Atlas acquisition to boost Hemas’ defensive cash flows: Fitch

LBO – Hemas Holdings acquisition of a controlling stake in Sri Lanka’s leading school and office stationery manufacturer, Atlas Axillia (Private) Limited, will bolster Hemas’ defensive operating cash flows, Fitch Ratings said.

Last week, Hemas agreed to buy a 75.1 percent stake in Atlas for 5.7 billion rupees. Atlas has a strong distribution network spanning over 70,000 outlets island wide.

“We believe the acquisition has no immediate impact on Hemas’ rating because we expect the transaction to be largely funded by cash at hand without a material increase in debt,” Fitch Ratings said.

Fitch views this acquisition as in line with Hemas’ strategy of using its significant cash balance to expand its core businesses through M&A.

Atlas’ stationery business broadly fits into Hemas’ fast-moving consumer goods (FMCG) segment, which includes the manufacture and distribution of homecare and personal care products, and contributed to around 38 percent of Hemas’ EBITDA in the fiscal year to end 31 March 2017.

“We view the Atlas business as defensive across economic cycles, which would strengthen Hemas’ FMCG business.”

Fitch expects demand for school stationery to grow over the medium term, supported by both government and private-sector investments in the education sector and rising per capita income in the country.

Atlas will be run as a separate subsidiary of Hemas after the acquisition, but may be able to benefit from operational synergies with the group’s larger FMCG business once the integration is complete.

As of end-September 2017, Hemas had 10.6 billion rupees of cash and cash equivalents at the group level, including 4.4 billion rupees at the holding company to be used for the acquisition.

“We do not expect a significant deterioration in the holding company’s credit quality, once it pays for the acquisition, as it has robust ability to extract dividends from its subsidiaries, many of which it fully controls,”

“We expect Hemas to maintain its leverage, defined as gross lease-adjusted debt/EBITDAR at less than 2.0x over the medium term, in spite of the acquisition.”

The 2.0x threshold is the level above which we would consider negative rating action. At 30 September 2017, Fitch estimates that Hemas’ leverage, computed using trailing 12 month EBITDAR, stood at 1.4x.

Sri Lankan shares edge lower; turnover up on foreign trades

Reuters: Sri Lankan shares edged down on Tuesday for a second straight session, their ninth session of losses in ten, but turnover was up on heavy trading by foreign investors.

The Colombo Stock index ended 0.05 percent weaker at 6,418.05.

Colombo Cold Stores Plc dropped 3.2 percent, while Ceylinco Insurance Company Plc declined 1.1 percent. Sri Lanka Telecom Plc fell 1.8 percent.

The index has shed around 2 percent in the past ten sessions. It dropped around 0.5 percent last week, the second straight fall on week.

“Foreigners are buying because they are looking at a time horizon of 3-5 years. But local institutional investors are staying away due to political uncertainties,” said Jaliya Wijeratne, CEO at First Capital Equities.

Turnover stood at 1.5 billion rupees ($9.73 million), with foreign trading accounting for around 85 percent of the day’s turnover, which was well above last year’s daily average of 915.3 million rupees.

Foreign investors bought a net 226.1 million rupees worth of shares on Tuesday, extending the year-to-date net foreign inflow to 3.1 billion rupees worth equities.

Foreign investors bought equities worth 18.5 billion rupees last year, and 633.5 million rupees in 2016.

President Maithripala Sirisena said over the weekend that he would handle the economy from this year, taking over from the government’s main coalition partner, led by Prime Minister Ranil Wickremesinghe.

The comments have sparked uncertainty over the future of the coalition government, analysts said.

($1 = 153.8500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

Sri Lanka may sell Samurai, Panda bond in 2018: CB Governor

ECONOMYNEXT - Sri Lanka is open to selling a Samurai (Yen) or Panda (Renminbi) bond in 2018 after a US dollar denominated international sovereign bond sale is wrapped up, Central Bank Governor Indrajit Coomaraswamy said.

