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.
We have 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.