Higher earnings, power business exit, improve Hemas outlook: Fitch

9 April 2015 08:26 am - 0     - {{hitsCtrl.values.hits}}

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Fitch Ratings Lanka has revised the outlook on Hemas Holdings PLC’s national rating of A+(lka) to Positive from Stable due the company’s improved risk profile and earnings amid divestment of its power business and improved performance of core business segments. 
“The outlook revision reflects Fitch’s expectations of an improved business risk profile and stronger earnings growth owing to expansion in its core businesses in the healthcare and fast-moving consumer goods (FMCG) sectors. 
The outlook is also supported by Fitch’s expectations that the group is likely to improve its leverage (measured as gross adjusted debt/operating EBITDAR) on a sustained basis to below 2.0x following the divestment of its power business, despite significant investments within its core segments,” Fitch said. 
Hemas’ rating reflects the essential nature of the products and services of its key operating subsidiaries in healthcare, FMCG and transportation, supported by the company’s low financial risk at the holding company and group level. 
The rating also factors in the businesses’ strong brands, leading market share and strong cash flow generation. 
Hemas also has subsidiaries involved in hotel operation and destination management. Hemas is Sri Lanka’s largest private healthcare company by revenue and according to Fitch is strongly positioned to benefit from favourable macroeconomic factors such as a rapidly aging population and increasing demand for treatment of non-communicable diseases. 
“Changes in regulations of prices of pharmaceuticals by the government remain a key risk,” Fitch noted.
However, higher disposable income and prevailing low inflationary and interest rates have created strong demand for Hemas’ FMCG segment in Sri Lanka, while this segment’s Bangladesh operation benefits from strong growth prospects.
Fitch expects the group to sustain a lower leverage ratio despite continued investments to expand its core businesses. 
The divestment of the power segment in the financial year ended March 31, 2015 (FY15) has improved Hemas’ financial profile given the significant amount of debt carried by the segment. 
Hemas’ leverage fell to 1.9x at end-December 2014, from 2.2x, or 1.9x excluding the power segment, at end-FY14.
The acquisition of J L Morison Son & Jones PLC, which manufactures and distributes products in the pharmaceutical, healthcare, beauty and agriculture sectors, in FY14 has strengthened Hemas’ product portfolio and local manufacturing capabilities. 
The company has demonstrated a long-term investment focus and a disciplined approach to capital management. The group’s large cash balance of Rs.5 billion at end-2014, strong operating cash flows and planned equity raising will ensure that Hemas’ financial profile is commensurate with its rating even as it expands and makes acquisitions.
Hemas is dependent on dividends and fees from its operating subsidiaries to service debt at the holding company level. Fitch considers the structural subordination of the holding company’s creditors to be low, because Hemas’ key subsidiaries are either majority owned or have low leverage. 
However, should leverage at the operating subsidiaries increase significantly over time, this could weigh negatively on the rating
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