Aitken Spence (AS) Group’s hotel sector is set to recover on the back of improvements in its Maldivian operations, and better profitability at the Sri Lankan resorts, Fitch Rating said in a report this week.
Issuing a statement on Aitken Spence’s senior unsecured notes which it has assigned a National Long-term 'AA(lka)' with a stable outlook, the agency said this was due to the improved domestic security situation, AS's strengths in its brand name, geographical coverage, market share and from available synergies with the travel segment. “The hotel sector is expected to incur close to Rs 5 billion capital expenditure during the next two years, and funding for these projects is planned through a rights issue at the hotel subsidiary as well as project based debt,” Fitch said.
The agency notes that while the increase in the hotel unit's contribution can somewhat mitigate the renewal risk of the power unit, AS's rating can be negatively affected by its increased dependence on the tourism industry if the contribution from its power unit wanes over the medium-term.
The ‘National Long-term’ rating reflects the strong operating cash generational ability of AS's core business segments, the geographical diversification of its revenue and profit streams, and the low leverage in two of its business segments.
Although AS is expected to increase its debt at the group and holding-company level as at FYE10 (holding company by approximately Rs 2 billion), Fitch says that scheduled debt repayments (FY11: Rs 2.2 billion) are expected to reduce leverage over the medium-term. The debt repayments, coupled with the stable and strong dividend receipts from the power sector (accounting for most of ASP's Q310 dividend) and expected improvements in its Sri Lankan tourism assets, underpin the rating and the outlook.
“Constraining AS's rating is its exposure to the state-owned and financially weak Ceylon Electricity Board (CEB) which is the sole purchaser of AS's power output. The power purchase agreements (PPAs) with built in safeguards provide some comfort to the rating, while penalty charges for delay in payments by CEB, and the non-recourse nature of the power unit's debt act as mitigating factors. State support for CEB as well as CEB's dependence on private thermal power generators, such as AS Power, allows the latter to withstand its exposure to CEB. Fitch notes that despite delays in payments, historically CEB has never defaulted on its payments to AS,” the statement added.
AS's cargo sector, which accounts for 17% of group revenue and EBITDA at 3Q10 and employs low debt capitalisation acts as a rating positive with its diversification impact. |
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