Fitch affirms Lion Brewery at 'AA-(lka)'; Outlook Stable

Expects Lions sales volume to increase by 12% in FY20



Fitch Ratings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC's National Long-Term Rating at 'AA-(lka)' with a Stable Outlook. Fitch has also affirmed the National Long-Term Rating on Lion's outstanding senior unsecured debentures at 'AA-(lka)'.


Lion's National Long-Term Rating reflects its leading market position in the domestic beer industry, which is protected by high entry barriers from the regulatory ban on media advertising, Lion's well-established brand and extensive retail coverage. However, Lion's profitability can be affected in the short-term by frequent hikes in excise taxes on alcoholic beverages, although the company has been able to pass on these tax increases to customers with demand normalising within a lag of 12 to 18 months.


Fitch has rated Lion's debentures at the same level as its National Long-Term Rating as the debentures are not materially subordinated because there is no meaningful prior ranking debt.


Lion's financial profile is strong with Fitch expecting net leverage - defined as lease-adjusted debt net of cash/operating EBITDAR - to remain below 1.0x over the next few years. Leverage has improved considerably, from 2.7x in the financial year ending 31 March 2018 (FY18) to 0.6x in FY19 and 0.5x during the trailing 12 months to end-2QFY20. The improvement is due to better sales volumes that drove strong EBITDA growth, amid the reversion to the previous excise tax regime which taxes beer at a relatively lower rate per unit of alcohol than spirits.


Fitch rates Lion on its standalone strength due to the weak linkages between its ultimate parent, Carson Cumberbatch PLC, in line with Fitch's Parent and Subsidiary Rating Linkage criteria. Lion has a stronger credit profile compared to Carson. Although Carson has control over Lion, its influence is mitigated by a large minority shareholder, Carlsberg Breweries A/S (BBB+/Stable), which owns 25% of Lion. Carson and Lion maintain separate financing arrangements and there is no cash fungibility between the two other than for dividends.


Fitch expects Lions sales volume to increase by 12% in FY20 due to relatively resilient demand for strong beer, while we expect weak tourist arrivals to affect mild beer sales. Lion's net revenue rose by 13% yoy in 1HFY20 despite the increase in excise taxes in March 2019 and the challenging operating environment following the Easter Sunday terrorist attacks. We expect mild beer sales to recover from FY21 onwards based on our expectations of a recovery in tourism.


Fitch expects the tourism industry to normalise from FY21 onwards after a faster recovery than the industry had expected - as evident from in-bound tourist arrivals increasing at an average of 38% month-on-month from June to September 2019. A relaxation in key tourist markets of travel advisories on Sri Lanka has supported the growth in visitors.


Lion has sufficient brewing capacity for the next few years, with plant capacity utilisation at 64% as of FY19. Lion expanded its production capacity between FY14-FY16, which drove the high capex of around LKR4 billion a year, or 20% of revenue. We expect capex to moderate to around LKR1.5 billion a year in the next two years.


 
 
 
 
 
 
 
 
 
 
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