Sri Lanka's Lion Brewery regains beer market dominance, rating outlook lifted to 'Stable': Fitch

ECONOMYNEXT - Fitch Ratings said it has affirmed Sri Lanka's listed Lion Brewery's A+(lka) credit rating and revised the outlook to 'stable' from 'negative' on improving leverage from increasing sales and profitability with the beer maker seen strengthening its market leadership position in the island.

Lion Brewery has consolidated its market leadership by regaining the shelf space it lost due to the temporary halt in production following floods in May 2016, Fitch said in a statement Thursday.

"Lion's 'A+(lka)' rating reflects its leading market position in the domestic beer industry, a well-established brand and extensive retail coverage," Fitch said.

The company's market position is protected to some extent by regulations in the form of stringent restrictions on advertising and limited issuance of new retail licenses,' the ratings agency said.

Fitch Ratings has revised Lion Brewery's outlook to 'Stable' from 'Negative' on improving leverage.

"Lion was able to improve its net leverage to 2.7-times as of end March 2018 down from 6.3-times end 2017, helped by the recovery in sales volumes and operating profitability," Fitch said.

Sales improved after the government reduced taxes on beer by 33-39 percent, while increasing taxes on hard liquor by 2 percent.

Earlier, taxes on beer had been 10 percent higher than taxes imposed on hard liquor.

Also, leverage will remain at low levels on a likely reduction in capital expenditure as the company has adequate capacity to meet growing demand over the medium term, Fitch said.

A Lion Brewery shares trading on the Colombo Stock Exchange closed Friday at 600 rupees.

Fitch Ratings statement in full:

Fitch Ratings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC's National Long-Term Rating at 'A+(lka)'. The Outlook is revised to Stable from Negative. Fitch has also affirmed the National Long-Term Rating on Lion's outstanding senior unsecured debentures at 'A+(lka)'.

The Outlook was revised to Stable because we expect Lion to be able to maintain leverage (defined as lease-adjusted debt net of cash / operating EBITDAR) at less than 3.0x over the medium term. Lion was able to improve its net leverage to 2.7x as of 31 March 2018 (FYE18) from 6.3x at FYE17, helped by the recovery in sales volume and operating profitability. The recovery was underpinned by a revision in excise taxes, which was announced in the Sri Lankan government's budget on 9 November 2017. The revised regime taxes alcoholic beverages with lower alcohol content at reduced rates compared to spirits.

Fitch rates Lion on its standalone strength due to weak linkages between Lion and its ultimate parent, Carson Cumberbatch PLC, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. Lion's 'A+(lka)' rating reflects its leading market position in the domestic beer industry, which is protected by stringent regulation, a well-established brand and extensive retail coverage. However, the domestic excise tax regime on alcoholic beverage sales changes frequently, which inhibits the industry's profitability.

KEY RATING DRIVERS

Recovery in Sales Volume: Fitch expects Lion's sales volume to improve in the medium term after excise duties were revised to tax manufacturers of hard liquor at higher rates than beer and wine makers. The Sri Lankan government reduced excise taxes on strong beer by 33%, mild beer by 39% while raising that on hard liquor by 2%, effective from 10 November 2017. Previously, excise duty per unit of alcohol of strong beer was 10% higher than that of hard liquor, which depressed Lion's sales volumes from November 2015 to October 2017, when the previous tax regime was in effect.

Balance Sheet to Strengthen: We believe that Lion's net leverage will remain below 3.0x, the level at which Fitch would consider negative rating action, in the medium term. This is mainly due to improving profitability and likely reduction in capex as the company has adequate brewing capacity to meet growing demand over the medium term. Fitch expects Lion's leverage to continue to improve from the FYE18 level, giving it more headroom for its 'A+(lka)' rating.

Improving EBITDAR Margin: Fitch expects Lion's EBITDAR margins to improve by around 100bp in FY19, from 27% in FY18, and to stabilise at around 29% from FY20, supported by better sales volume and operating conditions. Lion's EBITDAR margin recovered significantly in FY18 from a low of 19.5% in FY17 when manufacturing was halted temporarily due to floods and Lion had to import inventory at a higher cost. The margin recovery was driven by the company's efforts to recoup some of the lost sales volumes and operational efficiencies that reduced costs.

Lion's sales volumes and profitability were also helped by the change in the excise tax regime in November 2017.However, margins may be somewhat constrained in the near term because of the depreciating Sri Lanka rupee, which raises the cost of the one-third of Lion's key production inputs that are likely to be imported.

