ICRA Lanka reaffirms the ratings of Hayleys PLC; Revises the Outlook to Stable from Negative
|Instrument*||Current Rated Amount|
|Issuer Rating||N/A||[SL]A+ reaffirmed; Outlook revised to Stable from Negative|
|Senior Unsecured Listed Redeemable Debenture Programme (Issued on Aug 08, 2018)||3,527||[SL]A+ reaffirmed; Outlook revised to Stable from Negative|
|Senior Unsecured Listed Redeemable Debenture Programme (Issued on Aug 26, 2019)||3,000||[SL]A+ reaffirmed; Outlook revised to Stable from Negative|
ICRA Lanka Limited has reaffirmed the issuer rating of Hayleys PLC (“Hayleys”/ “the Group”) at [SL]A+ (pronounced SL A plus1) while revising the outlook to Stable from Negative. ICRA Lanka has also reaffirmed the issue ratings of [SL]A+ (pronounced SL A plus1) assigned to the Company’s two-Senior Unsecured Listed Redeemable Debenture programmes, amounting to LKR 3,527 Mn and LKR 3,000 Mn respectively while revising the outlook to Stable from Negative.
ICRA Lanka has taken a consolidated view of the Hayleys PLC and its group entities given the strong operational linkages among the group entities and the high degree of control, the holding company has over the dividend streams of the subsidiaries. ICRA Lanka notes that the scale and the diversity of the Group has enabled Hayleys to demonstrate good performance amidst the challenging macro environment. The healthy operating profits of the Group and the Company on a standalone basis have resulted in better coverage and leverage indicators for FY2021. In addition, ICRA Lanka notes that historically low interest rates have also supported the Group’s earnings profile.
ICRA Lanka also considers the Groups’ experienced management team, the Group’s strong professional setup and its sound corporate governance practices as key positives, which have complemented its business strengths.
However, the ratings take cognizance of the relatively high stand-alone debt level at the Holding company, as the planned asset monetizations have got delayed due to the adverse macro environment. Also, the deteriorating financial profile of the leisure sector of the group remains a challenge from a rating point of view.
The Stable Outlook reflects the improved financial performance and the debt matrices of the Group, and ICRA Lanka’s expectation that the Group would continue to perform well over the short to medium term.
The outlook maybe revised to Positive in case the debt at the holding company level reduces and the Group financial performance improves further. Outlook could be revised to Negative in case the Group performances deteriorates and the holding company debt increases further.
Key rating drivers
One of the largest conglomerates in Sri Lanka with significant diversifications across several sectors and geographies: Hayleys is one of the most diversified groups in Sri Lanka with a presence spanning across 12 diverse sectors. The Group is also the largest listed conglomerate in Sri Lanka in terms of the total revenue. Starting initially with trading and Logistic & shipping operations, over the years, the Group has expanded its operations to sectors such as consumer and retail, transportation and logistics, purification, hand protection, agriculture, plantations, textiles, leisure, eco solutions, construction materials, industry inputs, investment and services as well as power and energy. The ratings take comfort from the Group’s well diversified business portfolio, with no sector (with the exception of transportation & logistics and consumer & retail) accounting for over 15% of Group revenue. The business risk profile is also strengthened by the geographical diversification of the Group, with only 51% of the group revenue being generated within Sri Lanka.
Leading market positions of several of the group companies in both local and global markets: the Group companies have market leadership (both global and local) in their respective industries/sectors. For instance, Haycarb PLC is a global leader in charcoal based activated carbon market with a 16% market share, while DPL is among the top players in the global rubber gloves industry. Hayleys Plantations, logistics and construction materials businesses are also the market leaders in their respective fields in Sri Lanka. The logistics segment, represented by Hayleys Advantis is the largest logistics company in Sri Lanka, handling approximately 18% of total annual container throughput of the Colombo Port. Group’s Agriculture Sector is the largest exporter of processed fruits and vegetable with a market share of over 45%, and is the market leader in Agri inputs in Sri Lanka. Singer (Sri Lanka) Plc, which was acquired in Sep 2017, is the market leader in the consumer durables sector, with an island-wide network of 341 stores. ICRA Lanka notes that the dominant market positions of the group entities in their respective sectors enable the Group to benefit from economies of scale and superior earnings performance.
