Sri Lanka's Hayleys in the red amid rising interest costs

ECONOMYNEXT - Sri Lanka's Hayleys Plc, which is in manufacturing, consumer durables and logistics lost 264 million rupees in the June 2018 quarter up from a loss of 149 million rupees, amid rising interest costs.

The group reported a loss of 3.48 rupees per share for the quarter. The stock closed at 199.90 rupees, down 20 cents on Friday.

After consolidating recent acquisitions, revenues rose 74 percent to 50.6 billion rupees, cost of sales rose 67 percent to 38.7 billion rupees and gross profit rose 96 percent to 11.5 billion rupees.

Distribution expenses rose to 2.9 billion rupees from 1.08 billion and administration expenses rose to 5.57 billion rupees from 3.6 billion rupees.

Net finance costs rose 171 percent to to 2.75 billion rupees from 875 million rupees a year earlier.

Hayleys has gone on an acquisition spree in recent years, mostly funded by debt.

Long term borrowings rose to 34.9 billion rupees at the end of June 2018 from 20.5 billion rupees and short term borrowings rose to 43.0 billion rupees from 23.4 billion rupees.

The current portion of long term borrowings rose to 23.9 billion rupees from 4.5 billion rupees.

Sri Lanka’s Aitken Spence Hotel June quarter losses rise 22-pct

ECONOMYNEXT –Sri Lanka’s Aitken Spence Hotel Holdings reported losses rose 22% from a year ago to Rs270 million in the June 2018 quarter, two months of which are considered off season both in local and overseas resorts.

Group sales rose 2.8% to Rs3.6 billion over the period, according to interim accounts filed with the stock exchange.

The loss per share rose to 81 cents for the June quarter. The share was trading at Rs27.10 mid-Friday, down 3.2% or 90 cents.

The accounts showed sales were only marginally higher in the quarter in both the Aitken Spence Hotel group’s Sri Lankan and overseas hotels classified as South Asia and the Middle East.

The losses came mainly from the group’s Sri Lankan hotels which were sharply higher while losses from overseas hotels were virtually the same as the previous year.

Nestlé Sri Lanka net profits down 5.7-pct in June quarter

ECONOMYNEXT - Profits at Nestlé Lanka Plc, unit of Swiss-based Nestle, fell 5.7 percent to 735.4 million rupees in the June 2018 quarter from a year earlier with higher taxes under a new law, despite margin gains, interim accounts showed.

The group reported earnings of 13.69 rupees per share. Nestlé shares closed at 1,840 rupees on Thursday, up from 1,820 rupees at previous close.

Gross profits increased 10.2 percent to 3.3 billion rupees for the quarter, with revenue increasing 5 percent to 9 billion rupees and cost of sales growing at a slower 2.1 percent to 5.7 billion rupees.

This was a recovery from last year, when gross margins fell as demand fell amid a drought and raw material prices also rose.

Sri Lanka was also collecting forex reserves in 2017, which tends to put a squeeze on credit and spending.

The bottom line fell in the June 2018 quarter due to income tax expenses which increased 83 percent to 451.3 million rupees from a year earlier.

From April 2018, Nestlé is charged 28 percent corporate tax under the new Inland Revenue Act. Under old laws, profits were taxed at a subsidized 12 percent, while profits from ready-to-drink milk was taxed at 10 percent, and offshore earnings were exempt.

Nestlé had obtained a 1.9 billion rupee related party loan from Nestlé Treasury Centre- Middle East and Africa Ltd during the quarter for the 5 billion rupee expansion of its dairy and coconut processing factory in Kurunegala.

Year to date, Nestlé net profits increased 2.3 percent to 1.7 billion rupees from 2017, while revenue increased 3.7 percent to 18.6 billion rupees from a year earlier.

Sri Lanka's Tokyo Cement in the red, vessel sale adds to loss

ECONOMYNEXT - Sri Lanka's Tokyo Cement Plc, which operates grinding plants and bulk cement lost 605 million rupees in the June 2018 quarter as revenues fell, with the loss on the sale of a ship adding 380 million to the loss, interim accounts showed.

The group reported profits of 807 million rupees for the June 2017 quarter. Tokyo Cement reported a loss of 1.31 rupees per share for the quarter.

Gross profits fell 27 percent to 1.507 billion rupees for the quarter, with revenues falling 4 percent to 7.76 billion rupees and costs rising 4 percent to 6.2 billion rupees.

