Ceylon Tea Brokers PLC

ICRA Lanka reaffirms the issuer rating of [SL]BBB with Stable Outlook for Ceylon Tea Brokers PLC

Instrument*Rated Amount (LKR Mn)Outstanding Amount
(LKR Mn)
   Rating Action
Issuer Rating N/AN/A[SL] BBB with Stable Outlook reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the Issuer rating of [SL]BBB (pronounced S L triple B) with Stable outlook for Ceylon Tea Brokers PLC (“CTB”/”the Company”).

Rationale

The rating reaffirmation factors in the healthy performance of the core business segment, tea brokering, during FY2020 and FY2021, aided by the increase in the Company’s market share in the tea broking industry. The rating also takes note of the increasing diversified revenue streams of CTB with the realignment of its wholly-owned subsidiary Logicare (Pvt) Ltd’s (“LPL”) as a fully-fledged high-end third-party logistics service provider in addition to CTB’s tea warehousing and supplier financing operations. The tea brokerage business generally remains susceptible to the Sri Lankan tea industry’s cyclicality and short-term price volatilities. Being an essential agricultural item in the global markets, Ceylon tea, amidst its perceived health benefits, would help drive the demand for Ceylon tea in the long term. The rating factors the healthy financial profile of the standalone Company supported by healthy profit margins and coverage ratios. The rating also factors in the long-standing track record of the Company in the tea broking business since 1963. CTB has gradually reduced the supplier financing portfolio over the last two financial years. ICRA Lanka views the Company’s new credit policy on the lending portfolio on a positive note, as this would reduce the Company’s susceptibility to counterparty risks. However, this risk is mitigated to a larger extent by being part of regulated industry associations like Colombo Tea Traders and Tea Brokers Associations. Any deterioration in the lending portfolio’s credit quality, leading to an increase in bad debt provisions/write-offs, would remain a rating sensitivity factor. The financial profile of the consolidated entity is constrained by its subsidiary LPL due to weak profitability, highly geared capital structure and modest coverage indicators. LPL will expand its capacity with a significant investment in the next six to 12 months. This would rationalize the overhead cost of LPL and improve profitability in the medium term. The ability of the management to achieve the profitability targets of this project will be a key rating sensitivity. The form of funding of the proposed expansion project will be a key monitorable since it will have a significant impact on the capital structure of the Company and the consolidated entity.

Outlook: Stable

The Stable Outlook reflects ICRA Lanka’s belief that the Company will maintain its strong market position in the core business and healthy financial profile. The Company’s new diversified revenue streams are expected to augment the Company’s overall financial performance in the future.

Key Rating Drivers

Credit strengths

Long standing track record, strong parentage and healthy market share in tea broking industry; CTB is one of the leading tea brokers in Sri Lanka and is the first tea broker to be listed on the Colombo Stock Exchange (CSE). CTB commenced its operations as a partnership in 1963 and was taken over by the Capital Alliance Group (flagship entity – Capital Alliance Limited rated at [SL]A-, with stable outlook) in 2005. During FY2018, Capital Alliance Group had carried out a restructuring exercise, which resulted in CTB being held directly by the ultimate shareholders of Capital Alliance Group. The Company has a healthy market share in the tea broking industry which has grown to ~16.00% during FY2022, compared to 14.77%, 14.34%and 13.12% during FY2021, FY2020 and FY2019 respectively.

Diversified revenue streams; The Company has diversified revenue streams comprising tea brokerage, interest income from supplier financing, tea warehousing, interest income on lending business, third-party logistics, and other activities like providing advisory services. The Company earns ~1% brokerage income on the total value of tea sales sold at the Colombo Tea Auction. The brokerage revenue has witnessed a healthy Y-o-Y growth of 21% in FY2021 compared to 1% in FY2020, attributable primarily to the increasing tea prices and supported by increasing market share during this period. During Q1FY2022, brokerage income has grown by 7% (Annualised). The Company also provides short-term advances against tea stocks and long-term loans to tea suppliers as part of financing operations. During FY2021, the income from the finance operation has declined Y-o-Y by 26% compared to 28% decline in FY2020 in line with the new credit policy in effect since FY2020, targeting to limit its higher risk lending portfolio. Due to the new credit policy, the Company has reduced the provision charge made under IFRS-09 to LKR 20.8 Mn in FY2021 compared to LKR 119.8 Mn charge made in FY2020. From Apr-21, CTB has taken back the tea warehousing operations from its subsidiary LPL. From FY2022 onwards, LPL will operate as a fully-fledged high-end third-party logistics provider. The reason for the realignment of warehousing operations is to optimize the revenue potential of LPL. For the tea warehousing business, the Company currently charges ~LKR 2.45/kg of tea stocks from sellers for ~40 days and buyers if held longer than 40 days. The growth of this segment remains moderate in line with the volume growth of the brokerage business. LPL has a warehousing capacity of 13,000 pallets and established corporate entities in Sri Lanka presently occupy 94% of the capacity.  LPL has entered into 1-2 year contracts with 90% of the customers, thus providing revenue visibility in the medium term.