Market Leadership Position: Lion is the largest beer manufacturer in Sri Lanka, with significant market share in the domestic strong beer market. During FY18, Lion consolidated its market leadership by regaining the shelf space it lost in FY17 due to the temporary halt in production following floods in May 2016. Lion's strong market share is supported by its entrenched brand and widespread retail coverage, with access to 2,800 retail outlets around Sri Lanka. The company's market position is protected to some extent by regulations in the form of stringent restrictions on advertising and limited issuance of new retail licenses.

High Regulatory Risk: Domestic alcoholic beverage producers face frequent revisions to excise duties, which cause significant operating cash flow volatility. In 2015, the government increased the excise duties on alcohol twice, which led to tax on strong beer overtaking the tax on hard liquor on an equivalent-alcohol basis. This situation was reversed after 24 months, which resulted in hard liquor taxed at 38% more than both strong and mild beer on an equivalent-alcohol basis. We believe any further tax increases will be gradual considering the importance of the industry to government coffers. Excise duties from alcoholic beverage makers made up 7% of government tax revenue in 2017.

DERIVATION SUMMARY

Lion's rating is supported by its leading market position in the domestic beer industry, but counterbalanced by high regulatory risks in the form of frequent tax policy revisions that have previously caused operating cash flow volatility. Lion's business risk profile is weaker compared with its closest rating peer, Hemas Holdings PLC (AA-(lka)/Stable). Hemas is a well-diversified conglomerate with exposure to the defensive healthcare and the manufacturing of personal care and homecare products. Hemas also has a conservative approach to acquisitions and expansions and has lower leverage than Lion, supporting its higher rating.

Lion is placed four notches below Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Stable) - the country's largest spirit manufacturer - reflecting DIST's considerably larger operating scale and dominant market position in spirits, which are more widely consumed domestically than beer. DIST has substantially stronger EBITDA margins than Lion as well as lower leverage.

Richard Pieris & Company PLC (A(lka)/Stable) is rated one notch below Lion, reflecting its weaker business risk profile due to significant exposure to the volatile agriculture segment.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer - Revenue to recover with a 23.4% increase in FY19; growth to moderate to a mid-single-digit rate on average over the next three years. - EBITDAR margin to modestly improve to 28.3% in FY19 and to stabilise at around 29.0% in the next three years. - Excise duty on strong and mild beer to remain unchanged during the next two years and increase by around 5% on average during in FY21 and FY22. - Capex at 4.3% and 8.0% of net revenue in FY18 and FY19, respectively then falling to 2.1% on average over the next two years, mainly for maintenance. - Dividend of LKR300 million per annum to shareholders in line with historical levels.

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating Action - A sustained reduction in Lion's lease-adjusted debt net of cash/EBITDAR to below 1.5x

Developments that May, Individually or Collectively, Lead to Negative Rating Action - An increase in Lion's lease-adjusted debt net of cash/EBITDAR over 3.0x for a sustained period

LIQUIDITY

Comfortable Liquidity Position: Lion had a comfortable liquidity position at end-March 2018, with unrestricted cash and cash equivalents of LKR8.1 billion and unutilised credit lines of LKR7.8 billion to meet LKR8.9 billion of debt maturing in the next 12 months. Lion's relatively defensive cash flows and consistent access to bank funding as one of Sri Lanka's largest listed corporates further supports liquidity.

Sri Lanka's Teejay Lanka June quarter net profits up 27-pct on GSP Plus

ECONOMYNEXT - Profits at Sri Lanka's listed fabric maker Teejay Lanka grew 27 percent from a year earlier to 279.3 million rupees in the June 2018 quarter on improving demand for clothing exports to Europe and the US, and capacity expansion at its mill in India, interim accounts showed.

The company which operates fabric mills in Sri Lanka and India reported earnings of 40 cents a share in the June quarter, accounts filed with the Colombo Stock Exchange showed.

"The increased turnover is the result of capacity expansion in India and an increased order book generated from both US and EU, yielding the benefits of GSP through a carefully managed European customer portfolio, further driven by new product launches to US customers," said Chairman Bill Lam.

Teejay Lanka closed 50 cents lower at 32.10 rupees on Wednesday.

Revenue grew 26 percent in the quarter to 6.8 billion rupees and cost of sales increased 27 percent to 6.1 billion rupees, leading to gross profits growing 15 percent to 697.1 million rupees.

Despite revenue growth, margins were impacted by rising cotton prices.

"To yield better margins the group is also continuously re-calibrating its product portfolio and has taken steps to increase prices which will come into effect in the 2nd half of the financial year," Lam said.

Business dynamics are changing rapidly with short life-cycle orders and more demand for discounted programmes, Lam said.

Teejay Lanka is looking to enter new markets in Asia and Africa.

Other income grew 97 percent from a year earlier to 61.3 million rupees in the June quarter

Distribution expenses grew 11 percent to 37.7 million rupees and administration costs increased 23 percent to 367 million rupees.