The sale of a ship owned by the firm added 380 million rupees to losses.

Finance expenses were rose 170 percent to 380 million rupees.

Tokyo told shareholders that delayed local government polls had halted country wide small projects generating a slowdown in construction.

Sri Lanka stock market depository offers digital share accounts, IPOs

ECONOMYNEXT – Sri Lanka’s stock market depository and settlement service provider said it would offer digital account opening options, removing paperwork for investors, along with electronic share issues and voting for shareholders.

The Central Depository Systems (Pvt) Ltd (CDS), a fully owned subsidiary of the Colombo Stock Exchange (CSE), said it was announcing a number of new offerings to make stock market investments easier and faster.

CDS has established a new unit to handle these areas of services which is different from the operations of the depository.

A statement quoted Nalin Fonseka, Head of CDS, as saying they are looking beyond their core function with new service offerings focused on developing into a more customer centric, customer experience driven organization.

“We intend to introduce an end-to-end digital CDS account opening process in the near future, which will go a long way in making the market accessible around the country and also in broad-basing our local investor base, which is pivotal to the progress of the Sri Lankan stock market in the long-run.”

With the introduction of this new service, CDS will have the ability to capture and verify information on prospective investors digitally through a mobile application in real-time in a convenient and secure manner, Fonseka said.

“This will facilitate a faster and smoother account opening process for prospective investors, offering them the option of not engaging in what would be perceived as a lengthy, paper-work driven, physical application process.

“The first step of this endeavor is to fully digitize the documentation process, and we are presently working with stockbroker firms to this end.”

The CDS also plans to implement a fully-fledged E-IPO system to facilitate a more efficient and convenience driven initial public offering process with E-Voting for shareholders also being planned, Fonseka said.

“The ‘ease of doing business’ is a key parameter for prospective investors when selecting a service provider in the investment services space which CDS operates in,” he said.

Fonseka said the CDS has expanded service offering to include corporate action and registrar services for companies listed on the CSE and also privately held unlisted companies.

The new service has been well received by listed companies with eight companies signed up for registrar services.

“Our registrar services offer coverage for corporate actions such as Dividends, Rights Issues, Capitalizations of Reserves, Mandatory Offers, Voluntary Offers, Sub- Divisions of Shares and Capital Reductions,” Fonseka said.

In addition, new service introductions also include CDS maintaining the company’s share ledger, attending to regulatory and statutory requirements and delivering other forms of administrative support functions for listed entities.

“Considering that these services are linked to our core services, we also have the ability to offer cost efficiencies and considerable convenience to listed companies and their investors,” Fonseka said.

Sri Lankan listed firms told to pay dividends directly to shareholder bank accounts

ECONOMYNEXT – Sri Lanka’s stock exchange has told listed companies to pay dividends directly to bank accounts of shareholders after complaints of payment delays.

The Colombo Stock Exchange (CSE) said it has got several complaints from shareholders that they had not got dividends within the stipulated time.

Some listed firms continued to post cheques to the postal address of CDS account holders or their banks, causing undue delays to the inconvenience of shareholders, the CSE’s chief regulatory officer Renuka Wijayawardhane said.

A statement said listed companies should not post cheques to shareholders or their banks.

All listed firms are required to directly credit dividends to the bank accounts of shareholders within seven market days from the ex-dividend date.

Sri Lanka’s Watawala Plantations June net down 57-pct

ECONOMYNEXT – Sri Lanka’s Watawala Plantations net profit fell 57% to 164 million rupees in the June 2018 quarter from a year ago with lower crop amid volatile palm oil prices and continuing losses at its dairy unit.

Sales of the firm, now focusing on cultivation and processing of palm oil and dairy farming, fell 66% to 673 million rupees during the period, interim accounts filed with the stock exchange showed.

Earnings per share of Watawala almost halved to 74 cents in the June 2018 quarter. The stock was trading unchanged at 23.90 rupees Thursday.

The accounts showed no earnings from tea, the business having been separated in a restructuring and now under Hatton Plantations. Watawala’s tea business had made a net profit of almost 90 million in the June 2017 quarter.

Watawala Plantations Managing Director Vish Govindasamy said global oil palm prices remained volatile due to supply and demand side factors.

“The volatility in the global oil palm market is likely to prevail for the foreseeable period,” he said in a note accompanying the accounts.

