Fitch affirms Singer (Sri Lanka) at A-(lka); outlook stable

Fitch Ratings has affirmed Singer (Sri Lanka) PLC's (Singer) National Long-Term Rating at 'A-(lka)'.

The Outlook is Stable. A full list of rating actions is at the end of this commentary. Singer's rating is supported by our expectations that the company will be able to weather weakening demand because of its strong market leadership, extensive product and brand portfolio across different price points and well-managed hire purchase (HP) business, which makes consumer durables more affordable during a downturn. We believe Singer will maintain leverage at levels commensurate with its current rating level despite debt-funded acquisitions and continued expansion. KEY RATING DRIVERS Demand to Weaken: We expect demand for consumer durables to be sluggish in the next six-12 months due to tightening of monetary and fiscal policies by the government. The government has increased the value-added tax and the central bank has raised benchmark interest rates. The depreciating Sri Lanka rupee also raises the cost of imported goods, which make up the majority of products sold by retailers. However, we believe long-term fundamentals driving demand, including a continued rise in per capita income and a growing middle class, are intact. Strong Market Position: Fitch expects operating challenges to be mitigated by Singer's strong market leadership, which is supported by a wide retail presence, its portfolio of well-known brands and extensive local manufacturing capabilities compared with peers. Singer's extensive in-house brands, which are competitively priced compared with similar imported products, and the company's well-managed hire purchase business make products affordable even in a weak operating environment.

Margins Under Pressure: Singer's EBITDA margins have deteriorated significantly in the last few years due to the company's increased focus on the low-margin IT and digital media. We do not expect a change in this strategy as the short replacement cycles and low prices of such products help the company to sustain growth through cycles. As such, we expect overall EBITDA margins during 2016- 2019 to remain below the double-digit levels of the past.

No Rating Impact from Acquisitions: In early 2016, Singer completed the acquisitions of two affiliates Regnis (Lanka) PLC and Singer Industries (Ceylon) PLC for LKR1.4bn in total. The rating is not affected by the acquisitions because Singer has sufficient headroom to absorb the cost of these acquisitions and Fitch does not expect any significant synergies to materialize from the integration. Leverage to Improve Post-2017: We estimate Singer's net adjusted leverage (measured as adjusted net debt/EBITDAR, excluding Singer Finance) to spike in 2016 due to the acquisitions and sluggish operating environment, which will put pressure on EBITDAR. However, we expect leverage to improve from 2017 with a turnaround in the operating environment. Well-Capitalised Finance Subsidiary: Fitch does not expect Singer to have to infuse more capital into its finance subsidiary, Singer Finance (Lanka) PLC (BBB(lka)/Stable) owing to its strong capitalisation that is well above the regulatory minimum, better than peer asset quality and strong funding profile. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - Revenue growth of low-double digits during 2016-19 driven by demand for IT and digital media products, which will partly offset softness in the consumer durables market - Slight margin contraction during 2016-2019 as the revenue mix continues to shift towards low-margin IT and digital media segment - Capex to average LKR700m a year during the forecast period - No capital infusions to Singer Finance (Lanka) PLC in 2016-2019 RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - A sustained increase in Singer's leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) to over 5.5x (end- 2015: 4.7x) - EBITDA margins sustained below 7% (end-2015: 8.7%) - Any significant equity support to Singer's 80% subsidiary, Singer Finance (Lanka) PLC Positive: Future developments that may individually or collectively lead to a positive rating action include: - Singer's leverage (measured as adjusted net debt/EBITDAR excluding Singer Finance) falling below 4.5x on a sustained basis - EBITDA margins sustained above 10% LIQUIDITY At end December 2015, Singer had LKR877m in cash and LKR5.5bn in unutilised facilities to meet LKR6.1bn of debt maturing in 2016, leaving the company in a manageable liquidity position. However, we do not expect the company to generate positive FCF in the next 12 months due to higher-thanhistorical capex. FULL LIST OF RATING ACTIONS Singer (Sri Lanka) PLC - National Long-Term Rating affirmed at 'A-(lka)'; Outlook Stable - National Long-Term Rating on outstanding senior unsecured debentures affirmed at 'A-(lka)' - National Short-Term Rating on commercial paper affirmed at 'F2(lka)'.