Fitch downgrades Sunshine Holdings to ‘A-(lka)’ - Outlook is Stable.

Fitch Ratings has downgraded Sri Lanka-based Sunshine Holdings PLC’s National Long-Term Rating to ‘A-(lka)’ from ‘A(lka)’. The Outlook is Stable.

The downgrade reflects Fitch’s expectations that Sunshine’s net leverage - defined as lease-adjusted debt net of cash/operating EBITDAR, including proportionate consolidation of Estate Management Services (Private) Limited (EMSPL), the holding company for the agriculture and consumer goods segments - will remain higher than the level commensurate with a higher rating over the next three years.

The higher leverage is due to the substantial increase in debt following Sunshine’s acquisition of an additional stake in EMSPL from Tata Global Beverages for Rs. 2.9 billion on December 28, 2017.

The acquisition will increase Sunshine’s ownership of EMSPL to 60.0%, from 33.2%, and improve the fungibility of group cash flow. We expect operating cash flow from the group’s palm-oil segment, a part of EMSPL, to improve in the medium-term, but this is unlikely to be sufficient to offset the higher debt.

Key rating drivers

Higher Financial Risk: Sunshine’s financial profile has weakened, as the acquisition has added LKR2.7 billion of additional debt. Fitch expects net leverage to increase to 2.5x in the financial year ending March 2018 (FY18), then modestly recover to around 2.3x through FY21, buoyed by a rising EBITDA contribution from the palm-oil business. We also believe Sunshine’s structural subordination risk is heightened, as the holding company borrowed Rs.1.4 billion for the share purchase, while its cash flow is dependent on dividend payments from subsidiaries.

However, this is mitigated by Sunshine’s increased control of EMSPL and better group fungibility of operating cash flow.

Increasing cash flow volatility: The EMSPL acquisition increases Sunshine’s exposure to the agriculture business, which generates more volatile cash flow relative to Sunshine’s comparatively defensive healthcare segment. We also believe that the long-term viability of Sunshine’s tea-plantation segment is inhibited by unstable export demand, lower productivity and an escalating cost structure.

However, this is mitigated by the rising cash flow contribution from the company’s profitable palm-oil business, which contributed 71% of agri-segment EBITDA in FY17.

Palm oil supports profitability: We expect the palm-oil segment to be a key contributor to higher operating cash flow in the medium term, based on our forecast for global palm-oil prices to average USD665/tonne in 2018 and USD675/tonne from 2019.

Sunshine is Sri Lanka’s largest palm-oil producer, accounting for more than half of domestic output, and is well-positioned to benefit from rising local demand, increased near-term capacity and the government’s protectionist import tariffs. Palm oil is the largest contributor to Sunshine’s profitability, accounting for 36% of group proportionate EBITDA in FY17 (FY16: 24%).

The government cut import taxes on edible oil by around 20% in November 2017 to make up for lower domestic supply volume due to adverse weather conditions.

This is likely to cause a slight short-term dip in Sunshine’s palm-oil margins, but we expect margins to recover in the medium-term as taxes revert to historical levels with improvements in supply.

Margin pressure in branded tea: The EBITDA margin of Sunshine’s branded-tea segment weakened by 660bp to 8.9% in FY17, due to higher tea prices in the Colombo Tea Auction over the previous 12-14 months. Intense price competition, particularly in the lower -end of the market, also limits Sunshine’s ability to fully pass on cost increases to customers. Nevertheless, we expect tea costs to moderate with easing supply-side pressure, which should benefit the segment’s margin.

Sunshine’s strategy to tap the higher-growth hotel, restaurant and catering industries should also support the segment’s top-line and profitability growth.

Long-term benefits from investments: Fitch expects capacity expansion in Sunshine’s power and dairy segments to stabilise cash flow in the long term by reducing the contribution share from the volatile tea and palm-oil businesses.

We estimate the EBITDA contribution from the power and dairy segments to exceed Rs. 190 million by FYE19, once the increased capacity goes into operation.
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Jetwing to start building Kandy hotel

Jetwing Symphony Ltd which opened trading at the Colombo Stock Exchange (CSE) on Friday following its Initial Public Offering last month is set to start building a boutique hotel in Kandy, officials said.

“We aim to start by end of 1Q or early 2Q,” Hiran Cooray, Chairman, Jetwing Symphony Ltd told media at the opening of trading.

This is the CSE’s first listing of the New Year 2018.

The company’s Rs. 750 million IPO with 50.22 million shares will be utilised to complete Jetwing Symphony’s projects in the pipeline and also settle debt payments, he said.

Jetwing Symphony is the investment arm of the Jetwing leisure and travel group.

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Central Bank lifts regulatory leniency on small finance companies

By Bandula Sirimanna

The Central Bank (CB)’s action to stop its regulatory leniency from this year on troubled, small licensed finance companies without minimum capital has jolted those small lenders who are struggling to survive amidst stiff competition.

