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

Fitch Ratings Lanka has affirmed Sri Lanka-based Hayleys MGT Knitting Mills PLC’s (HMGT) National Long-term rating at ‘BBB+(lka)’. The Outlook is Stable.

The rating reflects HMGT’s strong credit matrix and market position. However, the rating is currently constrained by a potential withdrawal of the Generalised System of Preferences Plus (GSP+) scheme by the European Union (EU), due to HMGT’s significant volume of indirect sales to the EU.

In addition, a tightening of global demand for garments, higher local competition in the medium-term and significant cost increases remain challenges.

The EU’s decision on re-awarding or withdrawing GSP+ scheme to Sri Lanka acts as an overhang on the rating, as approximately 70% of HMGT’s sales in FY08 were indirectly to EU-based brands.

Fitch also views the slowdown in sales of final garment products in the developed markets (Q109 - Marks & Spencer: clothing down 3.6%; Next Plc: retail down 5%) and cost increases in input cotton yarn and utilities as key operational constraints for HMGT.

Over the medium-term, the possible entry of a large Indian knit manufacturer by 2009 is also expected to increase competition within the local industry.

However, HMGT’s encouraging financial and operating performance over the last three years, with continuous revenue growth (FY06-FY08 compounded annual growth rate: 26%), margin stability within a low volatility band (Gross Profit:2 4%-26%; Profit After Tax: 9.8%-10.5%), improved working capital management, and the forecasted leveling-off of capital expenditure in the short-term are expected to act as a cushion to the above negative effects.

HMGT’s coverage and leverage ratios (as measured by funds from operations/gross interest expense and total adjusted debt, net of cash/operating EBITDAR) have gradually improved over the last three years to 5.9x and 1.6x respectively (FYE08).

Its lower liquidity and the reduced undrawn credit facilities will be, to some extent, negated by the expected reduction of capital expenditure in the short-term, and the possible increase in access to credit lines due to an enhancement of banks’ “single borrower limits” subsequent to main shareholder Hayleys’ divestures. HMGT is the second-largest independent knitted fabric manufacturer in Sri Lanka.