Fitch Ratings has assigned Singer (Sri Lanka) Plc’s (Singer; A(lka)/Stable) unsecured redeemable debenture issue of up to Rs. 3 billion a final National Long-Term Rating of ‘A-(lka)’.
The final rating is the same as the expected rating assigned on 20 April 2015, and follows the receipt of documents conforming to information already received.
The debentures are rated in line with Singer’s National Long-Term Rating as they represent senior unsecured obligations of the retailer of consumer durables and would rank equally with the company’s other senior unsecured debt.
Key rating drivers
Strong Market Share: Singer’s position as a leading consumer durables retailer is supported by its extensive distribution network, multi-brand strategy and robust after-sales service. Singer’s extensive reach of over 1,000 outlets is important given its mass market focus; this includes 414 exclusive Singer showrooms.
Singer retails a range of products across a number of brands and price points, including its well-known, competitively priced in-house brands, Singer and Sisil, which account for over half of Singer’s consumer durables revenue.
Improved Operating Environment: Consumer durables sales rose 14.4% in 2014, following a 0.6% decline in 2013, due to an improvement in demand. Electricity tariff and fuel price reductions implemented in late 2014, low-interest rates and a relatively stable exchange rate environment have also supported better consumer durables demand.
Fitch expects initiatives announced in the Government’s interim budget in February 2015 to sustain this trend. These measures include higher salaries and allowances for public sector employees (who form about 25% of households), and a further reduction in fuel prices in line with market pricing.
Cyclical Demand and Currency Risk: The discretionary nature of consumer durables makes demand volatile across business cycles. Singer is also vulnerable to exchange rate risk because a range of its products are imported. Locally, Singer produces and procures close to 35% of its products from related companies and local suppliers, which mitigates this risk.
Well-Managed Consumer Loans: In-house financing accounted for around 40% of Singer’s sales in 2014 and is important given Singer’s mass market positioning. In-house financing makes products available to individuals who may otherwise have limited access to credit. The portfolio of loans is well-managed, with the average duration less than a year, an average loan-to-value ratio of 85%, while staff is strongly incentivised to recover debts. At the end of 2014, overdue accounts stood at 4.4% of the portfolio (2013: 3.7%), while write-offs remain negligible.
Fitch’s key assumptions within our rating case for the issuer include:
- Revenue to increase due to improved consumer purchasing power.
- Margins to improve gradually as a benign demand environment lowers competitive pricing pressure.
- No material capex as Singer consolidates its store network.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A sustained increase in Singer’s leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) to over 5.5x (2014: 4.76x)
- EBITDA margin sustained below 7% (2014: 7.5%)
- A material weakening in Singer’s (company-level) liquidity profile
- A material weakening of the credit profile of Singer’s 80% subsidiary, Singer Finance (Lanka) Plc (BBB+(lka)/Stable), given strong linkages between the entities
Positive: Future developments that may individually or collectively lead to a positive rating action include:
- Singer’s leverage falling below 4.5x on a sustained basis
- EBITDA margin sustained above 10%