Fitch affirms Abans at ‘AA(lka)’; Outlook Stable

Handing over the agreement by Anthony Watson – Country Manager Sri Lanka and Maldives at Visa ( second from left ) to Lakshman Silva, CEO DFCC Bank (Third from left ) Nalin Dissanayake – Director MS & A Sri Lanka and Maldives at Visa Worldwide PTE Ltd ( first from left) Denver Lewis – Vice President/Head of Cards, DFCC Bank ( second from right ) and Chrishan Jayamanne, Manager – Merchant Acquiring, DFCC Bank (first from right) are also in the picture.

Fitch Ratings has affirmed Sri Lanka-based consumer-durable retailer Abans PLC’s National Long-Term Rating at ‘AA(lka)’. The Outlook is Stable. Fitch has simultaneously affirmed the ‘AA(lka)’ rating on Abans’ outstanding senior unsecured debentures and the ‘F1+(lka)’ National Short-Term Rating on its commercial paper.

The affirmation reflects our expectations that the healthy performance of Abans’ core operations will counterbalance the higher risks of its Colombo City Centre (CCC) real-estate project. The Stable Outlook is based on our belief that Abans’ leverage, defined as net lease adjusted debt/operating EBITDAR including the full consolidation of Abans’ immediate parent Abans Retail Holdings (Pvt) Limited (ARH) and CCC, will rise only temporarily above our negative sensitivity of 6.0x in the financial year ending 31 March 2022 (FY22) even if the impending sale of its finance subsidiary and other deleveraging plans do not materialise.

Resilient Core Operations: We expect Abans’ revenue to rise by 8% in FY21, despite the challenging economic environment, amid strong demand for IT products, reduced competition from the informal sector and low interest rates. Its revenue fell 22% yoy in 1QFY21 due to an island-wide lockdown and movement restrictions, before recovering 25% yoy in the next two quarters. We do not expect similar movement restrictions amid lower infections and an ongoing vaccination drive, limiting the incremental impact on Abans’ consumer-durable sales.

Challenging Demand Conditions: Fitch expects Sri Lanka’s GDP to grow by 4.9% in 2021 (2020 estimate: -3.6%) on a lower base and a gradual return to economic normalcy. However, recovery that is weaker than our forecast could dampen demand for consumer durables as they are mostly non-discretionary. Abans has reduced sales financed by in-house hire purchase schemes to cut its incremental exposure to rising local unemployment, falling disposable income and a softening exchange rate.

Leverage to Peak in FY22: We expect Abans’ leverage to spike to 6.7x in FY22 (2.4x in last 12 months to December 2020) with the consolidation of LKR10 billion in CCC debt and LKR4.5 billion in debt we have assumed to fund the balance construction costs and any cash flow shortfalls. CCC’s consolidation will add 2.0x-2.5x to Abans’ leverage in FY21-FY23. Leverage should ease from FY23 with improved cashflows from CCC. The proposed sale of Abans Finance PLC (A(lka)/Rating Watch Evolving), if finalised in FY22, should reduce leverage by around 0.9x.