Cash-rich Melstacorp will stay acquisitive: Fitch

• Forecasts M&As to the tune of Rs.5bn per annum from FY23
• Estimates annual free cash flows at Rs.4-5bn
• Affirms both Melstacorp & Distilleries at ‘AAA’ able to maintain leverage 
• Says spirits biz remains resilient but doesn’t rule out strain if further lockdowns imposed

Fitch Ratings Lanka this week said its rating forecasts on Melstacorp PLC are based on the assumption that the company will remain acquisitive, particularly from 2023 as it generates strong cash from existing businesses, sufficient enough to launch an aggressive mergers & acquisition (M&A) drive worth at least Rs.5.0 billion a year. 
With an outsize spirits business represented by its subsidiary Distilleries Company of Sri Lanka PLC, the group has been on the lookout for new businesses and sectors to put its stamp on since the group restructured under its newly formed ultimate parent, Melstacorp PLC. 

Melstacorp this year acquired a 70-bed regional hospital in Ragama for Rs.1.6 billion with the aim of expanding its healthcare business, and it also invested Rs.1.4 billion in a cement packaging joint venture, which is yet to commence operations.  

However, none of these new businesses would contribute more than 2 to 3 percent to the group EBITDA in the next few years, Fitch Ratings said. 

“Our rating-case forecast assumes the group will invest around Rs.5 billion per annum in M&A from FY23, largely funded by its strong free cash flow, which we estimate at around Rs.4 billion-5 billion per annum, although the group has not confirmed any details,” Fitch Ratings said in a rating report on Melstacorp and Distilleries Company. 

Fitch Ratings this week affirmed both entities at ‘AAA’ with a Stable outlook considering the group’s ability to maintain leverage below 4.5 times and resilient spirits business, despite the pandemic.  The rating agency however did not rule out possible pressure on the ratings if the pandemic intensifies leading to further lockdowns and stricter social distancing requirements, “which would have a negative impact on its beverage segment cash flows”. 

Sri Lanka’s largest distiller with 70 percent market share in the spirits market, Distilleries Company reported revenues of Rs.14.6 billion for three months for the April-June 2020 quarter, compared to Rs.20.05 billion in the year earlier period, down of 27.4 percent.

Social distancing orders forced liquor shops to remain closed for nearly two months while the near decimation of the tourism business dampened sales. 

The company reported earnings of 21 cents a share or Rs.982.8 million for the quarter compared to earnings of 36 cents a share or Rs.1.66 billion in the comparable period, last year. Distillery Company contributes 70 percent to the consolidated EBITDA of Melstacorp. 

Melstacorp recently announced its intention to enter into retail pharmaceutical industry as its healthcare arm, represented by Melsta Health (Pvt) Limited seeks to play a significant role in the country’s healthcare sector since its acquisition of Browns Hospitals in Ragama, which is now re-branded as Melsta Hospitals Ragama.

Melstacorp also has interests in plantations, telecom, leisure, power and logistics.