Fitch affirms Abans at ‘BBB+(lka); outlook stable

Fitch Ratings has affirmed Sri Lanka-based retailer Abans PLC’s national long-term rating at ‘BBB+(lka)’ with a stable outlook. Fitch has also affirmed the national long-term rating on Abans’ unsecured redeemable debentures at ‘BBB+(lka)’ and its outstanding commercial paper at national short-term rating of ‘F2(lka)’.

The ratings reflects Fitch’s expectation that the company will maintain net leverage, as measured by lease-adjusted net debt to operating EBITDAR (excluding Abans Finance PLC), below 5.5x, the level at which Fitch would consider negative rating action, over FY17-FY20 (financial year ending March 31). Abans’ leverage will be restrained by modest levels of capex and better working capital management amid the weakening operating environment. However, Fitch does not expect Abans’ credit profile to improve to the extent that positive rating action will be warranted, unless there is significant deleveraging.

Demand to weaken: Fitch expects demand to be sluggish in the next six to 12 months due to rising interest rates, an increase in taxes on consumer durables and a depreciating Sri Lanka rupee, which raises the prices of imported goods that account for the majority of products sold by Abans. However, Fitch believes the long-term fundamentals driving demand for the consumer-durables sector is still strong.

Defensive market position: Fitch believes Abans’ strong brand portfolio, extensive dealer network and well-managed in-house hire-purchase book will help defend the company’s market position during a downturn. Abans has also widened its product portfolio to include low-priced, Abans-branded products, which make its business more resilient in a downturn.

Margins to contract and stabilise: Fitch expects Abans’ EBITDAR margins to contract marginally in FY17 due to weaker demand, which puts pressure on Abans to sacrifice margins to protect the top line. However, we expect Abans’ medium-term EBITDA margins to settle in the high-single digits because of improvements in profitability of its low-margin IT and mobile segment, and efficiency gains from store rationalisation and leaner inventory management.

Strengthening credit profile: Abans’ credit profile continued to improve in the last 12 months, with leverage improving to 5.2x in FY16 (FY15: 6.6x), mainly due to strong EBITDAR generation. However, the company has been slow to deleverage due to higher working capital investments, capital infusions to subsidiaries and returns to shareholders. 
Fitch believes Abans will maintain its current credit profile in the next 12-18 months and improve thereafter, but positive rating action is unlikely unless there is significant deleveraging by the company.
Project risk remains: Construction at the Colombo City Centre (CCC) mixed development project, a joint venture (JV) between Abans and Singapore-based property developer Silver Needle Hospitality, has started after a delay of around six months. 

The project is now due to be completed in mid-2019. Further delays or cost escalations could weigh on Abans’ rating, despite the progress made in pre-sales and debt funding.

Less pressure from AFP: Abans’ finance subsidiary, Abans Finance PLC (AFP), should see its capital improve to well above the regulatory minimum and to levels commensurate with its risk appetite, after a rights issue and a proposed private placement in FY17. This will reduce pressure on Abans to inject more capital into the subsidiary in the medium term. Abans took up Rs.165 million of AFP’s rights issue in FY17.