Fitch Ratings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC’s National Long-Term Rating at ‘A+(lka)’. The Outlook is revised to Stable from Negative.
Fitch has also affirmed the National Long-Term Rating on Lion’s outstanding senior unsecured debentures at ‘A+(lka)’.
The Outlook was revised to Stable because we expect Lion to be able to maintain leverage (defined as lease-adjusted debt net of cash / operating EBITDAR) at less than 3.0x over the medium term. Lion was able to improve its net leverage to 2.7x as of 31 March 2018 (FYE18) from 6.3x at FYE17, helped by the recovery in sales volume and operating profitability.
The recovery was underpinned by a revision in excise taxes, which was announced in the Sri Lankan government’s budget on 9 November 2017. The revised regime taxes alcoholic beverages with lower alcohol content at reduced rates compared to spirits.
Fitch rates Lion on its standalone strength due to weak linkages between Lion and its ultimate parent, Carson Cumberbatch PLC, in line with Fitch’s Parent and Subsidiary Rating Linkage criteria.
Lion’s ‘A+(lka)’ rating reflects its leading market position in the domestic beer industry, which is protected by stringent regulation, a well-established brand and extensive retail coverage. However, the domestic excise tax regime on alcoholic beverage sales changes frequently, which inhibits the industry’s profitability.
Recovery in Sales Volume: Fitch expects Lion’s sales volume to improve in the medium term after excise duties were revised to tax manufacturers of hard liquor at higher rates than beer and wine makers. The Sri Lankan government reduced excise taxes on strong beer by 33%, mild beer by 39% while raising that on hard liquor by 2%, effective from 10 November 2017. Previously, excise duty per unit of alcohol of strong beer was 10% higher than that of hard liquor, which depressed Lion’s sales volumes from November 2015 to October 2017, when the previous tax regime was in effect.
Balance Sheet to Strengthen: We believe that Lion’s net leverage will remain below 3.0x, the level at which Fitch would consider negative rating action, in the medium term. This is mainly due to improving profitability and likely reduction in capex as the company has adequate brewing capacity to meet growing demand over the medium term. Fitch expects Lion’s leverage to continue to improve from the FYE18 level, giving it more headroom for its ‘A+(lka)’ rating.
Improving EBITDAR Margin: Fitch expects Lion’s EBITDAR margins to improve by around 100bp in FY19, from 27% in FY18, and to stabilise at around 29% from FY20, supported by better sales volume and operating conditions. Lion’s EBITDAR margin recovered significantly in FY18 from a low of 19.5% in FY17 when manufacturing was halted temporarily due to floods and Lion had to import inventory at a higher cost. The margin recovery was driven by the company’s efforts to recoup some of the lost sales volumes and operational efficiencies that reduced costs.
Lion’s sales volumes and profitability were also helped by the change in the excise tax regime in November 2017.a.