Fitch affirms Hemas’ debt at ‘A+’; revises outlook to positive
Thursday, 9 April 2015 01:40
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Fitch Ratings has affirmed the rating on Hemas Holdings PLC’s (Hemas) outstanding senior unsecured debentures at ‘A+(lka)’. It has also published the company’s National Long-Term Rating of ‘A+(lka)’ and revised the Outlook on the rating to Positive from Stable.
The Outlook revision reflects Fitch’s expectations of an improved business risk profile and stronger earnings growth owing to expansion in its core businesses in the healthcare and fast moving consumer goods (FMCG) sectors. The Outlook is also supported by Fitch’s expectations that the group is likely to improve its leverage (measured as gross adjusted debt/operating EBITDAR) on a sustained basis to below 2.0x following the divestment of its power business, despite significant investments within its core segments.
Key rating drivers
Essential goods and services: Hemas’ rating reflects the essential nature of the products and services of its key operating subsidiaries in healthcare, FMCG and transportation, supported by the company’s low financial risk at the holding company and group level. The rating also factors in the businesses’ strong brands, leading market share and strong cash flow generation. Hemas also has subsidiaries involved in hotel operation and destination management.
Strong demand dynamics: Hemas is Sri Lanka’s largest private healthcare company by revenue and is strongly positioned to benefit from favourable macroeconomic factors such as a rapidly aging population and increasing demand for treatment of non-communicable diseases. Changes in regulations of prices of pharmaceuticals by the government remain a key risk. Higher disposable income and prevailing low inflationary and interest rates have created strong demand for Hemas’ FMCG segment in Sri Lanka, while this segment’s Bangladesh operation benefits from strong growth prospects.
Low leverage: Fitch expects the group to sustain a lower leverage ratio despite continued investments to expand its core businesses. The divestment of the power segment in the financial year ended 31 March 2015 (FY15) has improved Hemas’ financial profile given the significant amount of debt carried by the segment. Hemas’ leverage fell to 1.9x at end December 2014, from 2.2x, or 1.9x excluding the power segment, at end-FY14.
Growth through acquisitions: The acquisition of J L Morison Son & Jones PLC, which manufactures and distributes products in the pharmaceutical, healthcare, beauty and agriculture sectors, in FY14 has strengthened Hemas’ product portfolio and local manufacturing capabilities. The purchase of J L Morison Son & Jones was in line with the group’s strategy to accelerate growth through acquisitions. The company has demonstrated a long-term investment focus and a disciplined approach to capital management. The group’s large cash balance of Rs. 5 b at end-2014, strong operating cash flows, and planned equity raising will ensure that Hemas’ financial profile is commensurate with its rating even as it expands and makes acquisitions.
Dependence on dividends: Hemas is dependent on dividends and fees from its operating subsidiaries to service debt at the holding company level. Fitch considers the structural subordination of the holding company’s creditors to be low, because Hemas’ key subsidiaries are either majority owned or have low leverage. However, should leverage at the operating subsidiaries increase significantly over time, this could weigh negatively on the rating.
Key assumptions
Fitch’s key assumptions within our rating case for the issuer include:
nRevenue growth driven by improved macroeconomic factors, rising tourist arrivals to the country and expansion within company’s core segments
nEBITDAR margins to improve with the divestment of the power segment, turnaround in the hospital segment and efficiency improvements across the company
nSignificant capex and acquisition spending in the healthcare and FMCG segments during FY16- FY18.
Rating sensitivities
Positive: Future developments that may, individually or collectively, lead to a rating upgrade
include:
nGroup gross adjusted debt/ EBITDAR maintained below 2.0x
nNo material deviation from company’s historical conservative approach to new investments.
Negative: Future developments that may, individually or collectively, lead to an Outlook revision to Stable include
nGroup gross adjusted debt/ EBITDAR sustained above 2.0x- Any material integration issues or deviations from company’s historical conservative approach to new investments.
