ICRA Lanka Assigns [SL]BB+ rating to Lankem Ceylon PLC August 02, 2016

Transcription

1 ICRA Lanka Assigns [SL]BB+ rating to Lankem Ceylon PLC August 02, 2016 Instrument Amount (in LKR Mn) Rating Action Issuer Rating N/A [SL]BB+ (Stable) Assigned ICRA Lanka Limited, Subsidiary of ICRA Limited, Group company of Moody s Investors Service has assigned an Issuer rating of [SL]BB+ (pronounced S L double B plus 1 ) with stable outlook for Lankem Ceylon PLC ("LCEY / the Company ). ICRA Lanka has taken a standalone view on LCEY given the very low dependence of the Company on its subsidiaries (dividends/advances) and the absence of major contractual obligations to support group entities which are currently reporting losses or recovering from the reported losses. The assigned rating primarily factors in the Company s strong brand name and leading market share in the crop protection as well as the industrial chemicals segment. ICRA Lanka also takes into account the experience of the promoters, the Company s strong track record and reputation in the industry which have enabled it to enjoy steady access to funding both from the capital markets as well as financial institutions that have supported its growth over the years. The Company s professional management team coupled with a good governance structure adds further comfort for the rating. These rating strengths are partly offset by the downturn in the key business segments over the past two years which have resulted in the company posting large net losses. Due to higher regulatory pressure for environmentally safer agro-chemicals, and the erratic weather conditions that prevailed during FYE Mar 2015 and Mar 2016, the company s crop protection segment has been negatively affected. Although the painting segment has registered a noticeable growth in FYE Mar 2016, due to promotional activities undertaken during this period, the profit margin of this segment has further deteriorated on account of relatively high selling and distribution expenses. Moreover, the changes in the distribution network, during this period have increased the administration expenses at the company level (standalone), exerting more pressure on the overall profit margins. Notwithstanding the market leadership under Industrial Chemical & Bitumen segments, the revenues under this segment have not shown any noticeable growth in the recent past. In summary, LCEY s financial profile has deteriorated over the past few years, resulting in losses (i.e. net loss of LKR 368 Mn in FYE Mar 2016), weaker capital structure and coverage metrics. Further, the company s liquidity position has further weakened during FYE Mar 2016 and this is characterized by higher working capital intensity and higher debt levels. Given the high dependence on imports which are not hedged fully, LCEY s revenues and profits are likely to be negatively affected owing to foreign exchange risks. LCEY s standalone profile is relatively weak, but the company s largest subsidiary, C W Mackie PLC, has been reporting a noticeable growth owing to the strong FMCG products segment as well as the recovering trading operation. The company s leisure sector has shown signs of recovery after the recent renovation of both Sigiriya Village Hotel and Marawila Resort. The new investments in the packaging companies would further diversify the group s business exposure, although these companies are expected to contribute to the group s revenue significantly only in the medium to long term. After adopting SLFRS 10, the new accounting standard relating to the consolidation of entities, the loss-making Kotagala Plantations PLC and its subsidiary Union Commodities Pvt Ltd, along with Agarapathana Plantations PLC, have been re-classified from subsidiaries to associate companies. If the 1 For complete rating scale and definitions please refer to ICRA Lanka's Website or other ICRA Rating Publications

