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Fitch expects Lion beer sales to increase by 12% amid strong demand

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29 November 2019 08:44 am - 0     - {{hitsCtrl.values.hits}}

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Fitch Ratings expects Lion Brewery (Ceylon) PLC sales to increase by 12 percent in FY20 driven by relatively resilient demand for strong beer among local consumers, even though weak tourist arrivals are likely to impact mild beer sales. 


Lion’s net revenue rose by 13 percent year-on-year (YoY) in 1HFY20 despite the increase in excise taxes in March 2019 and the challenging operating environment following the Easter Sunday deadly terrorist attacks.


The mild beer sales are also expected to pick up from FY21 onwards driven by faster than anticipated recovery in tourist arrivals. 

The tourist arrivals have increased at an average of 38 percent month-on-month from June to September 2019.


Fitch believes that any further tax increases would be gradual, considering the importance of the industry to government revenues. The excise duties from alcoholic-beverage makers made up 7 percent of government tax revenue in 2018.


At present, spirits are taxed 22 percent higher per proof litre compared with beer, after taxes on beer were increased by 12.5 percent in March 2019. 


“The current tax regime is more consistent with the practice that prevailed before November 2015, when drinks with lower alcohol content such as beer were taxed at lower rates per proof litre than spirits,” Fitch stated. 


Therefore, the rating agency expects the current excise tax regime to prevail over the medium term as it encourages the consumption of drinks with lower alcohol content and has been the norm historically, except for the period between November 2015 and November 2017. 


However, Fitch noted that Lion’s profitability can be affected in the short-term by frequent hikes in excise taxes on alcoholic beverages, although the company has been able to pass on these tax increases to customers with demand normalising within a lag of 12 to 18 months.


In terms of profitability of the firm, Fitch expects that Lion’s EBITDAR margin to stabilise at around 30 percent in FY20 and FY21, which is relatively lower than the 36 percent in FY19, due to the challenging operating environment.


Fitch has affirmed Lion Brewery (Ceylon) PLC’s National Long-Term Rating at ‘AA-(lka)’ with a Stable Outlook. The rating agency has also affirmed the National Long-Term Rating on Lion’s outstanding senior unsecured debentures at ‘AA-(lka)’.


Lion’s National Long-Term Rating reflects its leading market position in the domestic beer industry, which is protected by high entry barriers from the regulatory ban on media advertising, Lion’s well-established brand and extensive retail coverage.

 


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