Fitch affirms Singer Sri Lanka at ‘A-(lka)’; Outlook Stable

Fitch Ratings has affirmed Sri Lanka-based consumer durables retailer Singer (Sri Lanka) PLC’s National Long-Term Rating at ‘A-(lka)’ with a Stable Outlook. 
Fitch has also withdrawn the expected rating assigned to Singer’s proposed senior unsecured debentures as the debt issuance is no longer expected to convert to final ratings in the near future. 
Singer’s rating reflects its strong market leadership, extensive product and brand portfolio across different price points and a well-managed hire purchase (HP) business, which gives its business model more stability across economic cycles. 
These strengths are counterbalanced by a moderate level of leverage (defined as adjusted net debt/EBITDAR) excluding its subsidiary Singer Finance PLC, amid high capex and shareholder returns. 
Singer is one of two market leaders in consumer durables retailing in Sri Lanka. Its market position has improved in the last few years, led by the increasing penetration of home appliances and mobile phones in the country. 
Consequently Singer’s EBITDA, excluding its subsidiary Singer Finance PLC, increased to LKR3.9 billion in 2016 from LKR1.8 billion in 2014. 
Fitch expects demand for white goods and consumer electronics to weaken in the next 12-18 months, following the increase in value added tax (VAT) rate to 15 percent from November 2016 from 11 percent, and rising interest rates.However, Fitch believes Singer has the ability to mitigate these challenges, aided by its extensive product portfolio across different price points and its strong brand presence. 
Fitch expects growth for Singer’s IT and mobile products to be sustained in the medium term, albeit at a slower pace. 
“We believe the segment will continue to benefit from increasing penetration of 3G and 4G mobile services in the country, higher smartphone usage by the younger population and digitisation spreading across most sectors in the economy,” Fitch said. 
IT and mobile products also tend to be at lower price points with shorter life cycles, making the demand for them more stable across economic cycles. Fitch expects Singer to significantly benefit from this trend in the medium term, underpinned by its leading market position in smart-phone retail. 
Fitch expects Singer’s EBITDA margin to contract slightly in the next 12-18 months because of cost pressures, which the company may not be able to fully pass on to customers amid intense competition. Singer’s sourcing costs have risen because of the increase in raw-material costs globally, with the impact to appear in margins after a four to six month lag, in line with the company’s cycle for import orders. The weakening Sri Lankan rupee in the last year has also made Singer’s imported inventory more expensive. 
The cost of Singer’s locally manufactured inventory has also risen due to higher labour costs. However, Fitch expects the margin contraction to slow in the medium term. This is because we expect smart-phone sales to increase, and Singer to benefit from improving economies of scale and operating efficiencies as its business grows. 
Fitch expects Singer’s leverage to remain at around 4.5x over the next two years compared with 4.3x at end-2016. The company is likely to spend around Rs.800 million a year to increase and refurbish its store network, while new stores may take longer to be profitable in an environment of slower demand. The company is also likely to maintain its dividend payout policy of around 60 percent of net income in the medium term. This would keep its free cash flow (FCF) generation negative, leaving limited room for meaningful deleveraging. 
However, Singer has sufficient headroom to increase leverage while maintaining its current ratings. 
Singer expects to invest around Rs.300 million in its finance subsidiary Singer Finance in the short term to support its new ventures. We do not consider the planned capital injection to be significant enough to have a negative impact on Singer’s rating. In addition we do not expect the subsidiary to require support from the parent in the medium term due to its strong capitalisation, above-average asset quality and strong funding profile.