RAM Ratings Lanka reaffirms Hayleys PLC’s ratings at AA-/P1
RAM Ratings Lanka has reaffirmed Hayleys PLC’s (“Hayleys” or “the
Company”)respective long- and short-term corporate credit ratings at AA-
and P1; the outlook on the long-term rating remains stable. Hayleys is a
diversified conglomerate with wide ranging business interests in hand
protection, purification, transportation, agriculture, plantations,
textiles, construction materials, fiber, consumer, industrial solutions,
power and energy together with leisure and aviation.
(Hayleys, along with its subsidiaries will collectively be referred
to as “Hayleys Group” or “the Group”). The ratings are upheld by the
Group’s diversified business portfolio, strong market positions in
several key businesses coupled with the Group’s adequate debt protection
indicators.
Nevertheless, the ratings are tempered by the Hayleys Group’s
moderately high debt levels, tight liquidity as well as its exposure to
fluctuations in commodity prices and foreign-exchange risk.
The ratings continued to be supported by the Group’s diversified
business profile, which has enabled it to withstand adversities
affecting a particular industry sector, as weaker showing in one
business can be balanced off by the strong performance in another.
Meanwhile, the Group continues to enjoy strong positions in several of
its key businesses. It is the world’s largest producer of
coconut-shell-based activated carbon with an estimated market share of
around 15 %-16 %. Additionally, the Group accounts for around 5 % of the
global market for non-medical gloves. Meanwhile, in plantations, the
Group is a sizable player that makes up around 4.5 % and 2.0 % of the
country’s tea and rubber production, respectively. The Group’s key
businesses are sensitive to fluctuations in commodity prices, which are
in turn governed by a range of factors including global supply,demand
and weather conditions. Thus, commodity prices directly affect the
Group’s margins, as demonstrated in the past. In addition, Hayleys is
also exposed to foreign exchange rates given its reliance on exports.
During the initial rating, RAM Ratings Lanka had raised concerns on
the Group’s loss-making textile arm, Hayleys MGT Knitting Mills PLC (“Hayleys
MGT”) which had weighed down on Group performance. Although Hayleys MGT
continued to be in the red during fiscal 2012, we note that performance
had improved during the 1st half of FYE March 31, 2013 (“1H FY Mar
2013”) with the division breaking-even at operational level, supported
by a capital infusion by Hayleys.
On a separate note, the Group’s debt burden continues to be high,
reflective of its debt-funded acquisitions over the past few years. The
Group’s total debt continued to be on the rise, increasing nearly 30 %
y-o-y during fiscal 2012 to
Rs 21.56 billion (end-September 2012: Rs 23.04 billion). The Group’s
gearing levels of 0.78 times by end-FY Mar 2012, was in line with RAM
Ratings Lanka’s expectations; gearing (Total debts/Total equity)
increased slightly to 0.80 times by end-September 2012. Meanwhile, we
note that debt levels at Hayleys PLC level had also been on the rise,
particularly during 1H fiscal 2013 with its gearing ratio worsening to
0.86 times (end-FY Mar 2011: 0.53 times).
However, our concerns are somewhat mitigated given that the company
has control over the dividend policies of its subsidiaries, thus
enabling dividend upstreaming when required. On the other hand, the
Group’s liquidity position continued to be tight given its heavy
reliance on short-term borrowings (which includes trade facilities) and
relatively low cash reserves.
Meanwhile, the Group’s debt-protection metrics continued to be
adequate and in line with our expectations. Its funds from operations (“FFO”)
debt coverage came in at 0.25 times by end-March 2012 before improving
to 0.37 times by end- September 2013. Going forward, although debt
levels are expected to increase as the Group pursues capacity
expansions, gearing levels are anticipated to remain relatively
unchanged supported by healthy profit generation. As such, the Group’s
ratings factor in RAM Ratings Lanka’s expectation that gearing will
remain around 0.8 times whilst FFO debt coverage amounts to around 0.3
times. |