The estate crop for the June 2018 quarter was down 14% from the previous year mainly due to seasonal factors resulting in lower revenue.

“This was partially offset by the crop purchased from other plantation companies resulting in a net crop loss of 9%,” Govindasamy said.

However, Govindasamy said net sale average for the period was higher than the same period last year and that cushioned the impact of the lower crops.

Startup losses at Watawala Dairy Limited remained large, rising to 45 million rupees from less than eight million rupees the previous year.

“However, they are being contained within the budgeted parameters,” Govindasamy said.

He said the dairy business should improve through better herd management and efficient utilization of resources.

“Milk yields are expected to increase when 246 cattle imported during the reporting period start milking in the ensuing period.”

Sri Lanka Dialog Axiata net profits up 21-pct in June quarter

ECONOMYNEXT- Profits at Dialog Axiata Plc, a wireless mobile and fixed operator grew 21 percent from a year earlier to 2.8 billion rupees from a year earlier, helped by higher mobile and broad band revenues, despite currency depreciation.

The group reported earnings of 35 cents per share for the quarter. For the six months to June Dialog reported earnings of 70 cents per share on total profits that grew 46 percent to 5.7 billion rupees.

Dialog shares closed at 14.20 rupees on Wednesday.

Gross profits for the June quarter grew 17 percent to 12.8 billion rupees, with revenues growing 15.6 percent to 26.6 billion rupees and direct costs growing at a slower 13.8 percent to 13.7 billion rupees.

Administrative costs for the quarter grew 32 percent to 5 billion rupees from a year earlier.

In the first half of 2018, Dialog posted 52.7 billion rupees in revenue, up 16.6 percent from a year earlier. Direct costs grew 14.7 percent to 27.5 billion rupees from a year earlier.

Dialog said that a new accounting standard on revenue contracts with customers, SLFRS 15, increased earnings before interest, tax, depreciation and amortization by 1.6 percent, or 1 billion rupees during the 6 months.

"Normalised for the positive impact from SLFRS 15, the EBITDA margin was recorded at 36.9 percent for 1H 2018. The impact on revenue from the adoption of the standard was not material."

The group’s mobile operations posted 42.9 billion in revenue during the first 6 months, up 15.2 percent from a year earlier, while operating profits grew 31.5 percent to 7.7 billion 2017.

Fixed telephony and broadband revenue was up 24.3 percent to 6.2 billion rupees from a year earlier, while operating profits grew 30.5 percent to 1.1 billion rupees from 2017.

Dialog said that it spent 11.2 billion rupees in capital expenditure during the first half of 2018, mainly on high-speed broadband public infrastructure.

Ookla, the global leader in mobile broadband network testing applications, recognized Dialog as having the fastest mobile broadband, the company said.

"Dialog mobile was conferred with 2018 Q1-Q2 Speedtest® Award by Ookla as the fastest Mobile Broadband Network in the country."

Year to date, subscribers for Dialog’s television business grew by 13 percent from a year earlier. Revenue from the segment during the first half grew 21.3 percent to 3.7 billion rupees from 2017.

Operating losses for the segment fell to 183.8 million rupees from a 353.5 million loss a year earlier.

Sri Lanka's Ceylon Tobacco net up 47-pct, volumes grow

ECONOMYNEXT - Profits at Sri Lanka's Ceylon Tobacco Company Plc, a unit of British American Tobacco grew 47 percent in the June 2018 quarter from a year earlier to 4.3 billion rupees helped by volume growth and a sharp fall in some operating expenses.

The firm reported earnings per share of 23.25 rupees per share.

Gross revenues grew 6.9 percent to 38.84 billion rupees in the June 2018 quarter with turnover taxes growing 7.4 percent to 20.17 billion rupees.

Net revenues grew 5.2 percent to 8.67 billion rupees.

Profits were helped by a fall in unspecified 'other operating expenses' to 858 million rupees from 1.40 billion rupees.

The company said volumes grew 6 percent from a year earlier.

The company claimed about 500 million cigarettes were being smuggled into Sri Lanka at a loss of 20 billion rupees a year in taxes, after tax hikes in recent year made smuggling more lucrative.

It is not clear how the 500 million stick estimate was arrived at.

Authorities had carried out 909 raids on illicit cigarettes, the firm said.