2 losses reported by these plantation entities continue, the company faces the prospect of further financial losses due to write off of these investments. While LCEY has a firm policy in place that would largely limit the intergroup transactions, ability of the Company to strictly enforce the same coupled with ability to diversify its own income streams would be key sensitivities to the rating. While the Company s financial profile is relatively weaker, LCEY is presently heavily dependent on short term loans to fund its working capital position, as operating losses have necessitated LCEY to rely on external working capital support. Ability of the Company to reduce reliance on short term debt and align cash flows in line with investment (fixed and working capital) requirements would be other sensitivities to the rating. Being a leading conglomerate with a reputed name in Sri Lanka, LCEY (on a standalone basis) is engaged in the manufacturing and distribution of agro chemicals, decorative painting products, Industrial Chemical & Bitumen Products and FMCG products. The Company is a market leader in the weedicides segment but faces increasing competition from other entrenched players. Moreover, the regulatory requirements under this business segment have been tightened in recent years, due to ongoing discussions for adoption of environmentally friendly agro chemical products in Sri Lanka. The adverse weather conditions that have prevailed over the past two years have also negatively affected the agro chemical business. Painting segment has recently registered a growth in revenue due to recovery of the overall construction industry coupled with the company s aggressive promotional activities. Currently, Lankem holds approximately 8% of market share in the decorative painting segment with its brand Robbialac. The innovative product ranges introduced by other leading competitors, and higher promotional expenditures is likely to further adversely affect the segment s profitability margins. The company has traditionally been a market leader in the Industrial Chemicals and Bitumen products segment. The slowdown in the construction industry has adversely affected this segment during FYE Mar 2016; however, with the recovery being witnessed, this segment is expected to perform well in the medium term. Lankem s Consumer Products segment has been the pioneer in producing key consumable products with brands like Biflex, Teepol, Bubble & Fenol being household names in Sri Lanka. In 2010 Lankem strengthened its position in the FMCG sector through the acquisition of C.W. Mackie PLC. The company is engaged in the business of manufacturing and trading of key consumable products along with its expertise in the processing premium grade rubber products manufactured through the plantations sector. Notwithstanding the negative outlook for the local rubber industry, the FMCG segment under C W Mackie PLC has shown a noticeable growth during FYE Mar 2015 and Mar Lankem has owned and operated the Sigiriya Village Hotel based in Sri Lanka's cultural triangle for over 3 decades. In 1993 the company acquired control of Beruwala Resorts Ltd which owns and operates a 120 room property on Sri Lanka's south coast. In 1995 the company opened its third property in Marwilla on the west coast. Further acquisitions in FYE Mar 2011 and Mar 2012 helped grow the group's portfolio to five landmark properties including Galle Fort and Fisherman's Bay hotels. The leisure segment has been reporting financial losses over the past few years. However, after the refurbishing exercise, this sector has registered a noticeable growth in FYE Mar 2015 and Mar 2016 and the profitability is expected to improve going forward. The company s new investments in the packaging sector would further diversify the business risk. However, in the medium term, the company is likely to further incur additional capital expenditures in order to support these operations.