Strong performance of the group entities resulting in higher dividends and better debt coverage indicators for the holding company: The holding company Hayleys PLC, operates as an investment holding company, which is primarily dependent on the dividend income (close to 90% of operating income in FY2021) from the operating entities. While the dividend income was moderate in FY2020, the company saw a sharp increase in its dividend income during FY2021, due to strong performance of its operating entities, particularly those of the export sectors and consumer durables (Singer). Sharp increase in the overall operating income from LKR 1.5Bn in FY2020 to LKR 4.1Bn in FY2021 resulted in standalone interest cover improving to 1.43x (0.43x in FY2020) and overall debt servicing coverage improving to 0.57x (0.14x in FY2020), during FY2021. Also, despite the overall stand-alone debt level remaining high, leverage (Debt/ EBITDA) improved from 20.07x in FY2020 to 7.07x in FY2021. Given the robust post pandemic performance outlook of the group entities, ICRA Lanka expects the holding company to receive a similar dividend inflow in the current financial year, while maintaining its coverage indicators stable. ICRA Lanka also notes that the group entities and the holding company are significantly benefiting from the sharp decline of systemic interest rates.
Comfortable liquidity profile with high degree of financial flexibility: Company’s liquidity profile remains comfortable with over LKR 10.4 Bn unutilized funding lines and unencumbered shares of the subsidiaries worth close to LKR 60 Bn. ICRA Lanka also expects the company to comfortably refinance its debt obligations due to the strong relationships with banks and financial institutions. Currently, the entire debt profile of the company (about LKR 26 Bn as in Mar-21) has been obtained on fully unsecured basis without any collateral and all the shares of its subsidiaries remain unencumbered. Hayley’s buffer over book value of its investments has significantly improved over the last financial year (to about LKR 39 Bn as in Jun-21) due to both strong performance of the subsidiaries and robust market performance since October 2020.
Standalone debt level remains high due to the delay in implementing the planned asset disposals: ICRA Lanka notes that the stand-alone debt level of the holding company sharply increased following the debt funded acquisition of Singer PLC in late 2017, and remains high at about LKR 26.2 Bn as in Mar-21 (LKR 27.3 Bn in Mar-20). While the company is committed to the asset disposal plan (underutilized real-estate and a minority stake of Singer), which is expected to raise about LKR 10 Bn, the macro environment has not been conducive due to the pandemic. ICRA Lanka notes that the operating income (mainly dividends) is not sufficient to cover the total debt servicing obligations of the company, exposing the company to refinancing risk. Debt servicing coverage ratio improved to 0.57x in FY2021, from 0.14x in FY2020 and 0.28x in FY2019; ICRA Lanka expects the same to remain at around 0.6x times during the current financial year. Hayley’s good strong relationships with banks will provide some comfort, in terms of debt refinancing.
Sizable losses at the leisure sector, due to consecutive macro-shocks: The leisure sector was under pressure since end of the CY2018, due to consecutive macro challenges in the country. The situation is aggravated as a result of the COVID pandemic. Hayleys Group’s leisure sector reported a net loss of LKR 2.4 Bn in FY2021, vis-à-vis a net loss of LKR 884 Mn during the previous fiscal. ICRA Lanka expects the sector to post losses during the current financial year, where the segment would be under pressure to meet its debt servicing obligations, which stands at about LKR 1.5 Bn for FY2022. The GoSL initiated debt moratorium is expected to be extended until the sector recovers, thus providing some comfort from a debt servicing point of view. However, ICRA Lanka expects the parent company to step-in as the last resort, in case the sector is unable to meet its debt servicing obligations.
Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.
About the Company:
Hayleys PLC (“Hayleys”/“the Group”) is the most diversified, largest, listed conglomerate in Sri Lanka, with operations spanning across 16 business sectors and a global presence reaching across 86 countries. Having origins dating back to over 140 years, Hayleys currently operates with 181 companies, with 149 of them being local. Initially commencing commercial operations in 1878 as Chas. P. Hayley and Company, the entity was incorporated as Hayleys Limited in 1952 and subsequently converted to a PLC. Hayleys acts as a holding company and does not have any significant operations on its own. However, through direct and step down subsidiaries as well as associates, the Company controls businesses spanning across Transportation & Logistics, Agricultural Inputs, Construction Materials, Power, Fiber, Rubber Glove Manufacturing, Leisure, FMCG, Purification products (activated carbon), Power, Plantations, Textiles and BPO. The Group’s consolidated revenues are well diversified with no sector (barring transportation & logistics and consumer) contributing to more than 15% of total revenues. The Group’s operations are also well spread geographically, with export revenues (Asia, Europe, Americas and indirect deemed exports) contributing to about 49% of revenues. During FY2018, the group had acquired the controlling stake of Singer (Sri Lanka) PLC, the market leader in the consumer durable market in Sri Lanka.
Consolidated financial indicators (audited)
|OPBDITA/Interest & Finance Charges(x)||2.20||1.62||1.80||3.13|
|Total Debt/OPBDITA (x)||5.98||5.35||4.94||3.38|
Rating history for last three years:
|Gangulee Weerakoon |
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