Fitch Ratings has affirmed Sunshine Holdings PLC's National Long-Term Rating at 'AA+(lka)'. The Outlook is Stable. Sunshine's rating reflects its steady business profile, which is anchored by defensive cashflows in its healthcare manufacturing and retail and consumer segments, and its
strong balance sheet.
This counterbalances weaknesses in its agriculture segment (16% of
EBIT) over the next 12-18 months amid moderating palm oil prices.
Sunshine's rating is constrained by its smaller operating scale and modest market positions in its core businesses compared to higher-rated peers.
KEY RATING DRIVERS
High Rating Headroom: Fitch expects EBITDA net leverage to remain at below 1.0x in FY25-FY26 (financial year ending March), which is comfortably below the 4.0x level above which we would consider negative rating action. We expect a limited drag on leverage from softer EBITDA margins and higher capex.
We expect Sunshine's margins to moderate to around 13.5% from FY25 (FY24: 15.5%) as it is not able to fully pass on increased wages, and the higher costs of inputs and electricity in the healthcare and consumer segments, due to consumer sentiment remaining weak.
EBITDA interest coverage is solid, and forecast at 6.8x in FY25 (FY24: 22.3x), in line with lower market interest rates as domestic inflation eases amid abating risks from Sri Lanka's economic challenges in the last 18-24 months.
Healthcare Leads Growth: We forecast a 13% revenue growth in Sunshine's healthcare segment, following the International Finance Corporation's (IFC) LKR3.27 billion investment for a 14.7% stake in subsidiary Sunshine Healthcare Lanka Limited (SHL) in May 2024.
Growth in the consumer segment is likely to remain muted at around 2% in the next 12-18 months because consumer spending will be pressured by significant direct and indirect tax hikes on disposable income. Fitch expects Sri Lanka's GDP to expand in the low single-digits in the next two years, which could support consumer sentiment.
Palm Oil Cashflows Pressured: We expect the palm oil segment's EBITDA to fall to LKR2.5 billion in FY25 (FY24: LKR3.0 billion) as Fitch forecasts benchmark global crude palm oil (CPO) prices soften to USD775 per tonne in 2024 and USD700 in 2025.
This is because we expect a resumption of La Nina weather patterns in 2H24 to drive higher palm oil production, which will be exacerbated by Sunshine's higher domestic production costs from increased wages.
Capex to Rise: We forecast capex to rise significantly to LKR3.2 billion in FY25, from LKR751 million in FY24, on Sunshine's healthcare and agricultural investments.
Funds from IFC's equity injection will be used to bolster SHL's annual production of medical products, such as metered-dose inhalers, and enhance the diagnostic capabilities of it medical devices.
Fitch expects Sunshine's share of its 50% joint-venture with Pyramid Wilmar (Pvt) Limited - Watawala Plantations PLC's (WATA) - capex to rise to around LKR1.2 billion to fund its share of an oil effluent management project.
We forecast the effluent project will improve operating efficiency in its palm oil processing and increase the oil extraction rate. This project is debt-funded given WATA's strong balance sheet. We proportionally consolidate WATA's financials in assessing Sunshine's rating given our view that Sunshine and Pyramid Wilmar will jointly support their share of obligations in WATA if required, and to factor in limited cash fungibility.
Geographical Concentration: We expect Sunshine's EBITDA contribution from regions outside of Sri Lanka to remain low over the medium term, despite adding tea exporter, Sunshine Tea Lanka Limited (SST), to its portfolio in early 2022. Sunshine aims to grow its tea export business mainly into China following its equity infusion of LKR500 million
into SST in January 2024.
However, we estimate SST's contribution to the group will remain flat at 3%-4% of EBIT throughout our forecast horizon.
Risk-Neutral Acquisition Appetite: Sunshine has significant headroom under its current rating sensitivities to engage in M&A, if required. The company has a record of focusing on large acquisitions to raise the group's overall profile instead of small-scale projects, but these have been managed prudently and conservatively funded. However, a larger than expected debt-funded acquisition could pressure its rating.