Fitch rates Singer Sri Lanka’s Rs. 1.5 b debenture ‘A- (EXP)’

Fitch Ratings has assigned Singer (Sri Lanka) PLC’s (A-(lka)/Stable) proposed senior unsecured redeemable debenture issue of up to Rs. 1.5 billion an expected National Long-Term Rating of ‘A-(lka)(EXP)’.

The debenture is to be issued at a fixed rate with a tenor of three years. Proceeds will be used to refinance debt.

The proposed debenture is rated at the same level as Singer’s National Long-Term Rating, as it ranks equally with its other senior unsecured obligations. The final rating is subject to the receipt of final documents conforming to information already received.

Recovery in sales volume: Fitch expects demand for consumer durables to pick up in the medium-term as consumers adjust to higher costs, supported by an earnings recovery in the agricultural sector, continued low personal taxes and stable interest rates. Singer’s consumer electronics and home appliance revenue growth slowed to 1% in 2017 on weak demand, after two years of double-digit growth, due to higher indirect taxes and a prolonged drought that affected the livelihood of a significant proportion of Sri Lanka’s population. Fitch believes Singer was able to better respond to the weak demand compared with peers due to its defensive product portfolio and strong brand presence.

Growth in IT, digital media: Fitch expects Singer’s IT and mobile segments to be key growth drivers in the medium term, aided by Sri Lanka’s increasing smartphone penetration and short replacement cycles compared with most other consumer durables. Singer is the country’s largest smartphone retailer and exclusive agent for Huawei, Sri Lanka’s second-largest smartphone brand. Singer’s IT and digital media revenue has increased at a CAGR of 57% over the past five years. Fitch expects it to maintain its market leadership for the next three years, with the renewal of its contract with Huawei.

EBITDAR margins to stabilise: Fitch expects Singer’s EBITDAR margin to improve by around 50bp-60bp from the current level of 9.1%, to stabilise at around 9.5% from 2019, on better sales volume and cost pass-through to customers. Singer’s EBITDAR margin contracted by almost 150bp in 2017 due to lower sales as well as higher indirect taxes and sales costs. The margin contraction was seen across most product segments, as weak demand compelled the company to absorb a majority of the tax increases and cost escalations to sustain top-line growth.

Leverage to improve: Fitch expects Singer’s leverage to improve meaningfully from 2019 amid the recovery in the operating environment and better margin, but headroom under the current rating will remain low due to high capex, dividend payments and working capital investments, which may limit debt pay down. Higher inventory build-up amid sluggish demand, coupled with lower profitability in 2017, saw leverage worsen to 5.5x, compared with 4.3x at end-2016.

No extraordinary support from parent: Fitch will continue to rate Singer on its financial strength due to weak-to-moderate linkages between Singer and its new 81% parent, Hayleys PLC, under Fitch’s Parent and Subsidiary Rating Linkage Criteria, as well as the size of Singer’s balance sheet and significant debt at end-2017. Hayleys acquired a controlling stake in Singer in 2017. Fitch does not expect additional pressure for higher dividend payments from Hayleys, as Singer’s average dividend payout, at around 60% of after-tax profit, is already high on average compared to most corporates.

Low dependence of Singer Finance: Fitch does not believe Singer will be called upon for an additional capital infusion to Singer Finance (Lanka) PLC (BBB(lka)/Stable) due to the 80%-owned finance subsidiary’s strong capitalisation, which is well above the regulatory minimum, better-than-peer asset quality and strong funding profile. Singer’s last equity infusion of Rs. 550 million was in 2017 to support the subsidiary’s new credit card business.