Fitch Ratings has affirmed Sri Lanka-based consumer-durable retailer Abans PLC's National Long-Term Rating at 'AA(lka)'. The Outlook is Stable. Fitch has simultaneously affirmed the 'AA(lka)' rating on Abans' outstanding senior unsecured debentures and the 'F1+(lka)' National Short-Term Rating on its commercial paper.
The affirmation reflects our expectations that the healthy performance of Abans' core operations will counterbalance the higher risks of its Colombo City Centre (CCC) real-estate project.
The Stable Outlook is based on our belief that Abans' leverage, defined as net lease adjusted debt/operating EBITDAR including the full consolidation of Abans' immediate parent Abans Retail Holdings (Pvt) Limited (ARH) and CCC, will rise only temporarily above our negative sensitivity of 6.0x in the financial year ending 31 March 2022 (FY22) even if the impending sale of its finance subsidiary and other deleveraging plans do not materialise.
KEY RATING DRIVERS
Resilient Core Operations: We expect Abans' revenue to rise by 8% in FY21, despite the challenging economic environment, amid strong demand for IT products, reduced competition from the informal sector and low interest rates. Its revenue fell 22% yoy in 1QFY21 due to an island-wide lockdown and movement restrictions, before recovering 25% yoy in the next two quarters. We do not expect similar movement restrictions amid lower infections and an ongoing vaccination drive, limiting the incremental impact on Abans' consumer-durable sales. Challenging Demand Conditions: Fitch expects Sri Lanka's GDP to grow by 4.9% in 2021 (2020 estimate: -3.6%) on a lower base and a gradual return to economic normalcy.
However, recovery that is weaker than our forecast could dampen demand for consumer durables as they are mostly non-discretionary. Abans has reduced sales financed by in-house hire purchase schemes to cut its incremental exposure to rising local unemployment, falling disposable income and a softening exchange rate. Leverage to Peak in FY22: We expect Abans' leverage to spike to 6.7x in FY22 (2.4x in last 12 months to December 2020) with the consolidation of LKR10 billion in CCC debt and LKR4.5 billion in debt we have assumed to fund the balance construction costs and any cash flow shortfalls. CCC's consolidation will add 2.0x2.5x to Abans' leverage in FY21-FY23.
Leverage should ease from FY23 with improved cashflows from CCC. The proposed sale of Abans Finance PLC (A(lka)/Rating Watch Evolving), if finalised in FY22, should reduce leverage by around 0.9x
Real-Estate Risk: CCC has sold 77% of the apartments and completed the residential units' construction. However, it needs to sell at least 30% of the remaining apartments annually and collect dues from pre-sold units to meet its annual debt servicing of LKR2.7 billion in the next two years. Apartment demand remains sluggish and susceptible to a prolonged economic downturn.
CCC's interest cost is mainly serviced through mall rentals, but it may need apartment sales to cover part of the cost in the next 6-12 months as timely rent collection may be challenging. CCC needs LKR3.8 billion in additional capital to complete the hotel construction, which will have to be funded from external sources as project cash flows are largely used to service the debt. Ultimate parent Abans International (pvt) Ltd (AIL) plans to bring this capital as equity from sources other than cash flows from Abans or ARH, but we have considered it as debt as we believe equity funding is subject to execution risks and market volatility. Construction delays or cost overruns above our assumptions could weigh on the rating.
Weaker Parent: Fitch rates Abans based on the consolidated profile of its weaker parent ARH due to strong operational linkages between the two in line with our Parent and Subsidiary Linkage Rating Criteria. ARH has full ownership and control of Abans, which we expect to contribute to around 80% of the ARH's EBITDAR over the medium term. CCC is now fully owned by AIL following the ultimate parent's acquisition of the 50% stake held by an unrelated joint-venture partner. We consolidate the CCC project when assessing Abans' credit profile given the strong linkages between Abans, ARH and their weaker ultimate parent AIL. The CCC project lenders do not have recourse to Abans or AIL once the construction is completed, but AIL considers the project to be strategic and therefore we believe AIL will use any available means to bridge a funding shortfall.
CCC is now fully owned by AIL following the ultimate parent's acquisition of the 50% stake held by an unrelated joint-venture partner. We consolidate the CCC project when assessing Abans' credit profile given the strong linkages between Abans, ARH and their weaker ultimate parent AIL. The CCC project lenders do not have recourse to Abans or AIL once the construction is completed, but AIL considers the project to be strategic and therefore we believe AIL will use any available means to bridge a funding shortfall.
Import Ban Manageable: The government is continuing its ban on the import of consumer durables unless it is on extended supplier credit. Abans has been able to negotiate 180-day credit with most suppliers, ensuring limited disruption to its operations. The ban has also helped established consumer-durable retailers win market share from the informal market as high-street retailers have been unable to secure sufficient supplier credit. Improved Profitability: We expect Abans to maintain its EBITDAR margin of around 9.4% over the medium term compared with an average of 7.5% in the past four years amid sustainable cost-efficiency measures. These include staff rationalisation, performance-driven commission schemes and lower discount sales. Abans' EBITDAR margin improved by 200bp to 11.4% in 9MFY21 due to strict cost-cutting measures amid the coronavirus pandemic.