Fitch Affirms CP ALL#s Ratings at #A(tha)#; OutlookStable

Stocks and Financial Services Press Releases Wednesday November 14, 2018 12:36
Bangkok--14 Nov--Fitch Ratings

Fitch Ratings (Thailand) Limited has affirmed retailer CP ALL Public Company Limited's National Long-Term Rating at 'A(tha)' with a Stable Outlook. Fitch has also affirmed the National Long-Term Rating of its secured bonds at 'A(tha)', the National Long-Term Rating of its unsecured bonds at 'A-(tha)' and the National Long-Term Rating of its subordinated perpetual debentures at 'BBB(tha)'. Simultaneously, Fitch has affirmed the National Short-Term Rating of CP ALL at 'F1(tha)'.

KEY RATING DRIVERS

Expansion Keeps Leverage Elevated: We expect the aggressive expansion of CP ALL's subsidiary, Siam Makro Public Company Limited (Makro; A(tha)/Stable), to increase the group's total capex to THB23 billion-24 billion a year over 2019-2021 from our earlier forecast of THB18 billion-20 billion a year. CP ALL also plans to open about 700 7-Eleven stores a year in addition to supporting services, a level of investment consistent with 2017 but higher than our previous forecasts. The additional capex, and the drag on Makro's earnings from losses on the overseas expansion will result in a neutral free cash flow (FCF) margin for CP ALL until end-2020 when FCF margin will be around 1.5%. We expect CP ALL's leverage, measured by funds from operations (FFO) to net adjusted debt , to decrease to 4.3x by end-2018 and be in the range of 3.5x-4.0x over 2019-2020. However, CP ALL's financial leverage may fall faster than our expectations if it is able to sell more Makro shares and use the proceeds to repay debt.

Moderate Sales Growth: Fitch expects CP ALL's consolidated sales to rise by 7%-8% in 2018 and 9%-10% a year in 2019-2020. The expected acceleration in sales growth over the medium term is likely to be driven by contribution from Makro's overseas stores. On the other hand, Fitch expects 7-Eleven's same-store sales to rise 2%-3% a year over the next two to three years, slower than our 3%-4% forecast previously, as the company's new stores are likely to cannibalise some of the business from its existing stores amid a slower-than-anticipated recovery in private consumption. CP ALL continues to benefit from the defensive nature of its business, which sells daily essentials with low volatility in revenue and margins.

Leading Market Position: We believe CP ALL is likely to maintain its leading position despite increasing competition. The company has more than 10,000 stores nationwide and more than 60% of the convenience-store market in Thailand, far ahead of its closest rival. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan. CP ALL's strong market position is supported by its large network and coverage area, along with well-established functions such as logistics, supply and maintenance, and staff training and development, giving the company better bargaining power over suppliers. Competition has however been building in the segment, with other large food retailers expanding more of their small-format stores in communities and petrol stations to achieve a larger scale or provide more services to meet consumer demand.

Secured Debt to Decrease: Fitch considers prior ranking debt that is 2.0x-2.5x more than EBITDA as the threshold above which senior unsecured creditors' interests are materially subordinated to the interests of secured or prior ranking creditors. Therefore we rate CP ALL's senior unsecured debt one notch below the company's 'A(tha)' National Long-Term Rating. The ratings of its perpetual bonds are three notches below, reflecting the subordinated nature of the instruments. Fitch expects CP ALL's prior ranking debt to gradually decrease, allowing its ratio to EBITDA to fall below the 2.0x-2.5x threshold, which could lead to an upgrade of its senior unsecured bonds.

DERIVATION SUMMARY

CP ALL has a strong domestic market position as the largest convenience-store chain in Thailand and is therefore compared with other industry leaders such as The Siam Cement Public Company Limited (SCC, A+(tha)/Stable), the largest cement and downstream petrochemicals producer in Thailand, and Thai Oil Public Company Limited (TOP, AA-(tha)/Stable), the largest oil refiner in Thailand. CP ALL has a stronger competitive position, with a market share that is significantly larger than that of its closest rival. CP ALL also has lower business risk than SCC and TOP, which are exposed to cyclical demand for their products and fluctuations in commodity prices. This is reflected in CP ALL's more stable EBITDAR margin.

CP ALL's financial leverage is, however, significantly higher than both peers due to the debt incurred from the leveraged buyout of Makro in 2013. This outweighs the lower business risk of CP ALL and therefore SCC and TOP are rated higher than CP ALL. TOP's credit rating also benefits from its linkage to its parent, PTT Public Company Limited (BBB+/Stable).

On the other hand, CP ALL has a significantly larger EBITDA and stronger business profile than Siam City Cement Public Company Limited (SCCC, A(tha)/Negative), the second-largest cement producer in Thailand. This more than compensates for CP ALL's higher financial leverage. Both are, therefore, rated at the same level. SCCC is nonetheless facing a challenge in deleveraging to the level more consistent with its current rating, which results in the Negative Outlook.

KEY ASSUMPTIONS
  • Revenue growth of 7%-8% in 2018 and 9%-10% per year in 2019-2020;
  • EBITDAR margin of about 10% in 2018-2020;
  • 700 new 7-Eleven stores per year in 2018-2020, seven new smaller-format Makro stores a year in Thailand in 2018-2020;
  • Three Makro stores overseas in 2018 and continued expansion overseas with capex of about THB3.0 billion -3.5 billion a year in 2019-2020;
  • Total capex of THB19 billion-20 billion in 2018 and about THB23 billion a year in 2019-2020, including capex for Makro's overseas expansion
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • FFO adjusted net leverage at less than 3.5x on a sustained basis (end-June 2018: 4.5x)
Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • FFO adjusted net leverage above 4.5x on a sustained basis
  • Deterioration in EBITDAR margin to below 7.5% on a sustained basis (1H18: 10.2%)
LIQUIDITY AND DEBT STRUCTURE

Strong Liquidity: CP ALL's liquidity is mainly supported by its cash balance of THB32 billion at end-June 2018, its robust cash flow generation as well as its strong access to debt capital markets. CP ALL had total interest-bearing debt of THB186 billion as of end-June 2018, including perpetual bonds. About 15.5% will be due in the 12 months from end-June 2018. About 93% of total debt is in Thai baht bonds, out of which about 57% is secured by Makro shares.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
The outstanding amount of subordinated perpetual debentures is based on the face value due at maturity, instead of net of issuance cost shown in the audited financial statements.
Additional information is available on www.fitchratings.com

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