Fitch Ratings has affirmed Sri Lanka-based consumer-durables retailer Abans PLC’s (Abans) National Long-Term Rating at ‘BBB+(lka)’ with a Stable outlook.
Abans’ ratings reflect its strong market position in consumer durables retail in Sri Lanka, its extensive brand portfolio, wide distribution network and well-managed hire-purchase (HP) business, which are partly offset by investments in riskier non-core operations, such as real estate and financial services.
The affirmation also reflects Fitch’s view that Abans will maintain leverage ¬defined as net lease adjusted debt/operating EBITDAR excluding its finance subsidiary - at below 5.5x over the medium term. Leverage was 4.7x at the end of the financial year to 31 March 2019 (FYE19).
Abans’ debentures are rated at the same level as Abans’ National Long-Term Rating because its senior unsecured debt is not materially subordinated to prior-ranking debt, which will remain below 2.5x EBTIDA (FY20 forecast: 1.7x).
Fitch rates Abans based on the consolidated profile of its weaker parent Abans Retail Holdings (Pvt) Limited (ARH) due to strong operational linkages between the two entities. ARH has full ownership and control of Abans, which is the main contributor to group consolidated EBITDAR.
Margins to Strengthen: We expect Abans’ EBITDAR margin to widen by around 100bp by FY21 from 8.4% in FY19 as the company continues to reduce discount sales, align sales commissions with product profitability and introduce automation and technology. Margins should also benefit from a shift in the product mix towards high-margin brands. Abans’ EBITDAR margin widened 300bp to 8.4% in FY19 and 30bp yoy to 9.5% in 1Q20, despite weak revenue growth.
Demand to Recover: We expect Abans’ revenue to grow at high-single digits from 2HFY20, helped by higher disposable income after a recovery in the agriculture sector, salary increases for state employees and potential benefits to voters ahead of two main elections. The 250bp cut in the central bank’s base interest rates during 2019 and the recently introduced cap on lending rates should drive higher credit-financed sales of consumer durables.
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