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Singer (Sri Lanka) downgraded by a notch over Coronavirus

ECONOMYNEXT – Singer (Sri Lanka) Plc, a consumer durables retailer has been downgraded to ‘BBB+(lka)’ from ‘A-(lka)’ by Fitch Ratings as curfews to halt the spread of Coronavirus hit sales.

“The downgrade and Negative Outlook reflect the significant business interruption from
the coronavirus pandemic and the likely implications of a downturn in discretionary
consumer spending, which we expect to extend into early 2021,” Fitch said.

Though liquidity was tight with about a billion rupees in cash at the end of 2019 and debt maturities of 13 billion rupees over the next 12 months, the firm has credit lines from banks, the rating agency said.

“Most of the maturities are working capital loans, and banks have demonstrated their willingness to roll-over these maturities during previous economic downturns,” the agency said.

“Singer has LKR10 billion of undrawn but uncommitted lines to help manage liquidity and we expect local banks to stand by these facilities.

“In addition, Singer has extended trade payable terms with global suppliers, which supports its near-term liquidity, although this could be eroded if the economic disruption continues for longer than we expect.”

The full statement is reproduced below:

Fitch Downgrades Singer (Sri Lanka) to ‘BBB+(lka)’ on
Coronavirus Pandemic; Outlook Negative

Fitch Ratings – Colombo – 16 Apr 2020: Fitch has downgraded consumer durables retailer
Singer (Sri Lanka) PLC’s National Long-Term Rating to ‘BBB+(lka)’, from ‘A-(lka)’. The
Outlook is Negative.

The downgrade and Negative Outlook reflect the significant business interruption from
the coronavirus pandemic and the likely implications of a downturn in discretionary
consumer spending, which we expect to extend into early 2021.

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Fitch anticipates a sharp increase in leverage to around 8.0x in the financial year ending March 2021 (FY21), from an estimated 5.6x in FY20; this is based on EBITDA dropping to around LKR2 billion after revenue falls of 36% to LKR33 billion. Leverage could improve to around 6.0x in FY22 assuming the pandemic is largely contained and top line recovers.

Singer’s liquidity is tight going into the downturn, with around LKR1 billion of cash at end-2019 (3QFY20) to meet debt maturities of LKR13 billion in the next 12 months.

Most of the maturities are working capital loans, and banks have demonstrated their willingness to roll-over these maturities during previous economic downturns.

Singer has LKR10 billion of undrawn but uncommitted lines to help manage liquidity and we expect local banks to stand by these facilities. In addition, Singer has extended trade payable terms with global suppliers, which supports its near-term liquidity, although this could be
eroded if the economic disruption continues for longer than we expect.

Heightened liquidity pressure in the next few quarters could lead to further negative rating action.

KEY RATING DRIVERS

Pandemic, Declining Volume: Fitch expects an unprecedented effect on revenue in the consumer discretionary sector from the coronavirus pandemic, as a nationwide lockdown and store closures for non-essential categories are likely to severely depress sales.

We expect sales to fall by around 60% in the quarter ending 30 June (1QFY21) with a moderation of the decline in the next three to four quarters, with a full recovery being at least 18 months away. Even when restrictions are lifted we believe the retail sector will continue to struggle due to loss of income and lower household wealth.

We believe Singer could recover in FY22 if the agricultural sector yields better harvests, consumers react to the late FY20 cut in direct and indirect taxation and if domestic interest rates continue to fall or at least remain stable. Approximately 30% of Singer’s revenue is financed by its in-house hire purchase scheme, which is sensitive to domestic interest rates.

Delayed Leverage Recovery: We expect the nation-wide lockdown to result in higher leverage, which we forecast to deteriorate to around 8.0x in FY21 and gradually recede to around 6.0x in FY22, assuming a 40% yoy recovery in revenue growth.

Our previous rating case assumed a gradual improvement in leverage to below 5.5x by FY21. Singer has deferred its planned expansionary capex and will only incur a minimum maintenance
component for the medium term, which should slightly improve its leverage.

Fitch expects working capital inflow of around LKR5 billlion in FY21, as Singer is likely to drawn down on its available supplier credit, liquidate inventory amid the poor demand environment and central bank-imposed import restrictions.

The company expects to use most of the working capital inflow to settle short-term working-capital related debt.

Weakened Profitability: Fitch expects Singer’s EBITDA margin to contract by around
100bp to 6% in FY21, against our previous base-case assumption of 7%.

The contraction will be caused by lower volume, probable price discounts for Singer’s portfolio and the absorption of currency-related costs; to date, the Sri Lankan rupee has depreciated by
around 10% against the US dollar. Singer imports more than 60% of the products it retails.

