Fitch affirms Hayleys MGT at ‘BBB+(lka)’

RATINGS: Fitch Ratings Lanka has affirmed Hayleys MGT Knitting Mills Limited’s (HMGT) National Long-term Rating at ‘BBB+(lka)’. The outlook on the rating remains stable.

The rating of HMGT reflects its position as the country’s second largest manufacturer of knitted fabric, along with its experience and expertise in the manufacturing of certain value added products.

The rating also notes the strong relationship maintained with its customers, which in turn, reflects its sound product quality and reliability.

Over the years, the company has consistently maintained growth in sales and operating profits supported by continuous investments in capacity and relatively high levels of capacity utilisation.

Its financial profile and key credit metrics are appropriate for the current rating. The domestic apparel industry has shown some resilience to the abolition of the apparel quotas thanks to the large scale manufacturers’ well established market position, and the benefits accrued via duty concession arrangements such as the EU GSP Plus scheme.

Local apparel manufacturers are increasingly focusing on backward integration to achieve better flexibility and to remain competitive in an increasingly competitive global market place.

The minimum local value addition criteria under GSP Plus has also encouraged local apparel manufacturers to procure locally made fabrics that benefit mills such as HMGT.

In FY06, total revenues and operating profits of HMGT amounted to USD37.6 million and USD5.3m, respectively (revenue up by 27%). 97% of total revenues was derived from sales made to local large scale apparel manufacturers. Gross profit margins improved from 25.1% in FY05 to 26.9% reflecting the sale of more profitable value added products.

HMGT is reasonably strong in translating cost increases into higher selling prices given its position in the industry and its good relationships with clients.

However in 9M07, its gross profit margins slipped from 26.9% to 21.2% largely due to increased fuel and energy costs. Nevertheless, HMGT is likely to improve its EBITDA margins from 9M07 levels supported mostly by scale economies and management of operating costs.

As at 9ME07, HMGT had total debt amounting to USD18.1m (9M06: USD15.3m) and cash and cash reserves of only USD34,000 (9M06: USD15,000). Of total debt, approximately 82% was due to mature within one year; hence its liquidity position was somewhat stretched. However, the company had total committed un-drawn credit facilities from banks of USD4m to provide additional liquidity support.

At the same time, its access to some banks is restricted owing to single borrower limit restrictions (HMGT is considered part of the Hayleys group when assessing banks’ group exposure).

Leverage, measured by total adjusted net debt to Operating EBITDAR improved from 4.2x in FY05 to 2.4x in FY06, largely reflecting improvements in its working capital cycle and reduced capex spend and higher EBITDA margins.

Increased supplier credit on HMGT’s cotton-yarn purchases had a significant positive impact on the company’s working capital.

However, HMGT is increasingly producing more polyester fabric (and its blends).

As the company does not enjoy any credit on polyester yarn purchases, Fitch expects HMGT’s working capital requirement to increase over time. Total capex for FY07 is estimated at USD1.5m of which approximately 95% will relate to further capacity upgrades and productivity improvements.