RAM reaffirms Hayleys’ ratings at AA-/P1 with a Stable outlook
Wednesday, 5 February 2014 00:01
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RAM Ratings Lanka has reaffirmed Hayleys PLC’s respective long- and short-term corporate credit ratings at AA- and P1. Concurrently, RAM has reaffirmed a long-term issue rating of AA- to the Company’s issued Rs. 2 billion Senior, Unsecured, and Redeemable Debentures (2013/2016).
Both the long-term ratings carry a Stable outlook.
RAM said the ratings are upheld by the Group’s diversified business interests, strong market positions in several key businesses coupled with the Group’s adequate debt protection metrics. Nevertheless, the ratings are tempered by the Group’s moderately high debt levels as well as its exposure to fluctuations in commodity prices and foreign exchange risks.
Hayleys is a diversified conglomerate with wide ranging business interests in hand protection, purification, transportation, agriculture, plantations, textiles, construction materials, fiber, consumer, industrial solutions, power and energy together with leisure and aviation (Hayleys, along with its subsidiaries will collectively be referred to as “Hayleys Group” or “the Group”).
The ratings continued to be supported by the Group’s diversified business interests, which has enabled it to withstand adversities affecting a particular industry sector, as weaker showing in one business can be off-set by the strong performance in another.
Meanwhile, the Group continues to enjoy strong positions in several of its key businesses. It is the world’s largest producer of coconut-shell-based activated carbon with an estimated market share of around 15%. Additionally, the Group accounts for around 5% of the global market for non-medical gloves. Meanwhile, in plantations, the Group is a sizable player in Sri Lanka.
In addition, Hayleys is also a strong player in domestic logistic industry and aluminum extrusion manufacturing.
On a separate note, The Group’s debt protection metrics continued to be adequate and above RAM’s expectations. Its funds from operations debt coverage improved to 0.35 times in fiscal 2013 (fiscal 2012: 0.25 times) before moderating to 0.33 times in end-September 2013. The improvement in debt coverage was supported by better performance in its key segments of purification, hand protection and transportation.
“We anticipate that the Group’s FFO debt coverage levels will remain around 0.34 times in fiscal 2014,” RAM said.
However, the ratings are weighed down by the Group’s relatively high debts, compared to the rated portfolio; borrowings had increased in recent years as the Group pursued aggressive debt funded expansions.
In fiscal 2013, the Group’s debt level was in line with RAM Ratings Lanka expectations as Hayleys’ total debts increased 8.48% y-o-y to Rs. 23.59 billion, primarily to fund capacity expansion in its key business lines, the refurbishment of the Group’s five star city hotel and higher working capital requirements; the Group’s gearing ratio (Total debt/total equity) stood at 0.70 times by end-fiscal 2013 (fiscal 2012: 0.76 times).
The Group’s debt further increased 11% in 1H FY Mar 2014 with gearing ratio increased marginally to 0.75 times by 1H fiscal 2014.
“We note that debt level at Hayleys PLC level had also increased, particularly during fiscal 2013 with its gearing ratio increasing to 0.83 times (end-FY Mar 2012: 0.72 times). However, our concerns are somewhat mitigated given that the company has control over the dividend policies of its subsidiaries, thus enabling dividend up streaming when required,” RAM said.
On a related note, the Group’s liquidity position continued to be constrained given its reliance on short-term borrowings (which includes trade facilities) and relatively low cash reserves. However, RAM Ratings Lanka notes that the company has restructured its borrowings through the proceeds from Rs. 2 billion debenture issue which was somewhat cushioned its liquidity position in 1H fiscal 2014.
Further, the Group’s key businesses are sensitive to fluctuations in commodity prices, which are in turn governed by a range of factors including global supply, demand and weather conditions. Thus, commodity prices affect the Group’s margins in the short term, as demonstrated in the past. Further, Hayleys is also exposed to foreign exchange rates given its reliance on international trade.
In addition, during the review period one of Dipped Products PLC’s domestic factory operations was affected due to alleged water contamination concerns. However, RAM Ratings Lanka notes that independent third parties (including State entities) have evidenced that the factory operation does not harm environment. Further, the Group has planned to set up a new factory at Biyagama Board of investment zone.
