Fitch affirms Abans at ‘BBB+(lka); Outlook Stable

Fitch Ratings has affirmed Sri Lanka-based retailer Abans PLC’s National Long-Term Rating at ‘BBB+(lka)’ with a Stable outlook. Fitch has also affirmed the National Long-Term Rating on Abans’ unsecured redeemable debentures at ‘BBB+(lka)’ and its outstanding commercial paper at National Short-term Rating of ‘F2(lka)’. 

The ratings reflects Fitch’s expectation that the company will maintain net leverage, as measured by lease-adjusted net debt to operating EBITDAR (excluding Abans Finance PLC), below 5.5x, the level at which Fitch would consider negative rating action, over FY17-FY20 (financial year ending 31 March). Abans’ leverage will be restrained by modest levels of capex and better working capital management amid the weakening operating environment. However, Fitch does not expect Abans’ credit profile to improve to the extent that positive rating action will be warranted, unless there is significant deleveraging. 

Key rating drivers 

Demand to weaken: Fitch expects demand to be sluggish in the next six to 12 months due to rising interest rates, an increase in taxes on consumer durables and a depreciating Sri Lanka rupee, which raises the prices of imported goods that account for the majority of products sold by Abans. However, Fitch believes the long-term fundamentals driving demand for the consumer-durables sector is still strong. 

Defensive market position: Fitch believes Abans’ strong brand portfolio, extensive dealer network and well-managed inhouse hire-purchase book will help defend the company’s market position during a downturn. Abans has also widened its product portfolio to include low-priced, Abans-branded products, which make its business more resilient in a downturn. 

Margins to contract and stabilise: Fitch expects Abans’ EBITDAR margins to contract marginally in FY17 due to weaker demand, which puts pressure on Abans to sacrifice margins to protect the top line. However, we expect Abans’ medium-term EBITDA margins to settle in the high-single digits because of improvements in profitability of its low-margin IT and mobile segment, and efficiency gains from store rationalisation and leaner inventory management. 

Strengthening credit profile: Abans’ credit profile continued to improve in the last 12 months, with leverage improving to 5.2x in FY16 (FY15: 6.6x), mainly due to strong EBITDAR generation. However, the company has been slow to deleverage due to higher working capital investments, capital infusions to subsidiaries and returns to shareholders. Fitch believes Abans will maintain its current credit profile in the next 12-18 months and improve thereafter, but positive rating action is unlikely unless there is significant deleveraging by the company. 

Project risk remains: Construction at the Colombo City Center (CCC) mixed development project, a JV between Abans and Singapore-based property developer Silver Needle Hospitality, has started after a delay of around six months. The project is now due to be completed in mid-2019. Further delays or cost escalations could weigh on Abans’ rating, despite the progress made in pre-sales and debt funding. 

Less pressure from AFP: Abans’ finance subsidiary, Abans Finance PLC (AFP), should see its capital improve to well above the regulatory minimum and to levels commensurate with its risk appetite, after a rights issue and a proposed private placement in FY17. This will reduce pressure on Abans to inject more capital into the subsidiary in the medium term. Abans took up Rs. 165m of AFP’s rights issue in FY17. 

Key assumptions 

Fitch’s key assumptions within our rating case for the issuer include: 

• Revenue growth to average in the low double digits over FY17-FY20 
• EBITDAR margins to contract in FY17, but to stabilise in the high single-digit range in the medium term 
• Capex to average LKR300m a year; mainly for maintenance capex and another LKR750m investment in the CCC project over FY18-FY19 
• No capital infusions to AFP in the medium term 
• A dividend payout ratio of 15% in FY17-FY20Rating sensitivities  

Positive: Future developments that may, individually or collectively, lead to a positive rating action include: 

• A sustained improvement in Abans’ adjusted net debt/EBITDAR excluding AFP to below 4.5x 
• Smooth progress of the Colombo City Centre project, which will limit Abans’ financial liability to the current committed amount 

Negative: Future developments that may, individually or collectively, lead to a negative rating action include: 

• A sustained increase in Abans’ adjusted net debt/EBITDAR excluding AFP to over 5.5x 
• Fixed-charge coverage (ratio of EBITDAR to gross interest + rent excluding AFP) reducing below 1.25x (at end FY16: 1.9x) on a sustained basis 
• Significant delay in the Colombo City Centre project or additional capital calls for the project 

Liquidity 

As of end-FY16, Abans was in a manageable liquidity position with only Rs. 4.8 b of unutilised but committed credit lines and about Rs. 800m of unrestricted cash available to meet Rs. 9.9 b of debt maturing in the next 12 months. However, the majority of company’s short-term debt is revolving, while Abans’ liquidity position is also supported by Rs. 12 b of inventory and receivables outstanding and a hire purchase balance of Rs. 6.7 b as at end-FY16. 

Full list of rating actions 

Abans PLC 

• National Long-Term Rating affirmed at ‘BBB+(lka)’; Outlook Stable 
• National Long-Term Rating on outstanding senior unsecured debentures affirmed at ‘BBB+(lka)’; 
• National Short-Term Rating on commercial paper affirmed at ‘F2(lka)’.