Sri Lanka’s Haycarb June net down despite higher sales

ECONOMYNEXT – Sri Lanka’s coconut shell-based activated carbon manufacturer Haycarb said net profit fell six percent to 101 million rupees in the June 2018 quarter from a year ago.

Sales of the firm, part of the Hayleys group, rose 31% to 4.3 billion rupees, according to interim results filed with the stock exchange.

Earnings per share of the company, which has factories in Sri Lanka, Thailand and Indonesia, were Rs3.40. The stock was last traded at Rs127.

Haycarb Managing Director Rajitha Kariyawasan said that initiatives to extend market reach and the value added portfolio contributed to the noteworthy growth in turnover. Haycarb has marketing offices in the USA, UK and Australia.

But continuing shortages and escalation of charcoal cost in Sri Lanka and India negatively impacted the profitability at both the company and group levels, a statement said.

"Even though coconut crop and charcoal supply chain dynamics stabilised in Indonesia, shortages in coconut shell based charcoal supplies are expected to continue in Sri Lanka, India and Thailand in the short term.

"In this backdrop the company is continuing to focus on the procurement strategy that emphasizes on retention of existing suppliers, broad basing the supply network and supporting low-cost environmental friendly charcoaling methods."

Sri Lankan Treasuries yields fall across maturities

ECONOMYNEXT – Sri Lankan Treasury Bill yields fell further at an auction Wednesday with the 01-year bill yield falling 07 basis points to 9.16 percent from last week, data from the Public Debt Department of the central bank showed.

It raised 12.9 billion rupees from 01-year bills, slightly more than what was offered, after getting bids worth almost 63 billion rupees.

The 03-month bill yield fell 01 basis point to 8.16 percent while the 06-month bill yield fell 04 basis points to 8.70 percent from the auction of 24 July when bids for that tenor were last accepted.

The debt office raised 20.5 billion rupees from all tenors, the same amount offered, having got bids worth 82.8 billion rupees.

Sri Lanka broiler chicken see pick-up despite currency depreciation woes

ECONOMYNEXT - Sri Lanka's broiler chicken demand is picking up, despite continuous hit to the sector from currency depreciation and the issue of maize import permits to third parties, Ceylon Grain Elevators, a poultry and feed-milling group said.

Revenues rose 4 percent to 3.9 billion rupees in the June 2018 quarter from a year earlier.

"The positive market sentiment for chicken consumption has contributed to increase in the Group revenue from Broiler day old chicks and Broiler feed," Executive Director Cheng Chih Kwong, Primus told shareholders in a quarterly review.

"The Group revenue was further strengthened by the demand for Cattle feed in the embryonic Dairy industry."

The egg market was still unstable and there were unsold layer day old chicks, Three Acre Farms Plc, the CGE unit involved in poultry said.

CGE was hit by rising maize prices, the key ingredient of its feed business and practice by the rulers to issue import permits to third parties.

"Acute shortage of local Maize, a key raw material for poultry feed has continued to be a major challenge to the animal feed industry," CGE said.

"The Country’s feed millers are still waiting for positive response from the Government on their long outstanding appeals for Maize import permits to be issued directly to them.

Analysts say permits are key tool of corruption in many countries.

Ceylon Grain Elevators said currency depreciation pushed up costs.

In the June quarter revenues rose 4 percent from a year earlier, cost of sales rose at a slower 2 percent to 3.59 billion rupees allowing gross profits to grow 22 percent to 396 million rupees.

Group profit after tax rose 23 percent to 173.6 million rupees, giving earnings of 6.94 rupees per share. The stock rose 90 cents to 63.90 rupees.

Sri Lanka CT Holdings to build multiplexes, mini-malls

ECONOMYNEXT - Sri Lanka's CT Holdings Plc is planning to revive defunct single theatres as multiplexes and build mini-malls in several key towns with two-screen threatres.

“Plans will also be drawn up in future to expand the cinemas in Kandy and Negombo (presently closed down) to a multi-screen concept,” Chairman Louis Page told shareholders in the annual report.

C T Holdings is going for the expansion amidst the group’s entertainment segment, which includes the cinema operation and movie distribution businesses, losing 33 million rupees in 2018, down from a net profit of 26 million rupees in 2017.

Page said the company has already converted one of its older single screen cinemas, Regal in Nuwara Eliya into a two-screen multiplex over the past year.

He said the response to the concept has been positive in Nuwara Eliya.

