Abans and Singer are two well-known consumer-durables retail companies in the country. For most people still unsure of buying electronic appliances or a smart TV online on Daraz, Abans and Singer are the go-to places for a range of products from smart mobile devices to laptops, smart TVs and home entertainment systems, refrigerators, air conditioners, washing machines, cooking stoves and ovens, kitchen appliances, and furniture.

Their portfolios include well-known international brands such as Apple, Asus, Black and Decker, Dell, Haier, HP, Huawei, LG, Panasonic, Sisil, Samsung, Sony, Swan and Whirlpool to name a few. They each also have a range of products branded Abans and Singer. Singer and Abans are the closest competitors in the consumer durables market.

Their origins are strikingly contrasting. Singer was a multinational company in the 19th century and entered Sri Lanka in the late 1800s when the country was called Ceylon by the occupying British. Abans came a century later, starting out as a corner shop selling used home appliances.

Today, both companies make a combined revenue of over Rs90 billion annually over the last five years. Singer is slightly ahead, with a revenue of Rs54 billion in the financial year to end March 2020 and Abans at Rs34 billion. However, during these five years, Abans has been more profitable (See Chart 1).

Singer Sri Lanka Plc is no longer a multinational. A few years ago, it was acquired by the Dhammika Perera-controlled conglomerate Hayleys Plc, expecting a retail boom as incomes improve in the long term. Abans has ventured into high-end real estate with a mixed development project including a shopping mall, luxury apartments and a hotel nearing completion in downtown Colombo. The Covid-19 pandemic has been tough on the economy. While household incomes weakening, the near term prospects of Abans and Singer however are holding up.

Abans reported a huge 260% growth in profits from a year earlier to Rs703 million during the six months to end September 2020. Total assets amounted to Rs28.5 billion as at end-September. Singer on the other hand reported a profit of Rs886 million in the same period, a phenomenal growth from Rs25 million a year earlier.

Singer’s assets at the end of the period totalled more than twice as much as Abans at Rs62 billion, but the smaller company has more manoeuvrability: Singer’s debt to equity ratio was 3.51 as at end September while for Abans, it was 0.50. Abans also has a bigger war chest in the form of retained earnings of Rs7.7 billion, compared to Singer’s Rs5 billion.

Abans Plc is fully controlled by Abans Retail Holdings, a private company with no shares held by the public. Hayleys Plc directly holds a 70% stake in Singer while related parties hold another 17%.

Mohan Pandithagae is the Executive Chairman of Singer Sri Lanka while Dhammika Perera is Co-chairman (the same positions they hold at the parent company Hayley’s Plc). The company’s chief executive is Mahesh Wijewardene. Over at Abans, its founder Aban Pestonjee continues to head the company as Chairperson while Behman Pestonjee is the Managing Director.

A LONG TIME AGO IN CEYLON

Its humble origin in 1968 as a corner shop in Bambalapitiya makes Abans’ ascendence a meteoric one compared with Singer.

Singer was a multinational that entered Sri Lanka a century earlier (in 1877) when the country was called Ceylon by the occupying British who were here initially for tea and ruled the island as a colony for 133 years. Singer enjoys its status as a household name in Sri Lanka for more than a century, first known for its sewing machines. Isaac Merritt Singer founded I. M. Singer and Company in 1851 to manufacture sewing machines in the United States. The company claims to have introduced one of the first consumer instalment payment plans in 1856, a staple of both Singer and Abans in Sri Lanka today. Both companies rely on hire-purchase and other instalment payment plans to push sales.

It took nearly a century for Singer to supplement sewing machine sales with home appliances in 1957. Around 15 years after Sri Lanka gained independence, Singer formed a separate company here called Singer Industries, to assemble sewing machines and manufacture cabinets and stands.

Singer Sri Lanka was incorporated as a public company in 1974 and listed on the Colombo Stock Exchange in 1981. Seven years later, it started another company Regnis (Singer spelt backwards) to manufacture refrigerators under another iconic household name, Sisil.

The US-based parent Singer Corporation which had expanded to Europe and Asia continued to be profitable after WWII but encountered periodic financial difficulties and by 1999 filed for bankruptcy. But business in Sri Lanka was booming. Regnis Appliances was launched in 2010 to manufacture home appliances, and in 2011, another subsidiary Singer Finance went public with a listed IPO oversubscribed by more than 100 times. Singer was among the cream of blue chips in the country. Since the 1990s the company sponsored the national cricket team, several international cricket series, and school cricket, cementing its status as a household brand.

It has a proud colonial heritage. Its employees across the group enjoyed an extra holiday on Boxing Day and January 01st, a practice only recently discontinued after a change in ownership at Singer Sri Lanka.

Hemaka Amarasuriya is perhaps still the face of Singer Sri Lanka. A long-serving former Chairman and Chief Executive at Singer Sri Lanka, he continues to be a recognisable corporate leader in the country. He had a long career with the company, serving in several senior positions in the Asian region. He retired in 2015 after serving 35 years in Singer Sri Lanka. He served on boards of several listed firms including the chair at Sri Lanka Insurance (Sri Lanka’s largest insurance company), Nations Trust Bank, and banking group NDB.

