Fitch upgrades Singer to ‘A(lka)’; Outlook Stable

Fitch Ratings yesterday upgraded the National Long-term rating on Singer (Sri Lanka) PLC’s (Singer) senior unsecured notes to ‘A(lka)’ from ‘A-(lka)’. The rating Outlook is Stable.

The upgrade reflects the improvements in Singer’s financial performance, including its liquidity, over the nine months to end-September 2010 (9M10). Its revenues increased to Rs. 11,269 m in 9M10, a 31% increase over the corresponding period of 2009.

Increased sales, lower interest rates and cost rationalisation measures undertaken in 9M10 improved its profitability; its EBITDAR to sales margin improved to 18.9% in 9M10 (FY09: 15.9%).

In 2008, Singer’s sales and margins were significantly affected by high inflation and interest rates, as well as by substantial additional import duties on white goods.

The turnaround in Singer’s operating performance comes as a result of improved macro-economic conditions in Sri Lanka.

While Singer’s effective interest cost declined to 13% in 9M10 compared to an average of 17% in 2008 and 2009, with effect from June 2010, import duties on consumer electronics have been reduced substantially (reduction in duties ranging 10%-90%).

Aside from the direct impact on sales, Fitch also views that lower import duties will result in reduced competition from Sri Lanka’s sizeable grey market for electronics.

In 9M10, Singer’s leverage as measured by adjusted net debt/operating EBITDAR (excluding its fully owned financial services subsidiary, Singer Finance (Lanka) Limited ‘BBB(lka)’/Stable) improved to 3.3x (FY09: 3.8x) and its fund flow from operations (FFO) to interest coverage to 1.9x (FY09: 0.9x).

Singer’s liquidity position has improved, and is now comfortable for its current rating. As at end-September 2010, it had cash and cash equivalents of Rs. 431 m and undrawn facilities of Rs. 2,400 m, against long-term debt maturities of Rs. 195 m due within one year and Rs. 666 m due in 12-24 months.  The company has good access to bank loan market, and continues to access local capital markets for long-term funds; it has raised around Rs. 1,000 m in debentures over the past 12 months. Fitch notes that SFL’s initial public offer to raise Rs. 400 m would further capitalise the subsidiary, reducing support required from the parent.

The Stable Outlook reflects Fitch’s expectation that Singer’s credit metrics and liquidity levels would remain at healthy levels over the next 12 to 18 months. However, any weakening of its liquidity position or leverage of beyond 4.5x on a sustained basis could place negative pressure on the rating.

Fitch also notes that any weakening of SFL’s financial profile could also put further downward pressure on the rating, given the increasing integration of the two entities.