Atlas acquisition improves Hemas Holdings’ defensive cash flow: Fitch

The acquisition of Atlas Axillia (Private) Limited (Atlas) has improved the business risk profile of Hemas Holdings PLC as the new entity will improve the group’s defensive cash flow when the other key units such as FMCG and leisure have slowed down, according to Fitch Ratings. 

Diversified conglomerate Hemas Holdings acquired a 75.1 percent stake in Atlas in January for Rs.5.7 billion. 

The acquisition of the largest domestic manufacturer and distributor of exercise books, pens, colour products and other school stationery, is a well fit with the group’s fast-moving consumer goods (FMCG) business and is also in line with Hemas’ strategy of growth through mergers and acquisitions (M&A). 

At a time when the group is facing operational pressures in its key business segments, Fitch is of the belief that Atlas would improve the group’s cash flow stability as the firm’s business acts as a defence across economic cycles. 

“Fitch expects demand for school stationery to grow over the medium term, supported by government and private-sector investments in the education sector and rising per capita income in the country,” Fitch Rating said affirming the Hemas group’s rating at ‘AA-’ with a stable outlook. 

Atlas’ stationery business complements Hemas’ FMCG segment and Atlas will be able to leverage on Hemas’ established distribution network once the integration is completed. 

“We expect Atlas to contribute around 15 percent and 25 percent to group revenue and EBIT, respectively, in FY19, its first year of full consolidation,” Fitch added. 

Meanwhile, the rating agency said it does not expect Hemas to engage in any other large-scale M&A similar to Atlas in the medium term but said the company would continue to spend Rs.3 billion to Rs.4 billion on organic expansion in its core segments in the next few years. 

“We estimate Hemas will generate around Rs.4 billion per annum in cash flow from operations in the next few years but this may be insufficient to fully cover the planned capex and shareholder returns. 
We do not expect an improvement in company leverage in the medium term amid higher borrowings and a moderating operating performance,” Fitch said. 

The group’s key business segment, FMCG, saw some slowdown in recent times due to the pressures faced by its Bangladeshi operations and the domestic slowdown in demand, which is likely to continue during the next 12 to 18 months. 

“We don’t expect a recovery in domestic FMCG volumes in the near term as weak personal income and inflationary pressures may force consumers to continue to cut down on personal and home care spending,” Fitch said. 

Meanwhile, the slowdown experienced by the group’s leisure segment is expected to persist due to the declining occupancy and room revenue, due to a slowdown in tourist arrivals, oversupply of graded accommodation and competition from the informal sector. 

However, the group’s healthcare sector provides stability while the ship agency business continues its growth providing some anchor to the group performance. 

“We do not believe the recent de-regularisation of foreign ownership in ship agency and freight forwarding businesses will have an immediate impact on the sector as it will take time and effort for foreign shipping lines to set up operations with similar service offerings provided by their local partners such as Hemas,” the rating agency opined.