Fitch cuts Sunshine Holdings rating over debt-funded acquisition

• Says acquisition of additional stake in Estate Management Services adds Rs.2.7bn in debt 
• Acquisition price surges to Rs.2.9bn from Rs.1.6bn as a result of Rs.1.3bn share buyback  

The high debt burden on diversified conglomerate Sunshine Holdings PLC following the acquisition of an additional stake in one of its subsidiaries recently,  has resulted in credit rating agency Fitch downgrading the firm.

Fitch Ratings Lanka last week downgraded Sunshine Holdings to ‘A-(lka)’ with a ‘Stable’ outlook, from ‘A(lka)’, after Sunshine increased its ownership in Estate Management Services (Private) Limited (EMSPL), which operates the tea and palm oil estates and the consumer goods businesses Sunshine Holdings.

Sunshine Managing Director Vish Govindasamy said while Sunshine Holdings bought the total shares in EMSPL previously owned by the Indian Investor Tata Global Beverages for Rs. 1.6 billion, EMSPL also conducted a share buyback from the remaining two investors Sunshine and Pyramid Wilmar for Rs. 1.3 billion.

Fitch said this has affected the Sunshine balance sheet negatively.

“Sunshine’s financial profile has weakened, as the acquisition added Rs. 2.7 billion of additional debt,” Fitch said.

It added the group’s leveraging will only modestly recover during the next 3-years, remaining higher than the level commensurate with a higher rating.

“We expect the operating cash flow from the group’s palm-oil segment, a part of EMSPL, to improve in the medium-term, but this is unlikely to be sufficient to offset the higher debt,” Fitch said.

The ratings agency said that Sunshine’s new rating is based on the assumption that revenues, which were constricted in the current financial year due to pharmaceutical price controls, would recover in the future through the expanding palm oil operations, and rebounds in pharmaceuticals, diagnostic and healthcare segments.

Continued government regulations in the agricultural and pharmaceutical segments too could affect the ratings in the future, Fitch said.

Sunshine is the country’s largest palm oil manufacturer, accounting for over half of the domestic production.

“(It) is well-positioned to benefit from rising local demand, increased near-term capacity and the government’s protectionist import tariffs,” Fitch said.

Although import taxes on edible oil were slashed by 20 percent last November due to weather related supply pressures, Fitch said this would only have a short-term effect on Sunshine’s profitability when taxes revert to historical levels.

Fitch also said high tea prices, even at the lower-end of the market, had limited Sunshine’s ability to pass on costs to customers over the past year, although costs were expected to moderate in the medium term, which would increase margins in the tea operations.

“Sunshine’s strategy to tap the higher-growth hotel, restaurant and catering industries should also support the segment’s top-line and profitability growth,” Fitch said.
The investments in Sunshine’s power and energy segments too would stabilize the group’s cash flow over the long term, according to Fitch.