Multiplexes were first developed Canada in the early 20th century as so-called uniscreen theatres faced a downturn, allowing the simultaneous screening of multiple movies or more flexible timings of the same film using the same ticket office and staff.

The concept has taken off, expanding into so-called 'megaplexes' with dozens of screens attracting more people.

CT Holdings will also build more 'mini-malls' which are made up of a two-screen theatre, a KFC restaurant and a Cargills Food City self-service supermarket, which are group franchises.

The first mini-mall branded 'Cargills Square' Gampaha was opened during the previous year.

“The success of this venture has given the Group the confidence to further expand on the Mini Mall concept and take it to other major towns and cities in the country,” Page said.

The report said that the group owns properties in Kandy, Negombo, Bandarawela, Dematagoda and Katubedda which would be used for similar developments.

The group currently operates a Cargills Square in Jaffna, which has related brands as well as third party outlets.

C T Holdings’ biggest mall is Majestic City, which was opened in 1988 and has 240 outlets.

The real estate sector of the group posted 1.1 billion rupees in net profits in the 2018 financial year, up from 200 million rupees a year earlier.

However, this was due to a one-off gain from selling a property in Colombo 02. Excluding the one off gain, segment profits were 132 million rupees in 2018.

Sri Lanka's Dipped Products back in profit in June quarter

ECONOMYNEXT - Sri Lanka's Dipped Products group, which has interests in glove making and rubber and tea plantations, said it returned to profit in the June 2018 quarter with earnings of 215 million rupees compared with a loss of almost 30 million rupees a year ago.

The Hayleys group firm, which has factories in Sri Lanka and Thailand, reported earnings of 3.59 rupees a share. The stock was last traded at 80 rupees.

Sales rose two percent to 7.6 billion rupees in the quarter, with cost of sales down one percent to 6.4 billion rupees and gross profit up rose 26 percent to 1.2 billion rupees.

A statement said Dipped Products (DPL) group profit before tax for the June quarter improved to 326 million rupees from 93 million in the same period the previous year.

“Overall performance improved during the period due to the prevalence of stable rubber prices and market conditions, which consequently enabled DPL to consolidate sales in a sustainable manner,” Dipped Products chairman Mohan Pandithage said.

“Several manufacturing excellence programs including Total Productive Maintenance (TPM) initiated by the company has also contributed to improve the performance.

“Consequently, the contribution to PBT from the Hand Protection segment improved to Rs. 247 million compared to Rs.24 million of the period in the previous financial year.”

Sales of Dipped Products Thailand remained stable for the quarter, while ICOGUANTI S.p.A, DPL’s Italian marketing company, recorded a revenue growth of 12%, the statement said.

The contribution from plantations enabled DPL to further strengthen its overall performance for the quarter.

Pandithage said that the plantation business contributed 79 million rupees to the group PBT, up from 69 million in the same period in the last financial year.

Sri Lanka’s Talawakelle Tea June quarter profit flat

ECONOMYNEXT – Sri Lanka’s Talawakelle Tea Estates June 2018 quarter was virtually flat at 46 million rupees compared with a year ago, interim accounts showed.

Sales were also flat at 1.1 billion rupees, according to interim accounts filed with the Colombo stock exchange.

June quarter earnings per share were 1.95 rupees compared with 1.93 rupees a year ago. The stock was at 49.30 rupees Tuesday.

The accounts of the Hayleys group firm showed that earnings from tea fell slightly while rubber made a loss.

The firm’s mini hydro power business made a profit of eight million rupees compared with a loss a year ago.

Sri Lanka’s Abans retains BBB+ (lka) Fitch rating

ECONOMYNEXT- Fitch Ratings has confirmed Sri Lankan retailer Abans Plc at BBB+ (lka) with a stable outlook, over improving net leverage.

“The affirmation reflects Fitch's view that Abans will continue to make meaningful progress towards improving its net leverage, defined as lease-adjusted debt net of cash/operating EBITDAR, to around 6.0x by the end of the financial year to 31 March 2019,” Fitch said.

It said that Abans has improved its net leverage over the past 12 months, and if the company deviates from this trend, a negative rating action may be taken.

Fitch said that Abans will see a recovery in profitability because the company will be better able to pass through costs to customers, improve operating efficiencies and reduce capital expenditure and investments.

Abans’ revenue is expected to decline over the next 12-18 months due to the recent fuel price increase, Fitch said.

