Business Times

Concern over Hayleys investment in Hotel Services -- Fitch

Fitch Ratings said this week that Hayleys PLC’s debt-funded investment through its holdings company of Rs.1.8 billion in Hotel Services (Ceylon) PLC remains a concern as it will not yield sizable dividends in the short to medium term. In a press release, Fitch noted that as at end of the 2010 financial year, investment spending resulted in net debt levels increasing by Rs.1.4 billion to Rs.1.8 billion. Hotel Services is the owning company of Ceylon Continental Hotel.

Including the subsidiary debt of Rs.112 million with recourse to the company, Hayleys’ holding company’s net adjusted debt/operating EBITDAR increased fourfold in the 2010 financial year. Consolidated net debt increased to Rs.8.6 billion for the 2010 financial year given both the consolidation of Hayleys MGT PLC and increased investment spending, Fitch stated.

The ratings agency also affirmed Hayleys National Long-term rating at 'AA-(lka)' with a Stable Outlook, reflecting the company’s diverse dividend income base as a holding company and its strong control over the operational and financial policies of its subsidiaries, which mitigates the subordination of group cash flows to its operating subsidiaries. Fitch stated that in FY10, dividend income accounted for 80% of Hayleys' revenues of Rs.628 million.

Fitch positively noted the improved financial profiles, higher expected profitability, and the resultant potential for higher dividends from some of Hayley's key divisions. The turnaround in its medical glove-manufacturing segment in Thailand, discontinuation of loss-making operations in the consumer and transportation segments, as well as the gradually increasing value addition in its purification segment are likely to result in stronger group earnings.

However, Fitch stated that Hayley's operations are exposed to foreign currency risks, vagaries of the weather and industry cycles. Nearly 67% of Hayley's total revenues in FY10 were generated from exports with Europe and the US accounting for 34% and 21% of export revenue respectively. Weak global economic conditions and currency fluctuations, especially with a weaker Euro, can exert pressure on the demand and margins for Hayleys' products.

As an export-oriented company, Hayleys is adversely affected by the strength of the Sri Lankan Rupee and rising domestic inflation.

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