Fitch affirms Singer (Sri Lanka) at ‘A-’; Outlook Stable

Fitch Ratings has affirmed Singer (Sri Lanka) PLC’s (Singer) National Long-Term Rating at ‘A-(lka). The Outlook is Stable. A full list of rating actions is at the end of this commentary.

Singer’s rating reflects its strong share in the market for retail of consumer durables in Sri Lanka, where Singer and Abans Limited (BBB+(lka)/Negative) dominate with similar revenue shares. The rating also takes into account the cyclicality of the sector and margin contraction as the portion of lower-margin products in Singer’s product mix increases.

 

Key rating drivers

Leading consumer durables retailer: Singer’s market share is supported by strong brands, an extensive distribution network with more than 1,200 sales points, and robust after-sales service. Growth is supported by the presence of a well-managed in-house hire-purchase portfolio, which accounted for 40% of revenue in 2014.

Improved operating environment: Singer’s consumer durables sales rose 17.5% in 2014, following a 0.6% decline in 2013. Electricity tariff and fuel price reductions implemented in late 2014, low interest rates and a relatively stable exchange rate supported demand for Singer’s products.

Fitch expects initiatives proposed in the government’s February 2015 interim budget, such as higher salaries for public-sector employees, who make up about 25% of households, and a further reduction in fuel prices in line with market pricing, to sustain this trend. The discretionary nature of consumer durables, however, remains a key risk.

Profitability under pressure: Fitch expects EBITDA margins, which contracted to 7.7% in 2014 from 8.0% in 2013, to remain under pressure due to discounting in a competitive environment, and an increasing portion of lower-margin products, such as mobile phones, in the product mix.

Acquisition of affiliates: Singer (Sri Lanka) B.V., the direct parent of Singer, has offered to sell its controlling stakes of 58.29% in Regnis (Lanka) PLC (Regnis) and 83.55% in Singer Industries (Ceylon) PLC to Singer as part of a restructuring initiative. Regnis and Singer Industries are domestic manufacturers of consumer durables retailed through Singer. The details of the transaction are not yet finalised. Fitch notes that the acquisitions are unlikely to result in Singer’s leverage breaching the level at which Fitch would consider negative rating action, based on end-2014 figures.

 

Key assumptions

Fitch’s key assumptions within the rating case for the issuer include:

• Revenue growth driven by higher purchasing power
• Margin pressure due to increasing share of lower-margin products in sales and possible competition driven discounting.
• Capex/revenue averaging 1.6% over the next four years in line with historical levels, on expectations of store renovations
• Acquisition of Regnis and Singer Industries at a value between market price and NAV
• Dividend pay-out ratio of 60%

Rating sensitivities

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

• A sustained increase in Singer’s leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) to over 5.5x (2014: 4.6x)
• EBITDA margin sustained below 7% (2014: 7.7%)
• A material weakening in Singer’s (company-level) liquidity profile
• A material weakening of the credit profile of Singer’s 80% subsidiary, Singer Finance (Lanka) PLC (BBB+(lka)/Stable), given strong linkages between the entities

Positive: Future developments that may individually or collectively lead to a positive rating action include:

• Singer’s leverage falling below 4.5x on a sustained basis
• EBITDA margin sustained above 10%

Full list of rating actions

Singer (Sri Lanka) PLC

• National Long-Term Rating affirmed at ‘A-(lka)’/Stable;
• National Long-Term Rating on outstanding senior unsecured debentures affirmed at ‘A-(lka)’;
• National Short-Term Rating outstanding commercial paper affirmed at ‘F2(lka)’.