating EBITDAR (FY17: 1.3x), as internally generated funds may not be sufficient to fully fund planned capex and shareholder returns.

KEY RATING DRIVERS

Atlas Boosts Defensive Cash Flows: We expect Hemas's LKR5.7 billion Atlas acquisition to improve cash flow stability as the latter's business is defensive across economic cycles. Fitch expects demand for school stationery to grow over the medium term, supported by government and private-sector investments in the education sector and rising per capita income in the country. We believe this acquisition is in line with Hemas's strategy of using its significant cash balance to expand its core businesses through M&A.

Atlas's stationery business fits into Hemas's FMCG segment and Atlas will be able to leverage on Hemas's established distribution network once the integration is completed. We expect Atlas to contribute around 15% and 25% to group revenue and EBIT, respectively, in FY19, its first year of full consolidation.

Expansion Limits Leverage Improvement: We do not expect Hemas to engage in any other large scale M&A that is similar to Atlas in the medium term, but the company will continue to spend LKR3 billion-4 billion on organic expansion in its core segments in the next few years. We estimate Hemas will generate around LKR4 billion per annum in cash flow from operations in the next few years but this may be insufficient to fully cover the planned capex and shareholder returns. We do not expect an improvement in company leverage in the medium term amid higher borrowings and a moderating operating performance.

FMCG Pressures: We expect the FMCG segment slowdown to continue in the next 12-18 months due to pressures in Bangladesh (around 15% of FMCG revenue in FY17) arising from the restructuring of Hemas's distribution network and increased competition. Bangladesh was the segment's growth driver in the last three years with revenue CAGR of over 50% but we expect the growth to materially decelerate in the near term as the company's moves to resolve the issues may take time. We believe Hemas may have to keep investing in its Bangladesh distribution network and marketing efforts to support its bigger operational scale and counter competition, which would keep margins below historical levels in the medium term.

We don't expect a recovery in domestic FMCG volumes in the near term as weak personal income and inflationary pressures may force consumers to continue to cut down on personal and home care spending. Domestic margins may also remain pressured due to a pickup in input costs and currency depreciation, which the company may find difficult to fully pass on to customers amid weak demand. However, steps taken by the company to streamline its supply chain operations are likely to generate cost savings to offset margin pressure to an extent. Hemas's FMCG revenue was flat yoy in 9MFY18 while EBIT margin contracted 270 bp over the same period.

Leisure Slowdown to Persist: We expect Hemas's hotel (around 50% of leisure sector EBIT) performance to continue to weaken in the medium term on declining occupancy and room revenue due to a slowdown in tourist arrivals, oversupply of graded accommodation and competition from the informal sector. Hemas's hotel sector revenue was flat in 9MFY18 while EBIT margins contracted almost 5 percentage points yoy.

Healthcare Stability: We believe the healthcare segment can offset most of the other segments' earnings volatility. We expect the drug distribution arm to continue winning market share from distributors exiting the market on price regulations, primarily on branded drugs. Hemas, which focuses on generic drugs, saw its market share rising to 30% in FY17 (22% in FY16) due to the lack of branded drugs in the market and acquisition of competitor brands. We expect the pharma segment and its hospital chain to continue growing in the medium term, supported by a rapidly ageing population, rising incidence of non-communicable diseases and undersupply in public healthcare services. However, the hospital sector may face regulatory pressure on pricing of certain services.

We expect Hemas's local drug manufacturing business to be the key growth driver for the segment. Less than 15% of Sri Lanka's drug requirements are produced locally with the government looking to increase it to 100% in the medium term with private-sector participation. Hemas plans to double its capacity by FY20 to cater to this demand. Hemas currently sells most of its output to the government under a long-term buyback program and we believe the company will be able to secure a similar contract for most of the new capacity. Any excess capacity can be used to produce its own branded products or for contract manufacturing.

Increased Mobility Contribution: We expect the mobility segment contribution to group EBIT to increase to 17% by FYE20 from 10% in FY17, supported by capacity expansion and exposure to high-margin businesses. The company is setting up a container yard and integrated logistics park to cater to the increased transhipment activity at the Colombo port and the growing demand for third-party logistics service. The new facility should contribute to the segment's top line and EBIT from FY19 when it is fully operational.

We expect Hemas's ship agency business to continue its growth, helped by extended service offerings and new partnerships. We do not believe the recent de-regularisation of foreign ownership in ship agency and freight forwarding businesses will have an immediate impact on the sector as it will take time and effort for foreign shipping lines to set up operations with similar service offerings provided by their local partners such as Hemas.