Sri Lanka has already called for managers to sell up to 2.0 billion US dollars in sovereign bonds in 2018. In the past Sri Lanka has sold up to 1.5 billion US dollars in bonds in a single offering.

The sovereign bond is expected to go market early this year, before the Fed raises rates again. Sri Lanka's last issued sovereign bond is also trading around 60 basis points narrower, and rating agencies have already given an outlook upgrade.

Sri Lanka was agnostic about the denominating currency, and was open to selling a Samurai or Panda bond after the dollar sovereign bond if the cost and tenor is right, Coomaraswamy said.

Sri Lanka is expected to pass a liability management law shortly which will allow the Treasury to sell more bonds than needed for debt repayment in a given year, to build a buffer to ride out a peak coming later.

A Samurai bond would allow Sri Lanka to tap into the Japanese bond market, while a Panda bond would allow Sri Lanka to enter the Chinese capital market.

Sri Lanka operates a 'de facto' soft-peg which generally depreciates uni-directionally against the US dollar generating high inflation. The currency collapses steeply whenever the central bank resists market interest rates by printing money, when the credit cycle turns strongly positive.

Due to operating a de facto dollar peg, there is also a currency risk in borrowings denominated in a currency other than the US dollar.

The Renminbi is also partially pegged to the US dollar, but it has shown a tendency to appreciate when the US Fed generates higher levels of inflation.

The Yen has weakened against the US dollar in recent years but is a floating rate with a very low interest rates.

Market analysts say it would be possible to sell a Samurai bond with a currency swap at a lower rate than a euro dollar bond of a similar maturity.

Cold Stores Dec. net down 32% as beverage segment slows

Ceylon Cold Stores PLC, a unit of the John Keells group, which has interests in soft drinks, ice creams and supermarkets, saw a significant fall in its December quarter earnings amid higher sales costs, the interim accounts released to the Colombo bourse showed.

The firm recorded a consolidated net profit of Rs.563.2 billion for the quarter, down 32 percent year-on-year (YoY) on a sales income of Rs.12.8 billion, up 14 percent YoY.

However, the higher top line was muted by a faster increase of sales costs, which rose 19 percent YoY to Rs.11.5 billion, denting the gross profit by 19 percent YoY to Rs.1.3 billion.

The sales costs are set to even go higher in the future quarters due to key regulatory changes. The 2018 budget last November introduced a 50 cent tax on every gram of sugar contained in beverages in a bid to discourage obesity, diabetes and a number of related illnesses.

As a result, Ceylon Cold Stores had to raise the prices of most of its soft drinks quite significantly, which may have affected the sales, specially during the December festive season.

Meanwhile, during the quarter under review, the firm saw increases in selling and distribution and administrative expenses, resulting in an operating profit of Rs.774.7 million, down 30 percent YoY, despite a similar percentage gain in the other operating income.

The earnings per share for the quarter deteriorated to Rs.5.93 from Rs.8.67.

The manufacturing operations of the firm, consisting of beverages and ice cream, saw the after-tax profit falling to Rs.261.8 million during the quarter under review, from Rs.478.8 million a year ago, on revenue of Rs.3.03 billion, down from Rs.3.2 billion.

The retail segment, which includes the Keells Super operations, saw its revenue increasing to Rs.9.8 billion from Rs.8.1 billion but the after-tax profit fell to Rs.302.4 million from Rs.344.6 million.

Meanwhile, for the nine months ended December 31, 2017, Ceylon Cold Stores made a net profit of almost Rs.2 billion, down 27 percent YoY. The earnings per share for the period also fell to Rs.20.94 from Rs.28.72.

As at same date, the John Keells group held over 80 percent of the issued shares of the company.

The company has announced Rs.3.8 billion investment on a new ice cream factory, which is currently underway and Rs.2.5 billion on a new bottling plant for beverages, which is yet to take off.

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