In 2017, the Haleys group controlled by Dhammika Perera acquired Singer Sri Lanka for Rs10.9 billion rupees. At the time, Singer was the largest contributor to Hayleys group revenue and was the largest consumer-durable retailer in the country, and it still is. Singer Sri Lanka reported consolidated revenue of Rs55 billion in the year to end March 2020, a quarter of Hayleys’ revenue of Rs210 billion.

Abans reported revenue of Rs33 billion, Singer’s closest rival. Yet, for many people, Abans and Singer are the largest closely competing brands in the electronic home appliances and consumer-durables market. They both are the go-to places for well-known global brands in mobile phones, refrigerators, smart TVs, laptops, and a range of other goods from air conditioners, washing machines, stoves, and furniture.

CORNER SHOP STAR

 Abans’ journey is perhaps most captivating and compelling, compared to Singer’s experience as a multinational in Sri Lanka. However, Singer Sri Lanka’s continued success here is no less significant considering its parent company Singer Corporation’s demise in 1999, making it a target for acquisition by those with a grander vision. However, Abans’ ascent and growth as corporate listed on the Colombo Stock Exchange is more remarkable. In five decades, Abans is within touching distance of Singer, already matching a little less than two-thirds of the one-time MNC’s revenue.

A busy mother with small kids Aban Pestonjee started a corner shop in Bambalapitiya in 1968 repairing and selling used household appliances. She bought used home appliances from embassy auctions, repaired them for resale, and offered buyers warranties for the goods she sold. The company’s annual reports tell the story.

Of her first batch of 20 appliances, Pestonjee set aside two for spare parts. Realising early that aftersales services and repairs were critical to attract and retain new customers, she started a workshop in her garage. Did she then dare dream to compete with multinationals such as Singer? We did not ask, relying on publicly available information for this piece, but Pestonjee was audacious, decisive, and plucky, for sure.

She seized her chance to up the game when Sri Lanka opened its economy in 1977. Pestonjee, still very much a busy housewife, quickly acquired agency and distributor rights to brands like Electrolux, Hoover, Russel Hobbs, and Mitsubishi Electric, challenging the long-established companies that enjoyed these rights for decades

In 1987 Abans acquired the agency and distribution rights for Goldstar, a little known South Korean manufacturer of black and white television sets, and small electrical appliances. The fortunes of Abans became entwined with that of Goldstar. Few would recall Goldstar, but everyone knows the name it rebranded to in 1996: LG. As LG, the brand enjoyed a resurgence and growing popularity in Sri Lanka. Today Abans is an agent for several global brands including Apple.

Abans opened its flagship showroom in Colpetty in 1998 and started a chain of McDonald’s outlets as a franchisee for the global fast-food giant. Abans has ventured into fashion retail with popular brands like Hugo Boss and Under Armour and a vehicle dealership becoming the authorised agent for Hyundai Motor Company, a South Korean Multinational. The company owned a non-bank lending institution called Abans Finance which was not so successful and later sold.

In 2018, on the 50th anniversary of the corner shop’s opening, Abans ventured into real estate with an ambitious project. In a joint venture with the Next Story Group of Singapore, Abans opened Sri Lanka’s first international shopping mall, the Colombo City Centre, a mixed development project including a 164-room hotel and 192-unit luxury apartment complex. The $180 million 47-storeyed building overlooking the Beira Lake in downtown Colombo with a stunning view of the Indian Ocean, has 200,000 square feet five-floor shopping mall and includes high-end restaurants, a 700 seat food court, and a six-screen multiplex cinema.

It may not be entirely fair to compare Abans favourably against Singer in terms of growth. Despite Singer’s head start, the economic reforms of the late 1970s in many ways levelled the playing field. Both have benefitted from economic growth (particularly, since the civil conflict ended in 2009) and rising income levels, as much as they are both subject to the same accommodative or restrictive import policies, failing government, inflation, and credit cycles.

CONVERGENCE

Now for the nuts and bolts of this piece which comes from a December 2020 Fitch report titled; Spotlight: Singer Versus Abans – Leverage May Diverge in the Next 12-18 Months.

Fitch identifies Singer as the clear market leader for consumer-durables with a better risk profile due to an extensive product portfolio, larger local manufacturing capacity and a strong finance subsidiary in Singer Finance Plc. Abans, on the other hand, enjoys lower leverage which counter-weighs its higher business risk, Fitch says.

Demand for consumer durables will likely be low in 2021 due to falling household incomes as unemployment rises amidst a weakening economic outlook, the rating agency says.

In the first two quarters to end September 2020 of the 2020/21 financial year, Singer reported 15% revenue growth while Abans’ fell 10%. “This was better than our expectation of a 40% drop for both, as retailers benefitted from higher demand for IT products and the absence of a grey market due to the ongoing import ban. However, white goods sales, which contribute most to revenue, fell by 10-15% year-on-year,” Fitch noted.