Healthy profit margins; The Company’s financial profile is generally characterized by healthy profit margins, gearing, and coverage ratios. The Company reported an OPM of 45.8% in Q1FY2022 as compared to 47.5% in FY2021 and 42.1% in FY2020. NPM margin improved to 21.4% in Q1FY2022 compared to 20.7% in FY2021 and 3.7% in FY2020. The profitability of the Company remained low in FY2020 due to strategic downsizing of the high margin supplier financing portfolio and LKR 119 Mn credit provision made on the same portfolio under IFRS9. The profitability of the Company improved due to reduced credit provisioning in FY2021. The operational losses of its subsidiary LPL have resulted in lower profit margins at the consolidated level. The gearing of the standalone Company reduced to 1.24x in Mar-21 as compared to 1.89x in Mar-20; it marginally increased to 1.50x in Jun-21. The Company’s gearing reduced due to lower borrowings as the supplier financing portfolio continues to decline. The Company’s gearing level adjusted for the financing operation, secured by the tea stocks from the regular tea suppliers, remains comfortable. The interest coverage and debt indicators have also improved due to low-interest costs and debt levels. Interest coverage ratio improved to 3.97x in Q1FY2022 compared to 2.55x in FY2021 and 1.31x in FY2020. Total Debt to OPBITDA ratio reduced to 3.20x in FY2021 compared to 4.21x in FY2020, and the same marginally increased to 3.37x in Q1FY2022. Going forward, ICRA Lanka expects the coverage and debt indicators to remain moderate due to lower growth envisage on the supplier financing portfolio.

Credit challenges

Performance is susceptible to demand cyclicality, forex fluctuations, regulations and adverse weather conditions: Any moderation in demand from Middle Eastern and CIS countries due to economic cycles or other exogenous factors (like war/economic sanctions) would also have adverse impact on CTB’s performance. The tea industry is presently benefiting from the depreciation of the Rupee against the US Dollar. This will encourage the sector to increase production. Future changes in Government’s policy on chemical fertilizer usage could also impact the performance of the tea industry. The tea industry is exposed to adverse weather patterns, and volatility in weather patterns will continue to affect tea production.

Weak financial performance of CTB’s subsidiary Logicare (Pvt) Ltd; LPL commissioned its state of the art warehouse in Jun-19. Due to high capital intensity and debt-funded investment, the financial profile of LPL remains weak with high overhead and interest costs. The strategic realignment of the business of LPL to third-party logistics will enable the Company to optimize its revenue with greater pricing flexibility. The Company plans to increase the capacity of the warehouse in next 6 to 12 months. This will be a significant Capex with a sizeable funding requirement of LKR 500-600 Mn. The Company plans to fund the investment through equity. The equity will be raised privately from a third-party investor. In case of any shortfall in equity funding, the deficit would be met by raising debt. The form of funding of the proposed expansion plan would be a key monitorable. Proposed capacity expansion will improve the scale of the operations and rationalize the overhead costs. The envisaged equity infusion from the third-party investor will improve the financial profile of LPL in the medium term.

Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.

Links to applicable criteria:  https://www.icralanka.com/corporate-rating-methodology

About the Company:

Ceylon Tea Brokers was founded in 1963 as a partnership firm, which was converted to a private limited Company in June 1999. The Company was taken over by the Capital Alliance Group in February 2005 and renamed as Ceylon Tea Brokers Ltd. It was subsequently listed on the Colombo Stock Exchange (CSE) in Feb 2010 and is the first standalone-listed tea broking company. The Company provides a wide range of services such as tea brokerage, warehousing and financing. the Company has a fully owned subsidiary, Logicare (Pvt) Ltd, which provides high-end third-party logistics solutions.

Key financial indicators (audited) – Standalone
Revenue and profitability indicators (Figs are in LKR Mn)FY17FY18FY19FY20FY21Q1FY22
Operating Income419.7655.9767.6580.6518.7146.0
OPBDITA168.3363.9412.4243.9246.566.9
PAT41.5106.8115.321.5107.531.2
ROCE (%)17.8%23.719.611.5%16.2%16.7%
NWC / OI(%)183.7%200.0%221.9%183.9%176.9%161.3%
Total Debt877.61,390.21,742.51,025.7788.0901.4
Networth237.7471.3582.6542.0633.4600.8
Gearing (x)3.692.952.991.891.241.50
OPBDITA/Interest & Finance Charges(x)1.651.851721.312.553.97
Total Debt/OPBDITA (x)5.223.824.224.213.203.37

Note; Gearing-(Total Debts/ Networth),*-Unaudited

Key financial indicators (audited) – Consolidated
Revenue and profitability indicators (Figs are in LKR Mn)FY17FY18FY19FY20FY21Q1FY22
Operating Income419.7655.9767.6692.6693.6191.8
OPBDITA168.3357.1408.1258.2255.566.5
PAT41.5100.0113.6(62.5)1.05.8
ROCE (%)17.8%23.3%19.1%9.0%9.6%10.0%
NWC / OI(%)183.7%200.1%223.4%151.3%134.3%119.6%
Total Debt877.61,390.22,191.31,614.01,512.51,606.2
Networth237.7464.5574.1444.9431.0373.0
Gearing (x)3.692.993.823.593.514.31
OPBDITA/Interest & Finance Charges(x)1.651.811.701.091.672.20
Total Debt/OPBDITA (x)5.223.895.376.255.926.04

Note; Gearing-(Total Debts/ Networth),*-Unaudited

Rating history for last three years
Analyst
Dasith Fernando
Senior Analyst
+94-774781593
dasith@icralanka.com  


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