Hayleys debenture given AA- rating by RAM
View(s):RAM Ratings Lanka has assigned a long-term issue rating of AA- to Hayleys PLC’s proposed Rs. 2 billion Listed, Rated, Unsecured, Redeemable Debentures.
“Concurrently, we have reaffirmed the company’s respective long- and short-term corporate credit ratings at AA- and P1. The long term ratings carry a stable outlook,” the rating agency said.
The ratings continued to be supported by the group’s diversified business portfolio, which has enabled it to withstand adversities affecting a particular industry. The group enjoys strong market positions in several of its key businesses. It is the world’s largest producer of coconut shell-based activated carbon, with an estimated market share of 15 per cent – 16 per cent. The group accounts for around 5 per cent of the global market for non-medical gloves, and is a sizeable plantations player.
That said, the group’s key businesses are sensitive to fluctuations in commodity prices, which directly affect its margins, as demonstrated in the past. In addition, Hayleys is exposed to foreign exchange rates, given its reliance on exports.
“During the initial rating, we had raised concerns on the Group’s loss-making textile arm, Hayleys MGT Knitting Mills PLC which had weighed down its performance. Although Hayleys MGT continued to be in the red in FYE 31 March 2012 we note that its performance had improved in 1H FY March 2013, with the division breaking-even at operational level, supported by a capital infusion from Hayleys,” the statement said.
Meanwhile, the group’s debt burden continues to be high, reflective of its debt-funded acquisitions over the past few years. Its total debt increased nearly 30 per cent y-o-y in fiscal 2012 to Rs. 21.56 billion (end-September 2012: Rs. 23.04 billion).” The statement said, the group’s gearing level of 0.78 times as at end-FY March 2012 was in line with our expectations; gearing (total debt/total equity) had risen slightly to 0.80 times by end-September 2012.
We note that Hayleys’ debt at company level had also increased, particularly in 1H fiscal 2013, with its gearing ratio deteriorating to 0.86 times (end-fiscal 2011: 0.53 times).
However, our concerns are somewhat mitigated by the fact that the company has control over the dividend policies of its subsidiaries, which enables dividend upstreaming when required. On the other hand, the group’s liquidity position continued to be tight, given its heavy reliance on short-term borrowings (which include trade facilities) and its relatively low cash reserves,” the statement said.
Going forward, although the group’s debt levels are expected to increase as it pursues capacity expansions, its gearing levels are anticipated to remain relatively unchanged, supported by healthy profit generation. As such, the group’s ratings factor in RAM’s expectation that it’s gearing will remain at around 0.80 times, whilst its FFO debt coverage comes up to around 0.30 times.
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