Sri Lanka Fitch gives ‘B+(lka)’ rating to Kotagala

ECONOMYNEXT – Fitch Ratings Lanka has assigned Sri Lanka’s Kotagala Plantations PLC a National Long-Term ‘B+(lka)’ rating with a Negative outlook.

Fitch has also assigned Kotagala’s outstanding senior secured debentures a National Long-Term Rating of ‘B+(lka)’.

“The rating reflects Kotagala’s weak liquidity, high leverage and low end-market demand for its products, despite holding a strong market position,” a statement said.

“The Negative outlook reflects Fitch’s expectations that the weak operating environment will further deteriorate the company’s liquidity unless it can restructure its debt maturities or arrange additional liquidity lines.”

The full statement follows:

Fitch Ratings-Colombo-10 May 2016: Fitch Ratings Lanka has assigned Sri Lanka-based Kotagala Plantations PLC (Kotagala) a National Long-Term ‘B+(lka)’ rating, with a Negative Outlook. Fitch has also assigned Kotagala’s outstanding senior secured debentures a National Long-Term Rating of ‘B+(lka)’.

The rating reflects Kotagala’s weak liquidity, high leverage and low end-market demand for its products, despite holding a strong market position. The Negative Outlook reflects Fitch’s expectations the weak operating environment will further deteriorate the company’s liquidity unless it can restructure its debt maturities or arrange additional liquidity lines.

KEY RATING DRIVERS

Weak Liquidity Position: As at end-December 2015, Kotagala had LKR787m of unrestricted cash and zero unutilised credit facilities to meet LKR1.4bn of short-term debt (about 45% of which was bank overdrafts) falling due in the next 12 months, placing the company in a weak liquidity position. Fitch expects the company to be FCF negative in the financial year 31 March 2017 (FY17), owing to operational weaknesses and ongoing capex plans, further pressuring its liquidity profile.

Low End-Market Demand: Kotagala continued its negative trajectory, reporting losses in the year FY15 and FY14 due to weak end-market demand and cost pressures, which are faced by the entire plantation industry. Fitch expects demand from key end-markets, such as Russia and the Middle East, to remain subdued over the next 12 to 18 months, resulting in continued operating losses for the company.

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Volatile EBITDAR Margin: The commoditised nature of agricultural products means selling prices are determined by global macroeconomic-factors and fluctuations in global prices can have a direct impact on company profitability. The tea sector also faces labour shortages and stipulated wage increases every two years, which are not linked to market prices or productivity. This has led to Kotagala’s EBITDAR margins deteriorating to 2% in FY15, from 19% in FY13.

High Leverage: Low profitability and significant investments have impaired Kotagala’s cash flow generation, resulting in its leverage, calculated as adjusted net-debt/EBITDA, rising to 12.6x at FYE15, from 1.3x at FYE12. Fitch expects Kotagala’s leverage to remain high in the medium-term unless there is a significant turnaround in global tea and rubber prices.

New Project Risk: Limited domestic land availability for large-scale expansion and lower production cost have led Kotagala to invest LKR997m in rubber cultivation in Cambodia. Any delays in finalising this project or breaking even could adversely impact the company’s profitability and cash flow generation and weigh on the rating.

Strong Market Position: Kotagala achieved better crop yields compared to peers, allowing the company to increase production without requiring significant capital expenditure. The performance of Kotagala’s tea segment has also benefitted from the acquisition of Union Commodities Private Limited in 2012, which allowed forward integration of its tea exports.

KEY ASSUMPTIONS

Fitch’s key assumptions within the rating case for Kotagala include:

– revenue decline in FY16 followed by an improvement to low double-digits over FY17 to FY19 on account global market recovery and increasing global oil prices

– EBITDAR margins to remain in the low single digits, with the expectation of wage-related cost escalation

– capex to average about 6% of sales between from FY16 to FY19

– no dividend outflows from FY16 to FY19

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to the Outlook being revised to Stable include:

– material improvement in the company’s liquidity profile

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

– further deterioration in the company’s liquidity profile, as evidenced by an inability to rollover maturing debt and failing to restructure debt obligations
(COLOMBO, May 10 2016)
 

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