3 The Company, on a standalone basis, had recorded a decline in revenue from FYE Mar 2012 to FYE Mar 2015 due to the decline in contribution from the key crop protection segment. However, the company registered a YOY 14 % growth in revenue in FYE Mar 2016 on the back of growth in the paints segment. Despite the revenue growth in FYE Mar 2016, the company s OPBDITA and PAT margins have been negatively affected due to increased raw material costs coupled with high overhead expenses. The company has registered a net loss of LKR 368 Mn in FYE Mar 2016 compared with a net profit of LKR 167 Mn in the previous year. The company s working capital requirements have remained high over the years owing to the high debtors and inventory levels. The recent increase in the debtor levels is partly attributable to the changes in the distribution network where the FMCG products under Lankem Consumer Division are now distributed by Hayleys to achieve a wider reach (as compared to being handled by group entities earlier, where the credit offered was low). The inventory levels have also remained high due to the seasonality of main segments such as paints and agro chemicals. The Company s negative profitability, weaker working capital position has led to reliance on external debt. Further, net losses in the recent past have eroded the net worth position of the company. As a consequence, the Company s capital structure has remained relatively weak with gearing increasing to 2.2x in FYE Mar The Company s coverage and key debt metrics have also deteriorated further given the debt levels on the books as compared to the profits generated. The Company s debt profile in the past was largely skewed towards short term loans, which were refinanced on a regular basis. However, in efforts to improve the balance sheet liquidity, the management is now trying to raise long term funds to match the cash flow requirements. The same would be largely used for capex/acquisitions to help grow the business into new product segments. As a consequence, going forward, the debt profile is likely to shift towards longer term debt. The Company has a large investment portfolio of ~LKR 3 bn and the major investments are in C W Mackies PLC, Sigiriya Village, Marawilla Resorts and Beruwala Resort PLC. Colombo Fort Hotel Ltd is the largest unquoted investment with the cost of investment approximately LKR 1.5 Bn. The Company s market portfolio (of listed entities) has a reasonable buffer over the cost of the investments providing incremental comfort on the Company s liquidity position. While the Company s Plantations and leisure sectors have not been performing well in the past, the management has indicated that there will not be any support from LCEY. Nevertheless, risk related to write-off of investments remains, which could have an adverse impact on profitability. Company Profile Lankem Ceylon PLC was created by Royal Dutch Shell in It was initially set up as an agro chemical business. As Sri Lanka started encouraging local ownership, the company was acquired by local investors and was listed on the Colombo Stock Exchange. The company has been prevalent in most industry segments in the country but primarily focused on chemicals and manufacturing. Over the past 25 years, Lankem has diversified into other related businesses. Lankem's Agro Chemicals, Paints and Bituminous Products have been the frontrunners in new product development in their specific industries. Lankem has introduced key consumable products which have become household names in Sri Lanka today. Group Profile Over the years, LCEY has grown by strategic acquisitions and now constitutes a diversified group with 27 subsidiaries which are in manufacturing of FMCG products, import/export of agricultural inputs/commodities, distribution and freight forwarding, trading of chemicals/auto components and, managing hotels and plantations. E B Creasy PLC (holding 45.73% direct stake in Lankem), which is owned by Colombo Fort Land & Building (CFLB) is the parent company of Lankem Ceylon PLC,

4 accounting for approximately 85% of the revenue and nearly 70% of the net profits of CFLB. Thus, LCEY is strategically important to the Group. The Company on its own also acts as a strategic investment holding company for the Group with several subsidiaries and step down subsidiaries being held by LCEY. Lankem Ceylon PLC is the EBCR s largest subsidiary (including its step down subsidiaries) contributing to 85% of the Group revenues. With several of Lankem s subsidiaries (including Lankem) being listed, the Group is also open to a rights issue to raise funds for supporting its debt obligations. However, there are no financial obligations toward any of the group entities. Further, dividend income from these entities forms less than 2% of the Company s revenues, making LCEY independent of any of the subsidiaries. C.W. Mackie PLC is the largest subsidiary of the Group, which has recorded a noticeable growth over the past few years, despite the slowdown in plantation sector. Leisure sector is another important segment of the group s investment, which has been recovering from the reported financial losses. LCEY has made some sizeable investments recently in the packaging segment. On a standalone basis, for the FYE Mar-2016, LCEY reported a net loss of LKR Million on a total income of LKR 5, Million compared to a net profit of LKR Million reported on a total income of LKR 5, Million in FYE Mar On a consolidated basis, for the FYE Mar-2016, LCEY reported a net loss of LKR Million on a total income of LKR 17, Million compared to a net loss of LKR Million reported on a total income of LKR 15, Million in FYE Mar August 2016 For further details please contact: Analyst Contacts: Mr. Raghunath T, (Tel. No ) Raghunath.t@icraindia.com Mr. Danushka Perera, (Tel. No ) danushka@icralanka.com Relationship Contacts: Mr. W Don Barnabas, (Tel. No ) wdbarnabas@icralanka.com

5 Subsidiary of ICRA Limited A Group Company of Moody s Investors Service CORPORATE OFFICE Level 10, East Tower, World Trade Center, Colombo 01, Sri Lanka Tel: ; Fax: info@icralanka.com; Website: Contents may be used freely with due acknowledgement to ICRA Lanka. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.