“We believe the fuel price rise will more than offset the recovery in demand in January-June 2018 stemming from better earnings in the agriculture sector, low personal taxes and stable interest rates.”

The full statement follows:

Fitch Ratings has affirmed Sri Lanka-based retailer Abans PLC's (Abans) National Long-Term Rating at 'BBB+(lka)' with a Stable Outlook. A full list of rating action is at the end of this commentary.

The affirmation reflects Fitch's view that Abans will continue to make meaningful progress towards improving its net leverage, defined as lease-adjusted debt net of cash/operating EBITDAR, to around 6.0x by the end of the financial year to 31 March 2019 (FY19). We expect this to be supported by a recovery in profitability because the company will be better able to pass through costs to customers, as well as operating efficiencies and moderating capex and investments. Abans' net leverage improved significantly to 6.8x in the 12 months to end-June 2018 from 7.2x at FYE18 and 7.7x at FYE17. However we may take negative rating action in the next six to 12 months if Abans deviates from its deleveraging trend.

Abans' rating also reflects its strong market position in consumer durables retail in Sri Lanka, its extensive brand portfolio supported by a wide distribution network and a well-managed hire-purchase (HP) business, which are partly offset by its investment in a large real estate project. However the risks stemming from the non-core investment has substantially reduced over the past 18 months because the project is near completion, which has reduced pressure on Abans for additional funding.

KEY RATING DRIVERS

Leverage to Improve: We expect the pace of Abans' deleveraging to pick up in FY19 as profitability recovers, dividend inflows from its associate company increase, and efficient use of working capital. We expect Abans to be able to reduce leverage to around 6.0x by FYE19 when it starts realising the full benefits of the cost efficiency measures that are being put in place. Abans has also decided to limit capex to maintenance levels in the medium term and refrain from shareholder returns in the next couple of years, which should help keep leverage at levels commensurate with the rating.

Margin to Widen Modestly: We expect Abans' EBITDAR margin to expand around 150 bp in the next 18-24 months from the 5.4% trough in FY18, which will be helped by a better cost pass-through and operating efficiencies. Management plans to reduce the store network in the next 12 months, which it expects to result in a net annual cost saving of around LKR200 million. We estimate this will widen margin by 50bp, based on our FY19 revenue projections. Abans cut selling, general and administrative costs as a percentage of sales by almost 200bp in FY18 and will target further cuts by eliminating redundancies and integrating processes over the medium term.

The company's EBITDAR margin expanded 100bp yoy in 1Q19. However these improvements will be partly offset by continued pressure from currency depreciation on 85%-90% of Abans' cost of goods sold, which the company may not be able to fully pass on to customers. Consequently we do not expect Abans' margins to recover to the high-single digit range of the past but expect it at around 7% in the medium term, which is essential to maintain net leverage at a level commensurate with the rating.

Demand to Remain Sluggish: Fitch expects Abans' revenue growth to slow in the next 12-18 months as the recent increase in fuel prices by more than 25% will reduce the discretionary income of consumers, which will reduce demand for consumer durables. We believe the fuel price rise will more than offset the recovery in demand in January-June 2018 stemming from better earnings in the agriculture sector, low personal taxes and stable interest rates. Revenue growth will also be muted by the company's price increases in the past couple of months and changes to the HP sales mix to improve cost pass-through. Abans' consumer durables retail revenue fell 7% yoy in 1Q19.

Turnaround in Abans Engineering: We expect Abans Engineering, which is involved in the installation and maintenance of mechanical, ventilation and air conditioning systems, to recover in FY19 after the new management revised its pricing strategy to guarantee a minimum margin from projects and transferred currency risk to the customer, which was previously borne by the company. Abans Engineering is the market leader and has strong growth potential due to the new buildings coming up. The company had an order book of LKR 2.9 billion at FYE18 (1.8x of FY18 revenues), providing strong revenue visibility. We expect the business to contribute around 5% to Abans' EBIT once it reaches a steady state compared with operating losses of LKR200 million in FY18.

No Further Cash for Property: The Colombo City Center (CCC) project which is a joint venture with a Singaporean partner will not upstream any dividend to Abans until the project loan is fully paid down in 2025. However, the business risk from the project has subsided because the project is due to be completed by mid-2019. Proceeds from pre-sales have been better than expected, and 85% of its retail space has been pre-leased. Management expects CCC to open by end-August, which should help with sales of the remaining inventory. Around 70% of the apartments were sold by end-July 2018.

