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Fitch Ratings said
yesterday it has downgraded the National long-term rating of
Hayleys PLC ("Hayleys") to 'AA(lka)' from 'AA+(lka)'.
Following the downgrade, the Outlook is now Stable.
The downgrade reflects the continued weakening of Hayleys'
creditor protection metrics and the lack of a sound strategy to
address these developments. The agency recognises that FY06 was
a particularly difficult year for the company as its earnings
were seriously affected by high raw material prices and adverse
currency volatilities.
The agency, however, expects some relief in raw material prices
and relatively benign currency movements in FY07, which should
lead to better earnings and operating cash flow generation. Any
improvements in the creditor protection measures are expected to
be limited given the continuing capital expenditure and the high
incremental working capital requirement. The rating continues to
incorporate the diversified nature of Hayleys' business
operations and its established brand name in its respective
businesses.
Hayleys has achieved robust sales growth in recent years through
the expansion of its traditional businesses and by venturing
into new areas. The company has taken initiatives to set up
offshore manufacturing units to broaden its manufacturing
capacity and ensure better access to raw materials in several
business sectors. Fitch expects this to add more stability to
the operating results of the company. The agency, however, notes
that much of Hayleys' investments have been debt-financed.
Moreover, the annual incremental working capital requirement of
some of the company’s businesses absorbs around 40% to 60% of
its cash flows generated, adding further pressure on its free
cash flows. Fitch expects Hayleys to maintain its capex at an
increased level of about 6% to 7% of annual group sales.
At the same time, the agency believes that its management
recognises the need to prune some of the underperforming
business units that are a drag on the group’s performance and to
critically review the investment portfolio of the company.
The agency notes that Hayleys’ equity infusions have been
limited to annual rights issues of about LKR100 million.
Although a sizeable equity infusion is helpful, it will require
the existing key shareholders to commit required funding or
agree to a dilution of ownership share. Leverage measured by net
debt/EBITDA was 2.3x for FY05, which increased to 2.8x at FYE06,
reflecting increased debt and weakened earnings.
The Stable Outlook underpins Fitch’s view that the expected
improvements in the operating conditions will benefit the group
in FY07 and lead to improved credit metrics.
That said, capital expenditure will have to be conservative,
particularly if they are to be mainly debt-financed, to avoid
further pressure on the rating or its outlook. Fitch had revised
Hayleys’ rating Outlook to Negative in January 2005, reflecting
the increasing leverage of the company driven by large debt
funded investments.
Hayleys’ total debt was LKR9.8bn at FYE06 (up from LKR8.1bn at
FYE05).
A detailed credit analysis report will soon be available on the
agency’s websites, www.fitchratings.com and www.fitchratings.lk.
The group had cash reserves of LKR2.0bn and some LKR6.0bn of
committed, undrawn credit facilities at FYE06. Although the
group’s borrowing capacity with a few large local banks is
stretched owing to single borrower restrictions, its liquidity
and financial flexibility appear adequate under current
circumstances.
Hayleys PLC is one of Sri Lanka’s largest and most
diversified conglomerates and has been established for more than
125 years. The group’s operations include the manufacture and
export of fibre-based products, rubber gloves and coconut-based
activated carbon, sale of agriculture-related equipment and
consumer durables, ship-owning and other transportation and
logistics services, agricultural produce and plantations. About
60% of the company’s revenue is derived from sales to overseas
markets.
A detailed credit analysis report will soon be available on the
agency’s websites, www.fitchratings.com and www.fitchratings.lk. |
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