May, 22, 2014
Fitch Ratings has downgraded the rating on Singer (Sri Lanka) Plc's (Singer) outstanding senior unsecured debentures to 'A-(lka) from 'A(lka)'. It has also published the company's National Long Term Rating of 'A-(lka)'. The Outlook is Stable. The rating on Singer's outstanding commercial paper has been revised to 'F2(lka)' from F1(lka). A full list of rating actions is at the end of this rating action commentary.
The downgrade of the debenture rating reflects Fitch's view that Singer's medium-term net leverage as measured by adjusted net debt/EBITDAR (excluding Singer Finance PLC's figures) is likely to remain over 4.5x due to continued pressure on profitability.
KEY RATING DRIVERS
Margin Pressure: In 2013, demand for consumer durables in Sri Lanka declined and cost of sales rose following VAT revisions that the company found difficult to pass on to consumers, who faced stressed macroeconomic conditions. As at end-2013, Singer's leverage increased to 4.7x from 3.4x at end-2012. The ratio further rose to 5.3x on an annualised basis at end-1Q14. While revenue is expected to recover, Fitch expects margin pressure to continue as the company increases selling expenses to drive sales.
Leading Consumer Durables Retailer: Singer has more than 1,000 retail points across Sri Lanka that sell a diverse range of brands and products, including in-house brands. The company was able to secure new brands, including Beko, Grundig, Sharp and Lenovo, which were added in 2013. Singer's well-known in-house Singer and Sisil brands, which are competitively priced and cater to the mass-market, provide the company with price-point diversity.
Well-Managed Consumer Loans: In-house financing plays a key role in Singer's business as it does in the operations of other retailers of consumer durables. In 2013, in-house hire purchase facilities financed approximately 45% of Singer's sales (2012: 44%). In-house financing makes products more affordable to the masses, which dovetails with mass market positioning of Singer's in-house brands. Singer continues to manage its hire purchase portfolio well, aided by average durations of less than a year and strong staff incentives for debt recovery. At end 2013, Singer managed to contain overdue accounts at 3.7% of the portfolio (2012: 2.3%), while write-offs were negligible.
Cyclical Demand and Currency Risk: Singer has managed to mitigate its foreign-currency risk stemming from imports by producing locally. It manufactures and locally procures close to 35% of products thorough related companies and local suppliers. Singer also faces volatility in the demand for non-essential consumer durables through economic cycles.
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 (end-2013: 4.7x)
- EBITDA margins sustained below 7% (end-2013: 8%)
- A material weakening in Singer's (company-level) liquidity profile
- A material weakening of the credit profile of Singer's 80% subsidiary, Singer Finance (BBB+(lka)/Stable), given the 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 margins sustained above 10%
The full list of rating actions follows:
National Long-Term Rating published at 'A-(lka)'; Outlook Stable
National Long-Term Rating on Singer's outstanding senior unsecured redeemable debentures downgraded to 'A-(lka)' from 'A(lka)
National Short-Term Rating on Singer's outstanding commercial paper downgraded to 'F2(lka)' from 'F1(lka)