Abans is not likely to need to provide further cash, if the project encounters any temporary cash flow deficits, because the company's shareholders will seek funding from other sources. Therefore we do not expect Abans to inject the remaining LKR300 million of its initial capital commitment.

DERIVATION SUMMARY

Abans is the number two player in terms of revenue in consumer durables retail in Sri Lanka, with a strong portfolio of well-known brands and an extensive distribution network. Abans is rated one notch below its closest peer, Singer Sri Lanka PLC (A-(lka)/Stable), the market leader, to reflect its weaker financial profile and thinner EBITDAR margins.

Abans is rated at the same level as DSI Samson Group (Private) Limited (BBB+(lka)/Stable) because Abans' weaker financial risk profile offsets its stronger business risk profile compared with DSI. DSI is the market leader in locally manufactured footwear, but faces a number of structural challenges, including increasing competition from cheap imports and reducing pricing power. At the same time, DSI's local tyre business is under pressure due to the lower sales of two-wheelers and three-wheelers following an increase in taxes.

KEY ASSUMPTIONS

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

- Revenue growth to slow in FY19 and recover to high-single digits from FY20

- EBITDAR margins to recover and stabilise at around 7% in the medium term

- Capex to fall to around LKR150 million a year in the medium term, mainly for maintenance and store upgrades

- Dividend income from associates to amount to LKR650 million in FY19, and LKR250 million in FY20

- Dividend pay-out to be maintained at 15% of net profit in the medium term

RATING SENSITIVITIES

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

- Any deviation in Abans' current deleveraging trend in the next six to 12 months that prevents the company from improving its adjusted net debt/operating EBITDAR to around 6.0x and fixed-charge coverage (ratio of EBITDAR to gross interest + rent excluding Abans Finance) to 1.3x (FYE18: 1.2x) by FYE19.

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

- A sustained improvement in Abans' adjusted net debt/operating EBITDAR to less than 5.0x and its fixed-charge coverage to more than 1.5x.

LIQUIDITY

Manageable Liquidity Position: As of end-March 2018, Abans had LKR600 million of unrestricted cash and LKR7.5 billion of unutilised but committed credit lines to meet LKR9.3 billion of debt maturing in the next 12 months. However we expect the company to generate around LKR800 million in free cash flow in FY19, which should help bridge the shortfall. In addition, LKR6.6 billion of these maturities are short-term working capital lines and are backed by net working capital of LKR16 billion. As such, we expect banks to roll over these facilities as they fall due in the normal course of business.

Sri Lanka tourist arrivals up 06-pct in July 2018

ECONOMYNEXT – Tourist arrivals in Sri Lanka rose six percent to 217,829 in July 2018 from a year earlier, with India, China and the United Kingdom the biggest markets, data from the state tourism promotion office showed.

Arrivals in the seven months to July were up 13.7 percent to 1.2 million visitors from the previous year.

India, China, the UK, Netherlands and France were Sri Lanka’s top five international tourist generating markets in July this year, the tourism office said in a report.

India was the largest source of tourist traffic to Sri Lanka with 14% of the total traffic received in July 2018 followed by China which accounted for 13% of traffic.

The UK came next with 12% of total arrivals, followed by the Netherlands and France which accounted for 6% and 5% of traffic.

Europe continued to be the largest source of tourist traffic to Sri Lanka with 44% of the total traffic received in July 2018, while the Asia and Pacific accounted for 42% of total traffic, and the Middle East 7%.

Sri Lanka’s CIC group losses down in June 2018 quarter

ECONOMYNEXT – Sri Lanka’s CIC Holdings group reduced losses in the June 2018 quarter to 23 million rupees compared with a loss of 87 million the year before, interim accounts showed.

Sales fell 12% to 6.7 billion rupees, according to the accounts filed with the stock exchange.

The firm’s loss per share fell to 24 cents from 92 cents a year ago. The stock closed unchanged at 49.70 rupees.

The accounts showed CIC had booked a loss of 73 million rupees on available for sale financial assets compared with a gain of 17 million rupees the previous year.

Profits more than tripled in CIC’s crop solutions business, its largest business in terms of both revenues and profits.

In CIC’s health and personal care business, with products from baby care to medical devices and pharmaceuticals, profits were slightly lower, while livestock business profits fell sharply.

Profits were also lower in the group’s industrial solutions business while its agri produce businesses losses increased.