Business tycoon Harry Jayawardena-controlled Melstacorp PLC could soon start targeting companies for acquisitions as the diversified conglomerate appears to be currently in its best form after the successful completion of its restructuring.
Melstacorp PLC, led by Distilleries Company of Sri Lanka PLC, is operating with strong cash flows and credit profile and has both the management time and space to stay in the hunt for entities to further diversify its portfolio.
Fitch Ratings believes that the group’s Distilleries Company, which has the market leadership in the alcoholic beverage segment, could perhaps target companies in the non-alcoholic beverage sector.
“We believe the group’s restructuring will allow the management to increase its focus on acquisitions in non-alcoholic beverage segments,” Fitch Ratings said while announcing the removal of the negative rating watch it maintained on the company.
Distilleries Company has ‘AAA’ rating from Fitch with a stable outlook.
The most recent rating action was triggered after the effective conclusion of the group’s restructuring exercise by way of private placement of Distilleries Company’s shares to Melstacorp in February without increasing the credit risk.
In a complex group resetting exercise undertaken in August 2016, the management lifted Melstacorp – the then investment holding company of the Distilleries group – to become the ultimate parent of the group.
This exercise ended after Distilleries Company becoming a 92 percent-owned subsidiary of Melstacorp.
Melstacorp has interest in alcohol, plantations, telecommunications, insurance, power generation, leisure and logistics.
Melstacorp in March exited from non-bank finance business by divesting Melsta Regal Finance Limited and increased its stake in the plantation sector assets in September 2017.
Mergers and acquisition deals have been dry in Sri Lanka due to widespread political uncertainty and the capital market has remained lacklustre in the recent times with foreign activity turning dull.
“The group has historically pursued acquisitions actively and while it has not indicated any specific targets at present, Distilleries Company’s rating could come under pressure if there are significant debt-funded acquisitions, particularly those that weaken the group’s overall business risk and increase cash flow volatility,” Fitch Ratings noted.
For the year ended on March 31, 2018, Melstacorp reported earnings of Rs.6.62 a share or Rs.7.7 billion, compared to Rs.6.29 a share or Rs.7.3 billion in the previous year.
The total gross revenue rose slightly under one percent to Rs.110 billion and the net revenue was up 11 percent to Rs.44.7 billion for the full year ended in March 31, 2018.
Distilleries Company accounted for an estimated 71 percent of Melstacorp’s consolidated revenue and 77 percent of its earnings before interest tax, depreciation, amortization and restructuring cost or EBITDAR, excluding Melstacorp’s insurance subsidiary, in the financial year to March 2018.
Distilleries Company accounts for over 60 percent of Sri Lanka’s hard-liquor production and has been able to maintain its market leadership due to its entrenched DCSL brand and access to a country-wide distribution network, Fitch Ratings said.
“The complete advertising ban on alcoholic beverages acts as a high entry barrier and further strengthens DIST’s dominance.”
Fitch Ratings however expects the hard-liquor makers’ volumes to drop following the government’s more favourable taxation policy towards beer makers from November 2017.
“We expect DIST’s volumes to remain flat in FY19 despite the policy given its strong market position and revenue to grow by low-single digits thereafter as it passes on higher input costs,” the rating agency added.