Fitch believes Singer will avert an operational loss after implementing its bare minimum
operating-cost structure if stores remain closed for longer.

Supply Disruption: The central bank has restricted imports of non-essential goods till end- June 2020 to control the rapid depreciation of the Sri Lankan rupee against the US dollar.

Consumer durable retailers import around 80%-90% of the products they market and are likely to face supply-side disruption. Singer has sufficient inventory for around threemonths that can be stretched given the nationwide lockdown, and should therefore be sufficient to cover sales till mid-June 2020. However, an extension of import restrictions beyond June could constrain Singer’s revenue generation from returning to historical levels.

Leading Market Position, Distribution Network: Singer’s National Long-Term Rating reflects its leading market position in consumer-durable retail, in-house portfolio of products and brands, which are diversified across price points, large national distribution and retail store network and a well-managed hire-purchase book with limited delinquencies.

No Extraordinary Support from Parent: Fitch will continue to rate Singer based on its
Standalone Credit Profile due to our assessment of weak linkages between Singer and its
parent, Hayleys PLC, under Fitch’s Parent and Subsidiary Rating Linkage methodology.
We do not expect Hayleys to provide any extraordinary support to its subsidiary, despite
its 90.4% stake, due to the size of Singer’s balance sheet and significant debt as of FY19.

DERIVATION SUMMARY

Sunshine Holdings PLC (A-(lka)/Stable) is rated one notch above Singer to reflect its
diversified operations, which have elements of defensiveness owing to its exposure to the
fast-moving consumer goods and healthcare segments, while also maintaining a healthy
financial risk profile when compared with Singer.

Singer is the country’s largest consumer durables retailer by revenue, with a portfolio of
well-known brands catering to all income categories. Singer has a stronger business
profile than Abans PLC (BBB+(lka)/Negative) owing to its well capitalised finance
subsidiary, which limits the need to inject fresh equity over the medium term.

Abans’ business profile has come under strain owing to its weak financial subsidiary, which
requires fresh capital from the parent, and venture into more volatile non-core operations
such as real estate. However, Singer’s financial profile has recently deteriorated and is
likely to remain weaker than that of Abans over the next few years; therefore, Fitch rates
both entities at the same level.

DSI Samson Group (Private) Limited (BBB(lka)/Positive) is rated one notch below Singer
to reflect the increased competition in some of DSI’s core markets. The Positive Outlook
reflects DSI’s decreasing trend in leverage.

KEY ASSUMPTIONS

– Pandemic to be profound during most of 1QFY21, and gradually ease between 2QFY21
– 1QFY22.

– Revenue and sales volume to decline by 36% in FY21 with FY22 recovering to around
90% of FY20 revenue.


– EBITDA margin to contract from FY20 level by around 100bp to 6% in FY21 and then
improve to 7.5% in FY22 amid a recovery in sales.


– We expect working capital inflow of around LKR5 billion in FY21 due to inventory
liquidation and extended supplier credit with proceeds used to primarily settle short-term
working-capital debt.

– Medium term capex to hover at around LKR400 million a year and will be mainly used
for maintenance.


– Dividend payment of LKR150 million in FY21, with similar amounts over FY22-FY23.

RATING SENSITIVITIES


Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

– The Outlook may be revised to Stable upon an improvement in leverage, as defined by
adjusted net debt/EBITDAR, to below 6.0x by FY22 (LTM 3QFY20: 5.6x, FY21: 7.9x)


– The Outlook may be revised to Stable upon an improvement in fixed-charge cover,
defined as EBITDAR/interest paid plus rent, to above 1.3x on a sustained basis (LTM
3QFY20: 1.2x, FY21: 0.9x)

Factors that Could, Individually or Collectively, Lead to Negative Rating

Action/Downgrade:

– Inability to make meaningful progress to reduce leverage to below 6.0x or improve
fixed-charge cover to more than 1.3x by FY22

– A significant deterioration in liquidity

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’.
Bestand worst-case scenario credit ratings are based on historical performance. For mor information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Tight Liquidity : Singer had LKR1 billion of unrestricted cash as of end-December 2019
to meet LKR13 billion of debt repayment falling due in the next 12 months. Around
LKR8 billion consist of working-capital lines, the repayment of which is subject to
lenders’ willingness to refinance and maintain exposure to Singer. We expect banks to
stand by Singer’s uncommitted unutilized lines of LKR10 billion due to the company’s
leading market position among domestic consumer durable retailers – Singer has a track
record of accessing banks across all points in the cycle.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY
DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable
Criteria.