Net finance cost fell 52 percent to 5.4 million rupees.

Sri Lankan shares hit over 2-week low

Reuters: Sri Lankan shares extended losses to a fifth straight session on Monday as investors sold blue-chip stocks such as John Keells Holdings Plc after weak first-quarter numbers from the conglomerate dampened sentiment.

Conglomerate John Keels Holdings Plc after market hours on Thursday reported a 26 percent year-on-year fall in quarterly net profit.

The stocks, bond and foreign exchange markets were closed on Friday for a public holiday.

The Colombo stock index ended 0.41 percent weaker at 6,128.95, its lowest close since July 12, extending its year-to-date loss to 3.8 percent.

The index dropped 0.47 percent last week, its first weekly fall in three.

Turnover stood at 169.4 million rupees ($1.06 million), well below of this year’s daily average of 859.4 million rupees.

“The market came down manly on JKH as the earnings came down,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

Shares of Keells fell 1.4 percent on Monday.

“Because the blue-chips are showing negative results, most of the investors are on the sidelines.”

Foreign investors bought equities net worth 1.4 million rupees on Monday. But they have been net sellers of 2.5 billion rupees worth of equities so far this year.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Hatton National Bank Plc ended 1.3 percent lower while Caltex Lubricant Lanka Plc closed 5.3 percent down and Sampath Bank Plc fell 1 percent. 

($1 = 159.5500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Vyas Mohan)

Sri Lankan shares fall for fourth straight session

Reuters: Sri Lankan shares extended their losses to a fourth straight session on Thursday as foreign investors sold blue-chip stocks such as John Keells Holdings Plc and Hemas Holdings Plc.

The Colombo stock index ended 0.14 percent weaker at 6,153.99, its lowest close since July 16.

The index dropped 0.47 percent this week, its first weekly fall in three, bringing its year-to-date losses to 3.4 percent.

Turnover stood at 430.8 million rupees ($2.7 million), half of this year’s daily average of 864.5 million rupees.

“The market is slowly coming down on blue-chip selling and is back to its support level of 6,100 again,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

Foreign investors sold equities net worth 169.6 million rupees on Thursday, extending the year-to-date net foreign outflows to 2.5 billion rupees.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares of conglomerate John Keels Holdings Plc fell 1.9 percent, while Hemas Holding Plc ended 3.1 percent lower. Biggest listed lender Commercial Bank of Ceylon closed 1.5 percent down and Sri Lanka Telecom Plc lost 2.9 percent.

The stocks, bond and foreign exchange markets are closed on Friday for a public holiday and will resume trading on Monday. 

($1 = 159.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Amrutha Gayathri)

Sri Lanka's Union Bank June net up 7-pct, weighed down by new tax rules

ECONOMYNEXT - Sri Lanka's listed Union Bank of Colombo said profits grew 7 percent from a year earlier to 134.3 million rupees in the June 2018 quarter on improving interest margins despite a sharp rise in tax costs.

"Profits were adversely impacted due to the changes in the tax regulations subsequent to the New Inland Revenue Act enforcement," the bank said in a statement filed with the stock exchange.

The bank reported earnings of 12 cents a share. Earnings were 25 cents a share for the six months to end June 2018 with net interest income growing 17 percent from a year earlier to 2.2 billion rupees in the six month period, interim results filed with the Colombo Stock Exchange showed.

Union Bank closed 10 cents lower to 12.30 rupees on Tuesday.

Income tax expenses grew 131 percent to 103.6 million rupees.

"The effective tax rate for the June quarter increased significantly in comparison to the previous quarter. This is mainly due to the withdrawal of tax exemptions on profits made out of Sri Lanka Development Bonds and corporate debt instruments invested prior to the tax changes and withdrawal in the notional tax credits," the bank said in a statement accompanying the interim results.

The bank saw interest income grow 17 percent from a year earlier to 3.4 billion rupees in the June quarter with interest expenses growing a slower 14 percent to 2.3 billion rupees, leading to a 22 percent growth in net interest income to 1.1 billion rupees.

"Both net interest margins and spreads depicted an improvement. This was despite the withdrawal of the notional tax credit which bears a direct impact on the interest income earned on the government securities portfolio carried prior to the change in the tax regulations," the bank said.

The bank's interest margin improved to 3.06 percent at end June 2018, up from 2.87 percent at end December.

Net fee and commission income grew 16 percent from a year earlier to 217.9 million rupees in the June 2018 quarter.

Provisioning for bad loans increased 84.5 percent to 109.4 million rupees.

Personnel expenses grew 11 percent to 522.6 million rupees and depreciation charges fell 1 percent to 103.8 million rupees.

Other expenses grew 17 percent to 459.6 million rupees.

The bank reported a loss of 80.9 million rupees from revaluating financial assets, compared to a 350.4 million gain a year earlier.

