Prime Cut

Fitch Ratings Lanka Ltd (FRL) assigns A+ (sri) for Singer Sri Lanka’s (SSL) proposed LKR300mn 2005/2009 debentures. Fitch Ratings Lanka Ltd (FRL) assigns A+ (sri) for Singer Sri Lanka’s (SSL) proposed LKR300mn 2005/2009 debentures. The agency also upgrades ratings assigned to SSL’s existing LKR204mn 2004/2008, LKR250mn 2004/2008 and LKR300mn 2002/2005 unsecured debentures to A+ (sri) [from A (sri)]. The Rating Outlook is Stable, Fitch said in a statement on Tuesday.

A+ (sri) ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

The proposed debenture will be utilised to fund the growing hire-purchase portfolio of SSL.

The rating upgrade reflects SSL’s strong, number one position in the consumer goods retail market, solid operating performance, track record of the management and increased earnings retention since FY03.

These factors are weighed against the high leverage to fund the hire purchase operations of the company and the various business risks of the industry that include increased competition, exposure to interest rates movements and impact on sales and repayments on hire-purchase sales from changes in the general economic conditions.

SSL continues to produce solid operating results, with comparable store sales up 38% in FY04 and 25% in the first quarter of FY05. In addition, the company’s EBITDA margin (EBITDA/ sales) expanded to 13.0% in FY04 from 11.16% in FY03.

SSL’s operating performance is supported by the strong demand for consumer goods despite high inflationary pressures on consumer spending power, additional duties introduced on ‘luxury’ goods and increasing of value added tax. Other positive factors include SSL’s well established retail network which continues to expand and a merchandising strategy that involves adding brands other than Singer to fill any voids in the product range.

SSL’s retail network expansion will entail adding more outlets of the typical SSL format, specialist furniture outlets (under the trade name ‘Modern Homes’) and exclusive ‘SISIL’ showrooms.

The company expects to invest some LKR270mn on setting up of new outlets and refurbishing of some existing locations.

Other capital expenditure will include an ERP system and expansion of the furniture manufacturing facilities – in order to cater to the growing demand for furniture with the launching of specialist furniture outlets, taking the total capex for FY05 to c. LKR425mn.

However, the agency expects capex/ sales to be lower than that expected for FY05 for the medium-term.

Singer Finance Limited (‘SFL’), a licensed wholly-owned finance company, was setup in 2004 to provide hire-purchase facilities at SSL’s non-exclusive dealerships – where such facilities are currently unavailable, and other financing facilities such as leasing, outside of SSL’s operations.

Though there could be some cannibalisation of hire-purchase sales at SSL exclusive outlets, the move will likely boost overall sales of SSL.

Credit risks on HP sales at non-exclusive dealerships are mitigated by the fact that this facility would only be available for employees of corporates with whom SSL will have corporate easy-payment schemes.

SFL will commence collecting public deposits from 2Q05.

Though not definite at present, there could be regulatory capital increases for SSL’s associates and subsidiaries in the financial sector (viz Singer Finance Limited – 100% ownership, Commercial Leasing Limited – 30% ownership, First Capital Limited – effective 50%) initiating capital calls on SSL.

However, the agency expects such capital infusions, if any, will be on a staggered basis, easing pressure on the company.

The tax expense of the company will increase with a half of advertising expenses and value added tax on financial services now being disallowed for tax purposes.

In addition, royalty payments to Singer Asia will increase with effect from 3Q05.

However, the impact of these two items collectively is estimated at LKR75mn (for a full year) and thus manageable.

SSL reported earnings of LKR500mn for FY04 compared to LKR378mn in the previous financial year.

First Capital Limited, an associate company of SSL was a drag on earnings of SSL with its turn of fortunes in FY04 where it made a loss of which SSL’s share was LKR57mn (as against SSL’s profit share of LKR128 mn in FY03).

SSL’s leverage measured by Debt/ EBITDA improved to 2.7(x) at FYE04 from 3.1(x) at FYE03 [Total Adjusted Debt including PV of operating lease rentals and off-balance sheet debt/ EBITDAR 4.0(x) to 3.5 (x)] as a result of improved EBITDA margins and increased cash sales in FY04.

A large portion of the debt at SSL is due to its financing operations (Hire-Purchase sales that account for c. 50% of total sales) and as a result would continue to increase. However, the agency recognises that differing capital structures apply for financial services operations such as SSL’s embedded HP operations. Given the sound profile of SSL’s HP operations in which the agency takes comfort (high interest spread, low default rates and well managed), FRL has also considered the credit metrics for the retail operations on an adjusted-basis that provide Adjusted Debt/EBITDAR of c.2.3(x), which is strong for the current rating category.

Dividends are expected to remain low around that of FY04 with no pressure from the key shareholders for increased cash dividends.

The company will issue fresh debt to roll-over the next major debt maturity of LKR300mn in 2005.

In addition, as mentioned earlier, debt will continue to increase to fund the growing hire-purchase portfolio. However, with increased earnings and higher retention of earnings, credit metrics are likely to remain largely unchanged over the next few years.

Fitch Ratings Lanka Ltd is a joint venture between Fitch Ratings, USA, International Finance Corporation Washington, Central Bank of Sri Lanka and several other leading local financial institutions. Fitch Ratings, USA is one of the three global full service credit rating agencies and rates over 85 sovereign nations, 8,000 structured finance ratings, 3,100 international banks and financial institutions and 1,200 Corporates.