This move is aimed at protecting the public trust in the financial system with the introduction of a new mechanism to oversee the finance companies through early warnings and faster resolution, CB Governor Dr. Indrajit Coomaraswamy said in Colombo this week.

The ‘Enforcement Division’ of the Central Bank has been converted into a full-fledged department with effect from January 1 to carry out duties relating to enforcement and resolution issues pertaining to financial institutions.

The objective is to combat the pervasion of prohibited schemes and other unauthorised financial undertakings, while also curbing violations related to exchange management.

Assistance of the CID officers will also be sought to carry out investigations against errant finance companies, he disclosed.

The Board of Directors and the senior management of these institutions are also equally responsible for the operations of the institutions, he said adding that the CB will consider implementing the legal provisions against the errant senior management, if warranted, in the interest of depositors.

The minimum core capital requirement has been revised upwards from Rs. 400 million to Rs. 1 billion by January 2018, followed by Rs 1.5 billion in 2019 and Rs. 2 billion by 2020.

The CB may order to halt the taking of new deposits by small finance companies which fail to fulfill the Rs.1 billion capital requirement this year.

The strengthening of the capital position will improve the resilience of existing institutions while encouraging only the more financially efficient and effective companies to remain in the sector, he said.

However several heads of finance companies told the Business Times that the tightening of rules on capital adequacy and strict surveillance and stringent enforcement methods would have a big impact on their financial management and could even trigger the closure of some of the smaller companies.

This type of policing is not necessary to monitor finance companies; they said adding that it is not easy to raise the core capital up to Rs.1 billion this year under the present stagnate economic climate.

Presenting the annual Road Map for 2018, Dr. Coomaraswamy told a large gathering of top government officials, heads of financial institutions and CB officers that the rapid growth and broad outreach of the non bank finance sector necessitate proactive supervision and regulatory guidance.

While several regulations have been introduced to strengthen these institutions, some licensed finance companies have shown signs of stress, while the rapid expansion of certain others has been curtailed due to their lack of compliance with regulatory requirements.

This reiterates the need for continued strengthening of the existing regulatory framework of NBFIs to ensure the soundness of the sector and contain its spillover effects on the whole system, he pointed out.

Initiatives are already underway to resolve such weaknesses through mergers and recapitalisation of such finance companies through strategic investors.

There are also ongoing discussions on the encouragement of licenced finance companies to obtain credit ratings and list themselves on the Colombo Stock Exchange (CSE). This will, in turn, ensure financial stability and operational excellence while creating healthy competition.

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Krishan takes over as deputy chairman JKH

Krishan Balendra has been appointed Deputy Chairman of John Keells Holdings (JKH) with effect from January 1, taking over from Ajit Gunewardena who retired last month after a long career at the company.

In an announcement on Tuesday, the company said Mr. Balendra will assume office as company chairman on January 2019 on the retirement of Susantha Ratnayake, long-standing chairman of JKH, on December 31, 2018.

Gihan Cooray has been appointed group finance director and will take over as Deputy Chairman on January 2019. These appointments were earlier reported by the Business Times in its December 10 issue. The smooth transition of power and management has been planned over the years, company sources said.

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Tourist arrivals reach 2.1 mln in 2017

Sri Lanka ended 2017 at 2.1 million arrivals, marginally higher than 2016 but below an earlier target of 2.5 million tourist arrivals for reasons including flash-floods, outbreak of dengue and the partial 3-month closure of the main international airport.

Arrivals in January to November 2017 reached 1.87 million, a marginal 2.5 per cent rise from 1.82 million in the same 2016 period. Arrivals last month reached 244,536 against 224,791 visitors recorded in December 2016.

The latest figures are available in the Sri Lanka Tourism new-look, user-friendly website which was launched recently. The website also has a new feature, a Chinese-language segment, catering to Sri Lanka’s soon-to-be second largest source market.

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Treasury to meet SEC, brokers to hasten demutualisation

By Duruthu Edirimuni Chandrasekera

Treasury officials will meet the Securities and Exchange Commission and stockbroker representatives next week to discuss fast-tracking demutualisation (the process through which a member-owned company becomes shareholder-owned) of the Colombo Stock Exchange (CSE), top Treasury officials said.

This process has been progressing slowly for a while owing to dissent between the SEC and brokers over the percentage that the latter should own after demutualisation, Treasury officials said. “The stockbrokers want more than 60 per cent in CSE (which is what the SEC is willing to part with) and argue that they deserve more as they started the CSE more than three decades ago without any assistance. But the regulator is adamant that 60 is the number. Each broker will get a maximum of 5 per cent if they agree to the 60 per cent,” one official said.

Demutualisation has been discussed for nearly a decade, Treasury officials say noting that it’s about time something actually happened.

The SEC Bill is to be presented to Parliament on January 25 and if passed will expedite demutualisation and establish a central counterparty clearing and settlement mechanism, provide for the development of new capital market products, and enhance investor protection.

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