Fitch affirms Abans at ‘A(lka)’: outlook Stable

Fitch Ratings has affirmed Sri Lanka-based Abans (Pvt) Ltd, (Abans) National Long-term rating at ‘A(lka)’, the outlook is stable.

Abans’ rating reflects its position as one of the largest retailers of consumer electronics and household products in Sri Lanka, backed by the exclusive agency franchise of LG Electronics Inc, its market leader position in several product categories, and its sizable distribution network.

Fitch notes the slowdown of revenue growth to around 5.5% for H109 compared to 7% growth for FY08 (Rs.11.2bn revenue in FY08) as driven by a slowdown in consumer demand due to lower disposable income. Operating expenses increased by 24% to Rs. 2,596m in FY08 compared to Rs. 2,097m in FY07, which together with increased finance costs, had a negative impact on net profitability.

Fitch expects these trends to continue, albeit with some degree of costs containment and a stabilisation of interest expenses.

The increase in gross profit margins at its retail operations - to above 30% in H109 versus 27.8% for FY08 - however, has been significant in enabling the company to arrest some of this deterioration.

The coverage ratio (funds form operations to gross interest expense) also deteriorated to 2.3x in FY08 compared to 3.4x in FY07 and will be key to retaining the rating at current levels.

The support shown by the principal (LG) through enabling imports on Delivery vs Payment terms, act as a strength for Abans. The market strength of Abans in the high value segment of the retail product range and the volume leadership in duty free sales are further positive factors on profitability.

Rating concerns for Abans include the concentration of its debt facilities towards short term bank based funds; approximately 90% of its debt maturities remain skewed towards the short term with bank based financing being the key source of funds (around 85%).

As of September 8, Abans’s total debt was around Rs.4.2bn and the cash balance was approximately Rs.190m (Rs.4.2bn and Rs.335m, in FY08) while unutilised facilities amounted to Rs.1.4bn. However, Fitch notes that these credit facility limits remain uncommitted.