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March 25 (The following statement was released by the rating agency)
Fitch Ratings has published Sri Lanka-based Lion Brewery (Ceylon) PLC's (Lion)
'AA-(lka)' National Long-Term Rating with Stable Outlook. Fitch has also assigned a 'AA-(lka)'
senior unsecured rating to Lion.
The agency has also assigned an expected National Long-Term rating of
'AA-(lka)(EXP)' to Lion's proposed unsecured redeemable debentures of up to
LKR3bn. Fitch will assign a final rating to the debenture subject to the receipt
of final transaction documents conforming to information already received.
The proposed debentures are rated in line with Lion's National Long-Term Rating
of 'AA-(lka)', as they will rank equally with the company's unsecured creditors.
Lion aims to use the proceeds to fund the upgrade and modernisation of its plant
in FY14 (ending March).
Key Rating Drivers
Strong market position: Lion's ratings reflect its leading market share of the
domestic beer industry and its strong operating cash flow generation. Lion's
market position and in turn its credit profile are also supported by its
entrenched domestic brands, and limited substitution of its products due to the
high technical competence required for brewing beer in contrast to the
manufacturing of spirits.
High regulatory risk: Domestic producers of alcoholic beverages face high
regulatory risk in the form of high excise duties, which puts legitimate
alcoholic beverages outside the reach of a large portion of the population,
promoting illicit consumption while stifling the growth of the licit market. At
the same time, however, regulatory restrictions on advertising and the limited
issuance of new retail licenses create high entry barriers and benefit
entrenched players such as Lion. Continued increase in excise duties on
alcoholic beverage producers could become a rating risk if profitability is
impacted materially over the longer term.
Industry growth below potential: Lion's ratings are constrained over the
medium-term by the limited breadth and depth of the domestic beer market, given
regulatory impediments on advertising and retailing. However, economic growth
and lifestyle changes may result in a shift in domestic consumption patterns
towards beer over the longer-term.
Concentrated portfolio: Lion's product portfolio is diverse across price points
which enables the company to cater to potential changes in consumer behavior and
makes Lion attractive to its distributors. Lion's sales reflect industry trends,
and is skewed towards its strong beer product, which is targeted towards the
Firmer profits starting FY15: Lion's EBITDAR margin fell to 15% at end-9MFY13
from 28% at FYE12 due to higher taxes paid on imported sales volumes. However,
Fitch expects EBITDAR margins to improve after November 2013 as the company will
no longer need to import a portion of its sales volumes once the upgrading and
modernisation of its plant is complete.
High capex in FY14: Lion spent over LKR2.8bn in capex in 9MFY13 (equal to 24% of
revenues) on upgrading and modernising its plant, and will spend a further
LKR5.3bn in FY14.
Balance sheet to improve: Fitch expects Lion's financial leverage (measured as
lease-adjusted net debt/operating EBTIDAR) to peak in FY14 due to lower
profitability and high debt-funded capex. Leverage should improve sharply in
FY15 and thereafter on lower capex and higher profits.
Satisfactory liquidity: At end-9MFY13, LKR3bn of Lion's borrowings were
short-term in nature, used to fund its working capital. A further 2.8bn
consisted of term debt, due after 2013. Fitch expects Lion to post negative free
cash flows (FCF, after capex and dividends) until FYE14 on account of higher
capex, which will mean the company may be required to refinance any term
maturities. However, this is not a serious risk given the company's access to
domestic banks, and Fitch's expectations that Lion will generate strong positive
FCF from FY15 onwards.
Negative: Future developments that may individually, or collectively, lead to
negative rating action include:
-Financial leverage above 1.5x on a sustained basis. Financial leverage stood at
an annualised 1.09x at end-9MFY13.
Positive: Future developments that may individually or collectively lead to a
positive rating action include:
-Lion's rating is constrained at the current level over the medium-term due to
the limited breadth and depth of the domestic beer industry. However this may
change over the longer-term if growth in domestic beer industry outpaces growth
A full rating report on Lion will be shortly available on www.fitchratings.com