Singer rating by Fitch drops to ‘negative’ from ‘stable’
View(s):Poor consumer sentiment which would lead to lower sales and the ban on Huawei by the US were among developments that led Fitch Rating to revise its outlook on consumer-durables retailer Singer (Sri Lanka) PLC’s National Long-Term Rating to ‘Negative’ from ‘Stable’.
In a media statement on Tuesday, Fitch said the negative outlook reflects the challenges Singer may face in reducing its leverage, defined as net adjusted debt/EBITDAR, to below 5.5x – the level at which we would consider negative rating action – by the financial year ending March 2021 (FY21), from 6.1x in the trailing 12 months to end-June 2019 and 6.4x at FYE19.
“The ban on Huawei Technologies by the US authorities is likely to weaken Singer’s mobile phone sales from a high of around 25 per cent of revenue in FY19. Singer will aim to diversify sales across other brands if the ban continues, but the efficacy of its strategy remains to be seen. It also plans to cut operating costs in the next two years, but this is subject to execution risk. Leverage fell in the year ending June 2019 following the removal of cash margin requirements on imports in mid-March 2019. This saw the resumption of Singer’s supplier credit cycle, with a cash inflow of Rs.750 million from improved creditor days in 1QFY20. The cash margin was introduced in November 2018 to discourage imports in a bid to combat pressure on the local exchange rate,” Fitch said.
The company had to increase debt and incur higher interest costs to fund the cash margin requirement so long as letters-of-credit remained unpaid. Consequently, Singer opted to repay suppliers early to reduce financing costs at the expense of higher working capital.
Fitch expects sales volume to decline in FY20 due to poor consumer sentiment, but there is a possibility that volume may pick up in FY21 if the recovery seen in the agricultural sector continues and domestic interest rates continue to fall. Approximately 40 per cent of Singer’s revenue is financed by its in-house hire-purchase scheme, which is highly sensitive to domestic interest rates. Rising smartphone penetration and a shorter replacement cycle for mobile phones should also support sales volume growth over the longer term.
“The affirmation of the National Long-term Rating is underpinned by Singer’s leading market position in consumer durables retail, its portfolio of products and brands, which are diversified across price points, its large island-wide distribution and retail store network and the well-managed hire-purchase book with limited delinquencies,” Fitch said.
Fitch said it will continue to rate Singer based on its Standalone Credit Profile due to our assessment of the weak linkages between Singer and its parent, Hayleys PLC, under Fitch’s Parent and Subsidiary Rating Linkage methodology. “We do not expect Hayleys to provide any extraordinary support to its subsidiary, despite its 90.4 per cent stake, due to the size of Singer’s balance sheet and significant debt as of FYE19,” it said.