Fitch Ratings has downgraded Sri Lankan consumer-durable retailer Singer (Sri Lanka) PLC's National Long-Term Rating to 'A(lka)' from 'A+(lka)'. The Outlook is Stable.
The downgrade reflects the sustained deterioration in Singer's financial profile such that Fitch-forecasted EBITDAR fixed-charge cover will fall to 0.7x in the financial year ending 31 March 2024 (FY 2024), compared with 1.1x in FY 2023.
Issuing a statement, the ratings agency said:“The Stable Outlook reflects Singer's adequate liquidity supported by its access to domestic banks, and our expectations that the company's EBITDA will recover gradually in the next two years supported by a slow improvement in demand amid falling interest rates and the removal of the ban on consumer durable imports since October 2023. However, we do not expect fixed charge cover to improve to above 1.2x - the level commensurate with a higher rating - until after FY 2025.”
Fitch expects sales volumes to rise in the low single digits in FY 2024 as consumer spending, especially on non-essentials such as consumer electronics, will remain weak in the next 12-18 months. Consumer income has yet to adjust to the higher cost of living while the increase in taxes in early 2023 weakened purchasing power. Fitch expects Sri Lanka's GDP to contract by 1.4% in 2023 (2022: 7.8% decline), before growing modestly by 3.3% in 2024, indicating only a gradual recovery in economic activity.
“We forecast Singer's sales volumes to grow by double digits in FY25, due to a gradual recovery in income supported by a revival in the agriculture sector, which accounts for 30% of the population, salary increments across the public and private sectors, and a full year's impact of pent-up demand after the removal of a ban on consumer-durables imports in October 2023.
Hire-purchase (HP) and credit sales should also rise with interest rates almost halving from the highs in FY23, and we expect Singer will selectively grow its HP book, which shrank in the last few years, to cater to this demand,” the statement further said.
Fitch also expects Singer's EBITDAR margin to improve to around 9% in FY 2025, from 3.3% in first half (H1) of FY 2024, benefitting from revenue growth, prudent inventory management, and a shift towards high-margin product categories. Margins contracted in H1 of FY 2024 due to markdowns to clear high-cost inventory that was procured when the Sri Lankan rupee was at a low, and the non-availability of high margin products due to the import ban, resulting in a one-time pre-tax loss of Rs. 2 billion. Singer is replacing this stock at a lower cost and with fast-moving products, which should bode well for margins.
Fitch views the risks stemming from SFL on Singer may rise given the weak domestic operating environment. Fitch adds Rs. 27 billion of additional debt above its reported borrowings which is equal to the value of SFL's entire customer deposits and borrowings, in calculating Singer's leverage. This is deemed to fund a hypothetical capital injection into SFL to support a capital structure commensurate with the subsidiary's risk profile. We believe this adjustment increases Singer's EBITDA net leverage by 3.0x-4.0x.
“We expect Singer's largely negative cash flow from operations (CFFO) in FY24-FY27 on working-capital investments to support revenue growth. We expect the net working-capital cycle to improve to 180 days by FY25 from 240 days in FY23 as the end of the import ban removes the need to hold substantial inventory. Also, we expect trade payable days to rise to 45 days (FY23: 30), with supplier credit terms normalising. We expect Singer to incur capex of Rs. 800 million and resume dividend payouts of 40% of net income from FY25, once operating performance improves,” Fitch elaborated.