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Fitch Ratings has affirmed Sri Lanka-based consumer durables retailer Singer (Sri Lanka) PLC’s National Long-Term Rating at ‘A-(lka)’ with a Stable Outlook. Fitch has also affirmed the National rating on Singer’s outstanding senior unsecured debentures at ‘A-(lka)’. A full list of rating actions is at the end of this commentary.
The affirmation of Singer’s rating reflects Fitch’s view that its net leverage, defined as lease adjusted net debt/operating EBITDAR (excluding the finance subsidiary), will improve and remain below the negative trigger of 5.5x over the medium term after it deteriorated to 5.5x by end-2017 from 4.3x in 2016 amid a weak operating environment. Fitch expects the improvement in its leverage to be supported by a recovery in sales volumes. Singer’s rating also reflects its leading position in the retailing of consumer durables, its extensive product and brand portfolio across different price points and its well-managed hire-purchase business.
Key rating drivers
Recovery in Sales Volumes: Fitch believes the demand for consumer durables will recover in the medium term as consumers adjust to higher costs, earnings in the agricultural sector recover, personal taxes stay low and interest rates remain stable. Singer’s consumer electronics and home appliance revenue growth slowed to 1% in 2017 after two years of double-digit growth on weak demand due to a prolonged drought in the country, which affected the livelihood of a significant proportion of the population, and an increase in indirect taxes. Fitch believes Singer was able to better respond to the weak demand compared with peers due to its more defensive product portfolio and strong brand presence.
Growth in IT, digital media: Fitch expects Singer’ IT and mobile segment to be the key growth driver in the medium term, aided by increasing smartphone penetration in the country and short replacement cycles compared with most other consumer durables. Singer is currently the largest smartphone retailer in Sri Lanka and it is the exclusive agency for Huawei, the secondlargest smartphone brand in the country. Singer’s IT and digital media revenue has grown at a CAGR of about 57% over the last five years. Fitch expects the company to maintain its leadership in this market amid the renewal of its contract with Huawei for the next three years. EBITDAR margins to stabilise: Fitch expects Singer’s EBITDAR margin to improve by around 50bp-60bp from the current level of 9.1% and stabilise at around 9.5% from 2019 on the growth in sales volume and better cost pass-through to customers. Singer’s EBITDAR margin contracted by almost 150bp in 2017 due to lower sales and increases in indirect taxes and sales costs. The margin contraction was seen across most product segments as weak demand compelled the company to absorb a majority of the tax increases and cost escalations to sustain its top-line growth.
Leverage to improve: Fitch expects Singer’s leverage to improve meaningfully from 2019 amid the recovery in the operating environment and margin improvement but headroom under the current rating will remain low due to high capex, dividend payments and working capital investments, which may limit any material debt pay down. Higher inventory build-up amid sluggish demand coupled with lower profitability in 2017 saw Singer’s leverage worsening to 5.5x compared with 4.3x at end-2016.
No extraordinary support from Hayleys: In Fitch’s view, Fitch will continue to rate Singer on its financial strength due to the weak-to-moderate linkages between Singer and its new parent, Hayleys PLC, under Fitch’s Parent and Subsidiary Rating Linkage methodology, and the size of Singer’s balance sheet and significant debt at end-2017. Hayleys acquired a controlling stake of 81% in Singer in 2017. Fitch does not believe there will be additional pressure on Singer for higher dividend payments to its new parent as Singer’s average dividend pay-out has already been high on average at around 60% of after-tax profit in the past.
Low dependence of Singer Finance: Fitch does not believe Singer will be called upon for additional capital infusion to Singer Finance (Lanka) PLC (BBB(lka)/Stable) due to the finance subsidiary’s strong capitalisation, which is well above the regulatory minimum, its better-than-peer asset quality and strong funding profile. Singer’s last equity infusion of Rs. 550 million was in 2017 to support the subsidiary’s new credit card business.
Derivation summary
Singer is the co-market leader in consumer-durable retail in the country, backed by a strong portfolio of well-known brands and an extensive distribution network. Singer is rated one notch above its closest peer, Abans PLC (BBB+(lka)/Stable), to reflect its stronger financial risk profile. Abans’ business profile has also weakened relative to Singer due to investments in a large real-estate project.
The one-notch differential between DSI Samson Group Ltd. (BBB+(lka)/Stable) and Singer stems from Singer’s better business risk profile as it enjoys a robust market position in the sale of consumer durables domestically while DSI’s sales remain under pressure due to increasing local market competition.
Sunshine Holdings PLC (A-(lka)/Stable) is rated at the same level. Singer has a stronger business risk profile due to its leading market position in consumer durables and a significantly larger operating scale. However, this is offset by Singer’s much higher leverage and more volatile operating cash flows because of the higher discretionary demand for its products compared with Sunshine, resulting in both companies having the same rating. Richard Pieris & Company PLC (A(lka)/Stable) is rated one notch above Singer to reflect its stronger business risk profile, reflected in its cash flow diversity, more defensive end-markets as well as its lower leverage.
Key assumptions
Fitch’s key assumptions within its rating case for the issuer:
Rating sensitivities
Developments that may, individually or collectively, lead to positive rating action:
Developments that may, individually or collectively, lead to negative rating action:
Liquidity
Tight but manageable liquidity position: As at end-December 2017, Singer had Rs. 1.8 billion of cash and Rs. 11.2 billion in unutilised credit facilities to meet Rs. 14.4 billion of long-term debt maturing in 2018, leaving the company in a tight liquidity position. Fitch does not expect the company to generate positive free cash flow in the next 12 months due to high capex and shareholder returns. However, it believes Singer will be able to roll over its short-term working capital-related debt amounting to around Rs. 9.2 billion in the normal course of business, leaving the company’s liquidity position more manageable.
Full list of rating actions
Singer (Sri Lanka) PLC:
