Fitch affirms Sunshine Holdings at ‘AA+(lka)’; Outlook Stable

Fitch Ratings announced it has affirmed Sunshine Holdings PLC’s National Long-Term Rating at ‘AA+(lka)’. The Outlook is Stable.
Sunshine’s rating reflects its steady business profile, which is anchored by defensive cashflows in its healthcare manufacturing and retail and consumer segments, and its strong balance sheet. 
“This counterbalances weaknesses in its agriculture segment (16 percent of EBIT) over the next 12-18 months amid moderating palm oil prices,” the rating agency said.
Sunshine’s rating is constrained by its smaller operating scale and modest market positions in its core businesses compared to higher-rated peers.
Fitch expects EBITDA net leverage to remain at below 1.0x in FY25-FY26 (financial year ending March), which is comfortably below the 4.0x level above which we would consider negative rating action. 

“We expect a limited drag on leverage from softer EBITDA margins and higher capex. We expect Sunshine’s margins to moderate to around 13.5 percent from FY25 (FY24: 15.5 percent) as it is not able to fully pass on increased wages, and the higher costs of inputs and electricity in the healthcare and consumer segments, due to consumer sentiment remaining weak.
EBITDA interest coverage is solid, and forecast at 6.8x in FY25 (FY24: 22.3x), in line with lower market interest rates as domestic inflation eases amid abating risks from Sri Lanka’s economic challenges in the last 18-24 months.Healthcare is expected to lead growth with Fitch forecasting a 13 percent revenue growth in Sunshine’s healthcare segment, following the International Finance Corporation’s (IFC) Rs. 3.27 billion investment for a 14.7 percent stake in subsidiary Sunshine Healthcare Lanka Limited (SHL) in May 2024. 
Growth in the consumer segment is likely to remain muted at around 2 percent in the next 12-18 months because consumer spending will be pressured by significant direct and indirect tax hikes on disposable income.  Fitch expects Sri Lanka’s GDP to expand in the low single-digits in the next two years, which could support consumer sentiment.Meanwhile, palm oil segment’s EBITDA is expectedto fall to Rs. 2.5 billion in FY25 (FY24: Rs.3.0 billion) as Fitch forecasts benchmark global crude palm oil (CPO) prices soften to US$ 775 per tonne in 2024 and US$ 700 in 2025. 
“This is because we expect a resumption of La Nina weather patterns in 2H24 to drive higher palm oil production, which will be exacerbated by Sunshine’s higher domestic production costs from increased wages,” the rating agency said. Further, the agency said Sunshine has significant headroom under its current rating sensitivities to engage in M&A, if required. The company has a record of focusing on large acquisitions to raise the group’s overall profile instead of small-scale projects, but these have been managed prudently and conservatively funded. However, a larger than expected debt-funded acquisition could pressure its rating.