Atlas acquisition will improve Hemas cash flow: Fitch

Diversified conglomerate Hemas Holdings PLC’s acquisition of stationary manufacturer Atlas Axillia (Private) Limited will improve the group’s defensive cash flow across economic cycles, ratings agency Fitch Ratings said yesterday.

“Hemas Holdings PLC’s (AA-(lka)/Stable) acquisition of a controlling stake in Sri Lanka’s leading school and office stationery manufacturer, Atlas Axillia (Private) Limited, will bolster Hemas’ defensive operating cash flows,” Fitch Ratings said.

Hemas agreed to buy a 75.1 percent stake in Atlas for Rs. 5.7 billion last week. 

Fitch is expecting demand for school stationery to grow over the medium term, supported by both government and private-sector investments in the education sector and rising per capita income in 
the country.

Atlas is the largest domestic manufacturer and distributor of exercise books, pens, colour products and other school stationery equipment with a strong distribution network spanning over 70,000 outlets 
island wide. Fitch noted that the acquisition would have no immediate impact on Hemas’ rating because the transaction is expected to be largely funded by cash at hand without a material increase in debt, and that Hemas would continue to maintain its current leverage, which is below the level required for a ratings action.

As at end-September 2017, Hemas had Rs. 10.6 billion in cash and cash equivalents at the group level, including Rs. 4.4 billion at the holding company to be used for the acquisition, a significant portion of which had been sourced from the rights issue in 2015.

“We do not expect a significant deterioration in the holding company’s credit quality, once it pays for the acquisition, as it has robust ability to extract dividends from its subsidiaries, many of which it fully controls,” 
Fitch added.

Atlas will join Hemas’ fast moving consumer goods segment, which before the acquisition contributed 38 percent to the group profits before interest, tax, depreciation and amortization.

Atlas will be run as a separate subsidiary of Hemas after the acquisition, but may be able to benefit from operational synergies with the group’s larger FMCG business once the integration is complete.