ECONOMYNEXT – Fitch Rankings stated it was confirming an ‘AAA (lka)’ score of Sri Lanka’s Lion Brewery, with a steady outlook, regardless of attainable competitors from a competitor.
“We anticipate Lion to keep up its strong market place within the native beer business over the medium time period,” Fitch stated.
“Our view is underpinned by Lion’s vary of product choices throughout value factors, which makes money move defensive via cycles. It additionally advantages from distinguished shelf house throughout its gross sales channels.
“Nevertheless, we anticipate competitors will improve over the medium-term from the latest new beer product launch, owned by a number one native spirits producer.
“The competitors will profit from a longtime retail-channel and distribution community, though Fitch believes the affect on Lion’s income will likely be gradual given manufacturing capability will solely ramp-up steadily over the medium-term.”
The complete assertion is reproduced beneath:
Fitch Affirms Lion Brewery at ‘AAA(lka)’; Outlook Steady’
Fitch Rankings – Singapore – 27 Nov 2024: Fitch Rankings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC’s Nationwide Lengthy-Time period Ranking at ‘AAA(lka)’. The Outlook is Steady.
The affirmation and Steady Outlook replicate our view that Lion’s credit score metrics will stay commensurate with its score over the medium-term, as Sri Lanka’s financial setting continues to stabilise. We consider Lion’s sturdy monetary profile will buffer in opposition to any weakening in client demand.
Lion’s score displays its advertising management within the home beer business, which is protected by excessive entry obstacles stemming from licensing necessities and a ban on media promoting, sturdy model presence and an intensive retail and distribution community.
KEY RATING DRIVERS
Robust Market Place: We anticipate Lion to keep up its strong market place within the native beer business over the medium time period. Our view is underpinned by Lion’s vary of product choices throughout value factors, which makes money move defensive via cycles. It additionally advantages from distinguished shelf house throughout its gross sales channels.
Nevertheless, we anticipate competitors will improve over the medium-term from the latest new beer product launch, owned by a number one native spirits producer. The competitors will profit from a longtime retail-channel and distribution community, though Fitch believes the affect on Lion’s income will likely be gradual given manufacturing capability will solely ramp-up steadily over the medium-term.
Web Money Place: We anticipate Lion to keep up a internet money place over the monetary years ending March 2025 (FY25) to FY28, supported by regular working money move and minimal expansionary capex plans, as Lion’s capability is ample for medium-term progress. We anticipate annual capex of round LKR5.0 billion-5.5 billion, primarily for upkeep and minor capability expansionary plans, as seen in its latest arrange of a minibrewery for product analysis and growth and the enlargement of warehouse house.
Strong Curiosity Protection: We forecast curiosity cowl to stay strong for Lion’s score (FY24: 6.6x), supported by decrease market rates of interest than throughout Sri Lanka’s financial disaster. The nation’s common weighted prime lending rate of interest declined to round 9.0% as of October 2024. Though we anticipate rates of interest to marginally improve over the following few years, Lion’s lowered borrowings, helped by steady working money move over the previous 12 months, permits it to keep up a powerful curiosity protection ratio.
Weaker Margin: We forecast Lion’s EBITDA margin to say no to 14.5% in FY25 (FY24: 15.9%), pushed by challenges in passing on elevated prices to end-consumers. We consider the corporate is more likely to partially take in price will increase, together with excise responsibility hikes, to keep up gross sales quantity, because of weaker client buying energy. We forecast Lion’s EBITDA margin to say no additional to round 12%-13% from FY26, on the background of elevated competitors within the medium-term.
Excise Responsibility Danger: We anticipate slower excise responsibility will increase, after a cumulative hike of round 64% over a 12-month interval via January 2024. The Sri Lankan authorities is required to overview excise duties, together with these on alcohol merchandise, on a yearly foundation as a part of the Worldwide Financial Fund’s (IMF) prolonged fund facility programme. Fitch expects additional excise responsibility will increase to be consistent with Sri Lanka’s inflation fee, however dangers to gross sales quantity from higher-than-expected excise responsibility hikes, as seen in January 2024, stay.
Growing Abroad Presence: Lion’s incorporation of its Singapore subsidiary, Lion Beer Pte Ltd, extends its abroad actions, on which the corporate has already spent round LKR100 million in preliminary funding. Lion expects to proceed funding the funding within the medium time period, which ought to facilitate its export operation in south-east Asia. Nevertheless, we anticipate income from exports to stay round 3%-4% within the medium time period.