DERIVATION SUMMARY

Hemas is a well-diversified conglomerate similar to Richard Pieris & Company PLC (A(lka)/Stable) and Sunshine Holdings PLC (A-(lka)/Stable). Hemas is rated two notches above Richard Pieris to reflect its low leverage and higher exposure to defensive end-markets compared with the latter's modest presence in the cyclical plantation sector. Hemas is rated three notches above Sunshine due to its stronger business profile stemming from substantially higher cash flows from its defensive pharmaceutical and FMCG businesses and its larger operating scale. Sunshine's financial profile has weakened compared with Hemas due to its debt-funded acquisition in the cyclical plantation sector.

Hemas is rated one notch above leading beer manufacturer Lion Brewery (Ceylon) PLC (A+(lka)/Negative) to reflect its cash flow diversity, lower regulatory risks and strong financial profile.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Excluding acquisitions, organic revenue growth to average in the high single digits in FY19 and FY20 on expansion in the pharmaceutical and mobility segments, offset to an extent by the continued weakness in the FMCG and leisure segments.
- EBITDAR margin to contract and stabilise at around 12.5%-13% in the next two years amid cost pressures, competition and price regulation across most segments.
- Capex to average around 7% of revenue in the next two years to support the planned expansion.
- Dividend payout ratio of about 30% of net income to be maintained over FY18-FY21.
- Three months of Atlas results taken into consideration in FY18 with the full 12-month results consolidated from FY19.
- No M&A activity in the next two to three years.

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action

- Improvement in business risk profile while maintaining the current financial profile.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- Group gross adjusted debt/EBITDAR rising above 2.0x on a sustained basis
- Any significant integration issues or deviation from the company's conservative approach to new investment.

LIQUIDITY

Strong Liquidity Position: As at end-December 2017, Hemas had about LKR10.3 billion of unrestricted cash and LKR5.8 billion in unutilised credit facilities to meet LKR2.0 billion of debt maturing in the next 12 months. We do not expect Hemas to generate positive free cash flow in the next 12 months due to working capital investments, high capex and the acquisition of Atlas but its large cash reserves at hand places the company in a strong liquidity position. Hemas has another LKR1.9 billion of short-term working capital-related debt, which we expect to be rolled over by lenders in the normal course of business.

Sri Lanka's LOLC to continue growth path after Orix exit: Official

ECONOMYNEXT - Sri Lanka's LOLC group will continue its growth path after the exit of Japan's Orix, which had a 30 percent stake, Group Managing Director Kapila Jayawardene said.

LOLC will focus on micro-finance and growth with acquisitions in Asian markets, he said.

"I expect the growth trajectory to continue," Jayawadene said.

Orix sold its stake for 12.8 billion rupees to LOLC Holdings, privately held company controlled by Deputy Chairman Ishara Nayakkara taking 29.9 percent.

Orix had been a passive investor in the LOLC for many years.

The Orix stake was traded at 90 rupees, below the previous close of 111 rupees.

The stock was up 6.50 at 117.50 rupees in intra -day trading after the Orix deal.

Sri Lanka February vehicle registrations up 26-pct

ECONOMYNEXT - Sri Lanka's vehicles registrations rose 26.6 percent from a year earlier to 37,354 in
February 2018, with motor cars up 131 percent to 4,949 units and broad-based double digit growth in all categories, data compiled by an equities research house shows.

Total registrations of all vehicles in February was down from 42,783 unit in January, with working days down in the second month of the year, J B Securities, a Colombo-based equities brokerage said in an analysis of Sri Lanka's vehicle registry data.

Van registrations were up 73 percent from a year earlier to 1,000 and marginally down from 1,085 in January.

Three wheeler registrations were up 63 percent to 1,477 from a year earlier and slightly down from 1,544 in January.

The three wheelers became the car of the craftsmen and the public transport, ambulance and goods a haulage vehicle less affluent households especially in rural areas.

The current administration delivered an interventionist blow to people's aspirations by pushing up taxes and restricting credit to three wheelers.

There was also a collapse of the currency in 2015 and 2016 pushing up inflation. The administration took a drubbing in local elections last month.

Out of the 4,849 cars registered 773 were brand new and 4,042 pre-owned. Many so-called pre-owned vehicles are 'registered-de-registered' cars imported from Japan with zero mileage.

In February 2,681 vehicles registered were hybrids. Of that 1,836 were Wagon R models. Among vans Suzuki led with 618 out of a 1,000 units.