Daintee acquisition to boost Sunshine’s defensive cash flows: Fitch

Sunshine Holdings PLC’s (A (lka)/Stable) 100% acquisition of Sri Lanka-based confectionery maker Daintee Ltd. will increase the cash flow of the group’s Fast-Moving Consumer Goods (FMCG) segment, which is defensive in nature as the lower-priced goods are considered essential, Fitch Ratings said yesterday. 

The rating agency said it believed the largely debt-funded acquisition would have no immediate impact on Sunshine’s rating as Fitch expected its net leverage to remain comfortably below its negative sensitivity of 3.0x.

Fitch believes the acquisition is in line with Sunshine’s strategy of restructuring its FMCG segment as a fully-owned subsidiary to pursue its organic and inorganic expansion. It said the Daintee acquisition would help Sunshine to expand the product offerings under its FMCG segment, which was previously limited to branded tea retailing. Sunshine is the second-largest domestic packaged-tea retailer with product offerings across price points.

Daintee holds 40% of the domestic confectionery market, which includes product segments such as hard-boiled candy and bubble gum, supported by a distribution network of 90,000 outlets focused mainly on the rural parts of Sri Lanka. Daintee has shown financial resilience over the years to regulatory changes such as indirect tax increases and rising raw-material prices.

Sunshine believes it has the ability to use its well-established modern trade-channel partnerships and marketing team to gradually help Daintee transition into more premium product categories and diversify its key product offerings, which should help to increase Daintee’s market share and increase cash flows. Sunshine expects the integration process to take around 24 months. 

Fitch expects Sunshine’s FMCG EBIT contribution to increase to around 21% of proportionally consolidated group EBIT after the acquisition from an earlier forecast of 16% in the year ending 31 March 2021 (FY21).

Sunshine agreed to fully acquire Daintee on 6 August 2020 for Rs. 1.7 billion, or an enterprise value/EBITDA multiple of 5.5x, a discount to the current trading average of around 7x for related companies listed in the food, beverage and tobacco section of the Colombo Stock Exchange. The required funds will be raised via its fully-owned subsidiary, Watawala Tea Ceylon Ltd., which will subsequently consolidate Daintee into the company.

“We raised our forecast for Sunshine’s leverage, defined as net debt (including proportionate consolidation of Sunshine Wilmar Ltd.) to operating EBITDA, after the acquisition to around 1.2x in FY21, from our previous base-case assumption of 0.8x. Sunshine’s net leverage stood at 0.8x at FYE20.”