Diversified conglomerate, Melstacorp PLC could be looking to acquire targets as the group sits on a large cash pile while generating a robust free cash flow, and its current debt stays conveniently serviceable, says Fitch Ratings.
After the successful conclusion of the group restructure, which made Melstacorp the holding company of a number of subsidiaries including Distilleries Company PLC and Aitken Spence PLC, Melstacorp stays acquisitive to spread its tentacles further.
The holding company to Sri Lanka’s largest distiller with a market share of over 60 percent could be looking for targets in the non-alcoholic beverage
Its latest focus appears to be on the healthcare sector although the company is yet to announce a strategy, Fitch said.
“We believe Melstacorp will increase its focus on acquisitions in non-alcoholic beverage segments”, the rating agency said assigning ‘AAA’ rating with a Stable outlook in a first time rating assignment.
“The group has historically pursued acquisitions actively and its latest focus is on the healthcare sector but the company has yet to announce a confirmed strategy,” Fitch noted.
The ‘AAA’ rating underlines Melstacorp’s strong credit profile, underpinned by its entrenched market position in the Sri Lankan alcobev sector with high entry barriers, which drives its strong operating cash flows and low leverage, which off-set the weaknesses in other less operationally significant segments.
Melstacorp owns 92.5 percent in Distilleries Company PLC and has 51 percent effective ownership in Aitken Spence, a Sri Lankan blue chip having interests in plantations, telecommunications, insurance, power generation, leisure and logistics.
However, Fitch cautioned that any acquisition funded by additional debt could weaken Meltacorp’s credit profile which could put pressure on its ‘AAA’ rating.
Currently Melstacorp operates with comfortable liquidity with Rs.19 billion unutilized but committed credit lines and Rs.15 billion of unrestricted cash available to meet Rs.19 billion of debt maturing during the next 12 months.
“We expect Melstacorp to generate around Rs.5 billion of negative free cash flow in FY19 amid higher capex at Aitken Spence. The group has strong access to local banks due to its position as one of Sri Lanka’s largest corporates and its solid credit profile”, Fitch said.
Fitch estimates Melstacorp’s leverage at 1.5 times at its peak in FY 19, including its 51 percent share of Aitken Spence’s net debt and earnings before interest tax depreciation and amortization (EBITDA).
This is due to large capital expenditure plans at Aitken Spence’s power and leisure segments and Melstacorp’s possible expansion into healthcare sector.
Meanwhile, leverage at the group’s telco sector represented by Lanka Bell and the plantations remain high as the former guzzles up money constantly for technology upgrades required in the broadband segment and the volatile prices in tea and rubber in the latter causing a strain on the working capital.