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ICRA assigns EAP Broadcasting BBB rating

11 September 2015 07:18 am - 0     - {{hitsCtrl.values.hits}}

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EAP Broadcasting Company Limited (EBC), a unit of the EAP group, has been assigned a rating of (SL) BBB by ICRA Lanka Limited, a wholly-owned subsidiary of ICRA Ltd, a group company of Moody’s Investor Services. 
The rating takes into account the extensive experience of the company’s management in the media industry and the strong positioning of some of EBC’s Television (TV) and radio channels which have enabled the company to generate repeat advertisement revenues from leading corporate houses in Sri Lanka. 
The company’s flagship channel – Swarnawahini – is estimated to be among the top three viewed TV channels in the island on the strength of its programming content and islandwide reach. Despite lower reported market share, the company’s radio channels also count leading business houses as its customers, indicating healthy listenership levels for some of its prime time shows. 
The ratings also take note of the strong entry barriers in Sri Lanka’s media industry owing to significant capital investments required to build technical competence, curb on new media licence issuances and strong linkages of incumbent market leaders with leading corporate houses which cumulatively bestow the existing players with competitive advantages. EBC has been able to capitalize on these strengths and improve its financial profile which is currently characterised by robust profitability, healthy cash flows, moderate capital structure and comfortable coverage metrics. EBC’s revenue profile is also diversified, spread across a broad array of domestic and international corporate clients which mitigates revenue concentration risks to an extent. These strengths are partially offset by concerns over increasing competitive intensity among the existing players necessitating aggressive pricing and high marketing spends, regulatory risks given stringent annual review of media licences, exposure to cyclicality in corporate ad-spending and volatile profitability of the company’s radio business on account of under investment in programming content and technology. 
ICRA also takes note of significant inter-Group (EBC is part of the EAP group) balances due to and from EBC. Though the company has implemented measures to restrict such advances in the future, the outstanding advances expose EBC to the business/financial risks of group’s firms which are engaged in non-related businesses. One of the group’s businesses (ETI Finance) which was primarily engaged in pawning has incurred heavy write-downs in the recent past which accentuates spill over risks given considerable intergroup transactions.
These risks are now being managed through the group’s Treasury and Investments Committee, Board Risk Management Committee and Board Audit Committee. The ability of the group to ensure strict control over such advances would be a key sensitivity to the ratings. In this context, ICRA Lanka derives comfort from the recent induction of experienced professionals across key verticals of the group which would aid in strengthening strategy formulation besides also ensuring implementation of sound corporate governance practices.
In arriving at the rating, ICRA has assessed the EAP group’s proposed restructuring plans under which EBC’s recently setup subsidiary– Galaxy Landmark – is likely to buy out several properties worth over Rs.1,500 million from ETI Finance as part of recapitalization efforts. The funding for the said transaction would be in the form of debt and equity from EBC. EBC is in turn expected to fund the same through a mix of accruals and external borrowings. Galaxy Landmark proposes to convert these properties into rentable commercial real estate assets.
The first such project would be the construction of a mall in Rajagiriya (Impala Cinema) at a cost of Rs.980 million, funded by incremental bank debt taken in Galaxy Landmark’s books.
The entry into the commercial real estate business increases the overall risk in the group, given the lumpy nature of cash flows and project-specific risks inherent to the real estate business. However, ICRA has taken comfort from the expected healthy cash flow generation from EBC’s existing standalone business lines on the back of expected growth in corporate ad-spends led by economic growth, which is expected to be adequate to cover debt obligations.  
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