Sri Lankan stocks end weaker on political woes

Reuters: Sri Lankan share index ended weaker on Monday, hovering near its nine-week closing low hit last week, as political woes over a no-confidence motion against the prime minister weighed on sentiment, although foreign buying boosted the turnover, brokers said.

The turnover stood at 2.3 billion rupees ($14.82 million), well above this year’s daily average of around 1.2 billion rupees.

The Colombo stock index ended 0.42 percent weaker at 6,449.90, near its lowest closing since Jan. 23 hit on Wednesday. The markets were closed on Friday for a holiday.

The index rose 0.51 percent last week, its first weekly gain in five, but dropped 1.14 percent last month.

“Local investors are on the sidelines ahead of the no-confidence motion, but foreign buying boosted the turnover,” said Dimantha Mathew, head of research, First Capital Holdings.

Foreign investors bought a net 1.6 billion rupees worth of shares on Monday, but they have net sold 1 billion rupees worth equities so far this year.

Political uncertainty and worries over a slowing economy weighed on sentiment, brokers said.

Prime Minister Ranil Wickremesinghe is facing a no-confidence motion, which will be debated on April 4 before voting, with analysts saying support from many political parties will be needed for Wickremesinghe to clear the vote.

Cautious investors await the outcome of the rate announcement, said analysts.

Sri Lanka’s central bank is expected to keep key interest rates unchanged on Wednesday after a rate review, but economists in a Reuters poll are not ruling out the possibility of a rate cut to help bolster economic growth that has slipped to a 16-year low.

Shares in Asiri Hospitals Plc ended down 9.1 percent, while LAUGFS Gas Plc closed 22 percent down, Commercial Bank of Ceylon Plc ended 1.9 percent down and Dialog Axiata Plc closed 0.7 percent weaker.

Sri Lanka’s economy grew by 3.1 percent in 2017, the slowest in 16 years and well below the 4.5 percent seen in 2016, revised government data released showed last week.

($1 = 155.2000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez, Editing by Sherry Jacob-Phillips)

USD160 Mn Havelock City Commercial Development to Commence Construction

Havelock City- the premier integrated mixed-use development project in Sri Lanka conducted the Ground Breaking of its Commercial Development, the developers said in a news release.

"The on-time completion of the piling works paved the way to commence the construction of the Super Structure which will be completed by 2021. The construction contract was awarded to China Harbour Engineering Company Ltd. which has its global foot print in over 100 countries.

"Havelock City, the brain child of Mr. S P Tao is developed by Mireka Capital Land a fully own subsidiary of Overseas Realty (Ceylon) PLC, the owner, developer and manager of the iconic World Trade Centre Colombo.

"The Havelock City Commercial Development was designed by the globally renowned Palmer & Turner Group Singapore. It comprises a 50 storeyed Office Tower and a Shopping Mall built to International Standards which will be an iconic landmark in the vicinity," it said.

"The Office Tower housing Grade A premium office space is designed to be a LEED GOLD certified building and is built to the highest standards that enables efficient space planning through column free wide floor plates and a smart functioning infrastructure. The overall design, built quality and facilities will enable businesses an unparalleled competitive advantage.

"The Shopping Mall is developed as a community level shopping mall serving the lifestyle needs of the catchment. A miniature heaven for the ardent shopaholic, the mega mall comprises six floors of both local and international fashion brands, dining and entertainment experiences amidst a state-of-the-art multiplex cinema; a welcoming treat to anyone who craves an undivided shopping experience

"Additionally, the two basement levels of parking with ample space to park over 800 vehicles complements the convenience and vibrancy offered by the Havelock City Commercial development," it added.

The Commercial development of Havelock city will be the visual anchor of the Havelock City Residencies which comprises eight magnificently designed apartment towers in 18 acres of prime land in Colombo, the release said.

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Harry group cross 50% threshold in Aitken Spence

Melstacorp PLC together with related parties (Milford Exports, Stassen Exports and Ms. DST Jayawardena) now have a controlling 51.04% of the Aitken Spence conglomerate, Melstacorp Managing Director Amitha Gooneratne said in a Stock Exchange filing on Mar. 26 announcing the acquisition of approx. 8.13 million Aitken Spence shares by Melstacorp.

Gooneratne listed the shares held by Melstacorp and related parties as – Melstacorp approx. 47.17%, Milford Exports approx. 1.064%, Stassen Exports approx 0.799 and Ms. Jayawardena as 0.0068% (27,839 shares.)

They collectively hold approx 199.09 million shares in Spence (49.038% approx).

The filing explained that "as this purchase is made after a completion of one year cycle and also as the company together with the aforementioned connected parties has crossed the 50% threshold, the restriction on purchase without triggering a mandatory offer as per SEC Rule No. 31.1 will not apply to this purchase or any future purchase of Aitkent Spence PLC shares by this company (Melstacorp).

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Melstacorp get SEC nod for off-floor transfer of DCSL shares to its shareholders

Melstacorp PLC, the holding company of Distilleries Company of Sri Lanka (DCSL), last week announced in a Stock Exchange filing that the Securities and Exchange Commission of Sri Lanka has approved the off-floor transfer of DCSL shares declared as a "dividend in specie" (a dividend other than in cash) to the shareholders of Melstacorp on the already announced ex-dividend date.

In an earlier filing on Mar. 27, Melstacorp announced that DCSL had, "due to a deviation with regard to the previous approval obtained from the SEC," had made an additional submission to the SEC regarding its off-floor transfer application.

In February this year, Melstacorp announced the interim dividend in specie of DCSL shares to its shareholders under which every 27 shares of Melstacorp will qualify to receive eight DCSL shares.

Since August 2016, DCSL shares have not been traded on the Colombo Stock Exchange at the request of the company to facilitate a share swap between Melstacorp and DCSL under which Melstacorp, previously a fully owned subsidiary of DCSL, became the holding company of DCSL.

In its March 27 filing, Melstacorp said it expected that the suspension of trading of DCSL shares will be lifted once the SEC approves the off-floor transaction.

Accordingly, DCSL had given an undertaking to the SEC that it will comply with the requirements of SEC’s Nov. 17, 2016, directive within a time frame agreed with the SEC.

The filing said that the failure to comply with the regulatory requirements would result in the suspension of the trading of DCSL shares on the CSE.

Under the Aug. 2016 arrangement, described as the country’s first 180 degree share swap, Melstacorp which was a fully owned subsidiary of DCSL, became DCSL’s holding company.

Under this arrangement, holders of each DCSL share were allotted four Melstacorp shares in exchange. They were also told that they will enjoy preferential allotment of DCSL shares once the arrangements are completed and DCSL will once again trade on the CSE.

For many years the cash rich DCSL, conscious of the fact that it was a player in the controversial liquor industry, has been diversifying into various other business segments.

Melstacorp is now the holding company of DCSL and these businesses.

It is expected that the DCSL shares being issued as a non-cash dividend to Melstacorp shareholders, will be uploaded to their Central Depository System (CDS) accounts shortly and DCSL will once again be on the CSE trading boards after a long absence.

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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.