Singer has a wider and more affordable product range that will help it sustain revenue in 2021. The ongoing ban on imports will have less of an impact on Singer because of its larger local manufacturing capacity. Abans’ dependence on LG, which accounts for half of all sales, limits its ability to maintain a more defensive product portfolio with different price points.

Fitch believes that both Abans and Singer can secure credit lines from banks to meet liquidity requirements, while extended credit periods from global suppliers will also help cashflows. “We expect domestic banks to largely support Singer and Abans, due to their strong market position and the temporary nature of the downturn,” Fitch contends.

Singer’s credit commitments maturing in 2021 amount to Rs3 billion, but it can easily refinance these because it has Rs17 billion worth of unused credit lines at its disposal. Abans had uncommitted unutilised credit lines of Rs6.5 billion to fund any shortfall. “We do not believe banks will reduce these lines, given Abans’ strong market position,” Fitch said.

Singer’s revenue has grown faster than Abans since 2017 helped by a wider range of local and international brands and more diversity across price points. “We believe Singer’s sales will rise 10% in FY21 compared with Abans’ 10% decline, indicating the downturn will have less of an effect on Singer,” Fitch says.

Both companies have similar exposure to consumer electronics, white goods, and IT-related products which account for 30-35% of revenue. Due to faster replacement cycles, sales will not be impacted during the downturn, however, these products offer thin margins.

Singer is the exclusive agent for Huawei and a shared agent for Samsung. Both Huawei and Samsung enjoy a 25% and 43% share of Sri Lanka’s mobile device market respectively, according to Fitch. Abans is the agent for Apple, Oppo and Vivo which have a combined 20% market share. If the US tightens the screws on Huawei, Singer can diversify sales to other brands, but this could take a year or two, Fitch estimates.

In terms of coverage, Singer is ahead, slightly, with 430 branded stores and over 1,000 distribution points compared to Abans’ 380 own-stores and 850 dealerships. Singer generates 30% of its revenue from locally manufactured white goods, large electrical appliances such as air conditioners, refrigerators and washing machines which are usually white in colour, Fitch notes.

Singer’s local products mitigate the foreign-currency exposure inherent in consumer-durable imports and support wider profit margins. The import ban to protect foreign currency reserves does not cover raw materials and parts, so Singer will benefit from that too, ensuring a better supply than Abans and other retailers in the consumer-durables market. Abans’ locally manufactured goods contribute just 15% to sales.

Both Abans and Singer are expected to generate 30-40% of revenues from in-house hire purchase schemes that are typically 12-month instalment plans. These schemes have made products more affordable and help retailers pass on cost increases and widen margins through interest income, Fitch observes. Both companies have managed their hire purchase books prudently and collections are robust.

Abans has better margin improvements and is gaining on Singer, and will converge at 9.5% around 2023, Fitch forecasts

Abans’ $184 million investment in Colombo City Centre will have bearing on its rating. The project was due to be completed by end 2020 but will now be delayed for about six to 12 months.

“The project needs to collect receivables from pre-sold apartments and sell part of the remaining apartments to fund the rest of the construction cost,” Fitch says. “However, the remaining cost is mainly for the hotel, which Abans has the flexibility to delay because the hotel’s cash flows will not be a major contributor towards servicing the project debt in the medium term”.

Fitch expects demand for the apartment units (average price $375,000) will be soft given the pandemic-led economic downturn, which means Abans will have to negotiate repayment extensions with its bankers. “Abans has fully paid up its equity contribution towards the project, but the inability to sell all the apartments by end-March 2022 and any shortfall in interest payments amid the weak economic environment could result in further capital calls on Abans, and this could raise leverage”.

The sale of its subsidiary Abans Finance for Rs1 billion negates the need for Abans to raise further capital to support it. Had Abans not sold its non-bank finance company, it would have had to raise Rs850 million to meet minimum regulatory capital requirements, thus raising Abans’ leverage. Singer Finance, on the other hand, has strong buffers against minimum capital requirements and does not depend on the parent.

Fitch expects Singer will maintain its dominance over Abans in the years ahead, but Abans will have better margins. According to Fitch, Abans’ leverage, defined as net lease-adjusted debt to EBITDAR, improved to 4.6x by FYE20 from 7.0x in FYE17 due to improved profitability and efficient working capital management. In contrast, Singer’s leverage has risen to above 6.0x compared to historical levels of 5.0x. The weakening was due to contracting margins and increased working-capital requirements at Singer. Abans could maintain leverage around 1.0 times lower than Singer, provided the economy and consumer spending recovers as expected.

Abans has better margin improvements and is gaining on Singer, and will converge at 9.5% around 2023, Fitch forecasts (see Chart 2). It says Abans is driven by cost-rationalisation and has leaner selling-cost structure and will benefit from a gradual consumer spending recovery, provided the Colombo City Centre performs as expected.