Weak Hyperlinks with Guardian: We notch Lion above the consolidated profile of its mum or dad, Carson Cumberbatch PLC, topic to Lion’s Standalone Credit score Profile. Our score strategy is supported by an evaluation of ‘Insulated’ entry and management and ‘Open’ authorized ringfencing beneath our Guardian and Subsidiary Linkage Ranking Standards. Lion has a stronger credit score profile than Carson, supported by extra defensive money flows and a internet money place.
‘Insulated’ entry and management is mirrored in Lion’s monetary independence and the presence of a giant minority shareholder – Carlsberg Brewery Malaysia Berhad – which owns 25%, regardless of Carson’s controlling stake. Our evaluation of ‘Open’ authorized ringfencing relies on the shortage of regulatory or self-imposed ringfencing of Lion’s money move, as there are not any formal restrictions in place. Money outflow from Lion to Carsons has been restricted to dividends traditionally.
DERIVATION SUMMARY
Lion is rated on the similar degree as Sri Lanka-based conglomerate, Melstacorp PLC (AAA(lka)/Steady), whose score displays its dominant market place in spirits, via its subsidiary Distilleries Company. Melstacorp’s bigger scale and stronger margin is counterbalanced by its extra aggressive enlargement and funding technique.
Lion is rated on the similar degree as Hemas Holdings PLC (AAA(lka)/Steady). Hemas has excessive publicity to the defensive healthcare and client sectors, catering to diversified end-markets. In the meantime, Lion’s score displays its dominant place within the native beer business. We anticipate each corporations to keep up related monetary threat profiles, characterised by low leverage, within the medium time period.
Sunshine Holdings PLC (AA+(lka)/Steady) has main positions in defensive sectors, however a small scale. Each corporations face some regulatory threat; Lion faces dangers from excise duties and oblique tax hikes on the gross sales of beer, whereas Sunshine faces value ceilings on some pharmaceutical merchandise.
Lion, given its credit score power, is rated increased than a variety of massive Sri Lankan banks, non-bank monetary establishments and insurance coverage corporations, that are extra uncovered to sovereign stress than Lion, regardless of their particular person credit score strengths. That is as a result of substantial sovereign-issued securities held for regulatory causes in addition to their broader publicity to quite a few sectors within the native economic system.
KEY ASSUMPTIONS
Fitch’s Key Assumptions Inside Our Ranking Case for the Issuer:
– Income to extend by 14% in FY25 and round 8% from FY26 onwards
– EBITDA margin to contract to round 14.5% in FY25 (FY24: 15.9%)
– Annual working capital investments of round LKR1 billion-2 billion to assist income progress
– Annual capex of round LKR5 billion-6 billion
– Dividend payout ratio of 40%
RATING SENSITIVITIES
Elements that May, Individually or Collectively, Result in Destructive Ranking Motion/Downgrade:
-A rise in leverage, measured as EBITDA internet leverage, to over 5.0x for a sustained interval
-A lower in EBITDA curiosity protection to lower than 2.0x for a sustained interval
-Stronger hyperlinks with mum or dad, Carson Cumberbatch, beneath Fitch’s Guardian and Subsidiary Linkage
Ranking Standards or weakening of the mum or dad’s consolidated credit score profile.
Elements that May, Individually or Collectively, Result in Optimistic Ranking Motion/Improve:
-There is no such thing as a scope for an improve, as Lion is already on the highest score on our Sri Lankan Nationwide Ranking scale.
LIQUIDITY AND DEBT STRUCTURE
Robust Liquidity Place: Lion had about LKR15.2 billion in money and money equivalents as at end-September 2024 exceeds its short-term debt maturities of round LKR4 billion, in addition to its total debt of LKR4.6 billion.
Nearly all of Lion’s debt is working capital associated and might be rolled over by banks given its sturdy money move technology and regular working capital cycle. Lion additionally has about LKR15 billion of uncommitted undrawn credit score traces that can be utilized for debt compensation as of end-June 2024. Regardless of being uncommitted, we anticipate banks to honour these amenities, because of Lion’s strong credit score profile in a neighborhood context.
ISSUER PROFILE
Lion is Sri Lanka’s largest brewery, with a powerful distribution community of shut to three,000 retailers throughout the island. Along with its personal manufacturers, Lion brews and markets Carlsberg branded beer.
