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.

Sri Lankan stocks edge up as financials lead

Reuters: Sri Lankan shares ended firmer on Thursday led by financials, edging up from a nine-week closing low hit in the previous session, with block deals boosting turnover on the last trading day of the current fiscal year.

The Colombo stock index ended 0.57 points firmer at 6,476.78, edging up from its lowest closing level since Jan. 23 hit on Wednesday. The markets will be closed on Friday for a holiday.

The index rose 0.51 percent on week, its first weekly gain in five, but has fallen 1.14 percent this month.

“A number of crossings went through today and that helped to push the turnover. Being the last day of the financial year, we saw some window-dressing in some stocks,” said Dimantha Mathew, head of research at First Capital Holdings.

Shares in Sofltogic Holdings Plc rose 10.3 percent, while the biggest listed lender Commercial Bank of Ceylon Plc ended 1.9 percent.

Ceylinco Insurance Plc climbed 7.4 percent, while Dialog Axiata Plc inched up 0.7 percent.

Turnover stood at 3.5 billion rupees ($22.49 million), well above this year’s daily average of around 1.2 billion rupees.

Foreign investors bought a net 2.7 billion rupees worth of shares on Thursday, but they have net sold 2.6 billion rupees worth equities so far this year.

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

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

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. 

($1 = 155.6000 Sri Lankan rupees) 

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

Sri Lankan stocks mark 9-wk closing low; turnover at 7-yr high

Reuters: Sri Lankan shares hit a nine-week closing low on Wednesday, but turnover touched a seven-year high as foreign investors exited from Lanka ORIX Leasing Company Plc.

The Colombo stock index ended 0.23 points weaker at 6,440.20, its lowest closing level since Jan. 23.

LOLC Holdings (Private Ltd) bought nearly 30 percent stake in its own subsidiary, Lanka Orix Leasing Company Plc, from ORIX Corporation of Japan, the company said in a disclosure to the bourse.

The Japanese firm’s stake sale resulted in a foreign fund outflow of a net 12.7 billion rupees ($81.62 million) worth shares on Wednesday, reversing the year-to-date net foreign inflow to a net 5.3 billion rupees worth outflow.

This was the highest net outflow in the last nine years for which data is available.

Turnover stood at 13.4 billion rupees ($86.12 million), the highest since March 16, 2012 and well above this year’s daily average of around 1.2 billion rupees.


“The biggest trade was the LOLC deal. Apart from that, there was no improvement in sentiment as investors are waiting for the outcome of the no-confidence motion against the prime minister,” said Prashan Fernando, CEO at Acuity Stockbrokers.

Losses in shares such as Ceylinco Insurance Plc, which fell 6.8 percent, and Ceylon Theatres Plc, which ended 4.4 percent weaker, offset gains by Lanka ORIX leasing Company and Dialog Axiata Plc, which ended up 2.2 percent.

Shares in Lanka ORIX leasing Company rose 6.3 percent.

Prime Minister Ranil Wickremesinghe is facing a no-confidence motion, which will be debated on April 4 before voting. Analysts say Wickremesinghe needs support from many political parties to survive the vote.

Negative sentiment over the island nation’s slower economic growth also weighed on the market, brokers said.

The index fell 1 percent last week, its fourth straight weekly drop.

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

($1 = 155.6000 Sri Lankan rupees) 

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

Sri Lankan stocks fall to lowest close in nine weeks

Reuters: Sri Lankan shares fell on Tuesday to their lowest close in nine weeks as negative sentiment over the island nation’s slower economic growth continued to weigh on the market.

However, foreign investors bought a net 477.1 million rupees ($3.06 million) worth of shares, extending the year-to-date net foreign inflow to 7.4 billion rupees worth of equities.

The Colombo stock index closed 0.13 percent weaker at 6,440.43, at its lowest close since Jan. 23.

The bourse fell 1 percent last week, its fourth straight weekly drop.

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

“Most investors are on the sidelines waiting for the central bank’s interest rate decision in April,” said Reshan Kurukulasuriya, chief operating officer, Richard Pieris Securities (Pvt) Ltd.

“But we can see some block trades taking place while foreign investors are also collecting.”

Turnover was 865.9 million rupees ($5.55 million), less than this year’s daily average of around 955 million rupees.

Shares in Ceylon Cold Stores Plc fell 3.9 percent, while conglomerate John Keells Holdings Plc ended 0.4 percent weaker and Lanka ORIX Leasing Company Plc ended 0.8 percent down.

Analysts said an increase in retail fuel prices also weighed on investor sentiment.

Sri Lankan fuel retailer Lanka IOC Plc, which fell 1.6 percent in the session, raised retail prices for gasoline and diesel over the weekend due to losses incurred after the government’s failure to implement a pricing formula. 

($1 = 156.0000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Amrutha Gayathri)

Sri Lankan stocks edge higher from 8-week low

Reuters: Sri Lankan shares crawled higher on Monday from their lowest close in more than eight weeks as blue chip stocks gained, but negative sentiment over the island nation’s slower economic growth weighed on the market.

The Colombo stock index closed 0.08 percent firmer at 6,448.60, edging up from its lowest close since Jan. 24 hit on Friday.

The bourse fell 1 percent last week, its fourth straight weekly drop.

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

Investors are waiting for the central bank’s interest rate decision in April, said Dimantha Mathew, head of research, First Capital Holdings.

Turnover was 1.6 billion rupees ($10.3 million), more than this year’s daily average of around 956.6 million rupees.

Shares in conglomerate John Keells Holdings Plc rose 0.8 percent, while Ceylinco Insurance Plc ended 2.3 percent firmer and biggest listed lender Commercial Bank of Ceylon Plc gained 0.1 percent.

Foreign investors sold a net 354.9 million rupees worth of shares, but they have been net buyers of 6.9 billion rupees worth of equities so far this year.

Analysts said an increase in retail fuel prices also weighed on investor sentiment.

Sri Lankan fuel retailer Lanka IOC Plc raised retail prices for gasoline and diesel, the company said on Saturday, due to losses incurred after the government’s failure to implement a pricing formula. 

($1 = 156.1000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Amrutha Gayathri)