The bank's loan book expanded 3 percent from a year earlier to 81.2 billion rupees as at end June 2018.

Public deposits fell a marginal 0.18 percent to 76.6 billion rupees.

The bank reported a Basel III Tier 1 Capital Ratio of 18.93 percent at end June 2018, higher than the 7.875 percent minimum regulatory requirement.

Total capital adequacy was 18.93 percent, above the 11.875 percent Basel III minimum requirement.

Gross non-performing loans increased to 3.18 percent of total loans at end June 2018, compared to 2.69 percent at end December 2017.

Sri Lanka's Ceylon Cold Stores June quarter net falls 65-pct

ECONOMYNEXT - Profits of Sri Lanka's listed Ceylon Cold Stores fell 65 percent to 238.9 million rupees in the June 2018 quarter from a year earlier, with a sugar-tax hurting manufacturing sales and falling margins and soaring finance costs hitting profits at its Keells supermarket chain, interim results showed.

The company, which makes fizzy drinks, juices and ice creams under the popular Elephant House and other brands, and operates the Keells supermarket chain of about 80 outlets, reported earnings of 2.51 rupees a share in the quarter, a Colombo Stock Exchange filing showed.

The stock was trading 1 rupee lower at 925 rupees on Wednesday. Ceylon Cold Stores is a unit of listed John Keells Holdings.

In the June quarter, revenue grew 13 percent from a year earlier to 13.9 billion rupees, with cost of sales growing at faster 19 percent to 12.7 billion rupees, resulting in a 25 percent contraction of gross profits to 1.2 billion rupees.

Selling and distribution costs rose 16 percent to 549 million rupees, and administration expenses increased 17 percent to 426 million rupees.

Other operating expenses rose 30 percent to 227.9 million rupees.

Net finance costs rose 236 percent to 40.2 million rupees, as finance income fell 26 percent to 23.4 million rupees and finance costs soared to 63.6 million rupees in the June 2018 quarter, up from 2 million rupees a year earlier.

Outstanding bank overdrafts amounted to 4.97 billion rupees at end June 2018, up 61 percent from the previous March quarter.

Revenue from manufacturing fizzy drinks and ice creams fell 7.8 percent from a year earlier to 3.1 billion rupees. Net finance costs rose 104 percent from a year earlier 742 thousand rupees.

Profits of the manufacturing segment declined 38 percent to 434.3 million rupees.

The Keells supermarket chain saw revenue grow 21 percent from a year earlier to 10.9 billion rupees in the June 2018 quarter. Net Finance costs increased 412 percent from a year earlier to 39.5 million rupees.

Profits of the retail business declined 60 percent to 95.6 million rupees.

The company has been reducing the sugar content of most of its drinks and cold-confectionery goods to meet regulatory standards over the last two years.

However, falling sales due to a sugar tax has resulted in the company deferring investments on a new bottling plant, with the current facility operating under capacity, the company said.

The sugar tax resulted in an average 33 percent increase in prices of its portfolio in 2017/18.

Ceylon Cold Stores is going ahead with 4.2 billion ice cream manufacturing plant, hoping to achieve better margins from impulse buying by consumers.

The company is also rebranding its supermarkets to Keells and refurbishing all outlets. It's investing in a 225,000 square foot centralized distribution centre.

Sri Lankan shares fall for third straight session in dull trade

Reuters: Sri Lankan shares extended fall for a third straight session on Wednesday as investors sold blue-chip shares, but foreign buying helped limit losses.

The Colombo stock index ended 0.34 percent weaker at 6,162.49. The index, which is down nearly 3 percent in the year so far, had on Friday recorded its highest close since June 29.

Turnover stood at 161.4 million Sri Lankan rupees ($1.01 million), less than a third of this year’s daily average of 873.1 million rupees.

“Today the market came down on blue-chip selling in dull trade,” said Atchuthan Srirangan, assistant manager - research, First Capital Holdings Plc.

“Investors are waiting to see the direction and the good sign is we are seeing net foreign buying for the fifth straight day.”

Foreign investors bought equities worth net 4.3 million rupees ($26,959.25) on Wednesday, but they have been net sellers of stocks worth 2.4 billion rupees so far in the year.

A downward revision in economic growth estimate earlier this month by the central bank has hurt sentiment, analysts have said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy said earlier this month.

Shares in Ceylon Tobacco Company Plc fell 9.5 percent, while conglomerate John Keels Holdings Plc ended 0.9 percent down, biggest listed lender Commercial Bank of Ceylon closed 1.0 percent down, Dialog Axiata Plc lost 0.1 percent and Hemas Holding Plc ended 1.3 percent lower. 

($1 = 159.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; Editing by Vyas Mohan)