Fitch Affirms Siam Makro#s Rating at #A(tha)#; Outlook Stable

Stocks and Financial Services Press Releases Thursday November 7, 2019 11:08
Bangkok--7 Nov--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Siam Makro Public Company Limited's (Makro) National Long-Term Rating at 'A(tha)' with a Stable Outlook.
KEY RATING DRIVERS

Leading Food Wholesaler: Makro has been the sole operator in Thailand's modern food-wholesale market for over 30 years. Unlike other large food retailers, its target customers are traditional retailers, distributors, hotels, restaurants and catering operators (HORECA operators), and institutional customers, which represent 70%-75% of its total revenue. "Makro" is also an internationally known cash-and-carry wholesale brand in a number of emerging markets. Parent CP ALL Public Company Limited (A(tha)/Stable), which owns 93% of the company, was granted the rights to use the brand in 11 Asian countries by SHV Group of the Netherlands, Makro's former major shareholder. This supports Makro's medium-term plan to expand in ASEAN. Makro also owns several house brands.

Slower Overseas Expansion: Makro's slower overseas expansion plan should support greater rating headroom over the medium term. Fitch expects Makro's funds from operations (FFO) adjusted net leverage to rise to about 2.0x by 2021 (last 12 months to end-June 2019: 1.7x), which is lower than the 2.0x-2.5x previously projected. The slower expansion should reduce its total capex by 18%-19% to THB21 billion over 2019-2021 while there is no significant change in its domestic store expansion. Makro cut back on its overseas expansion due to difficulties in securing good locations and it plans to focus on improving the productivity and efficiency of existing stores.

Moderate Revenue Growth: Fitch expects Makro's revenue to increase by 9%-10% a year in 2019-2021, supported by recovery in domestic sales and increasing contribution from overseas stores. Makro's revenue rose by about 10% in 1H19, driven by a recovery in prices of major food items, the implementation of its omni-channel strategy, and government stimulus for traditional food retailers - a major group of Makro's customers. Makro launched its omni-channel services in late 2018, mainly to smoothen the purchasing process for its institutional customers, including online orders and pick-up services, credit sales and delivery.

Concentration Risk: Makro, as a wholesaler, has higher customer-concentration risk than other companies in the food-retail industry. In addition, the revenue contribution from one of Makro's key customer bases - traditional, independent retailers - is likely to shrink over the long term as consumers continue to transition towards modern retail formats such as supermarkets and mini-markets. However, Makro's strategy to tap more HORECA operators as well as its overseas expansion should mitigate this risk.

Moderate Linkages with Parent: Makro's 'A(tha)' National Long-Term Rating is driven by its Standalone Credit Profile. Nonetheless, Fitch considers the linkages between Makro and CP ALL to be moderate, stemming from moderate operational linkages between the two, and Makro's strategic importance to CP ALL. Therefore, if Makro's standalone profile is lowered, Fitch will apply a one-notch uplift to reflect the moderate linkages, provided the linkages between Makro and CP ALL remain intact.

DERIVATION SUMMARY

We expect Makro to account for around 20%-25% of CP ALL's consolidated EBITDA over the medium term. Makro's business profile is weaker than that of CP ALL due to its smaller operating scale and higher counterparty concentration risk. Makro has fewer stores and customers than CP ALL. However, Makro's leverage is significantly lower than that of CP ALL, which counterbalances its weaker business profile, resulting in both being rated the same.

The Siam Cement Public Company Limited (SCC, A+(tha)/Stable) is rated one-notch higher than Makro due to its more diversified operating cash flows and larger operating scale, which mitigate SCC's exposure to the higher demand cyclicality of its end-markets, commodity price fluctuations, and its slightly higher leverage.

We consider Makro's business risk to be similar to that of Siam City Cement Public Company Limited (SCCC, A(tha)/Negative). SCCC is exposed to end-market cyclicality and commodity-price risks, and its cash flows are concentrated in cement production. However SCCC benefits from greater geographic diversification than Makro, resulting in both being rated the same. However, the Negative Outlook on SCCC's 'A(tha)' rating reflects the risks that the company may not be able to deleverage to a level that is more appropriate for its rating over the next few years.

KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
  • Five domestic new large-format stores to open in 2019, eight in 2020 and five in 2021;
  • Three new overseas stores in 2019, and continued expansion overseas (in Cambodia, India, China and Myanmar) with capex of about THB2.6 billion in 2020 and about THB1.6 billion in 2021;
  • Total revenue growth of 9%-10% a year in 2019-2021;
  • A decline in EBITDAR margin to 5.4%-5.8% in 2019-2021;
  • Total capex of THB5.5 billion-5.6 billion in 2019 and THB7.5 billion-8 billion a year in 2020-2021, including capex for overseas expansion.
RATING SENSITIVITIES
  • Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • Positive rating action on CP ALL provided linkages between Makro and CP ALL remain intact.
  • Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • Negative rating action on CP ALL provided linkages between Makro and CP ALL remain intact.
  • For Makro's Standalone Credit Profile, the following developments may individually, or collectively, lead to negative action:
  • An aggressive debt-funded investment leading to an increase in FFO adjusted net leverage to above 2.5x on a sustained basis
  • Deterioration in EBITDAR margin to below 4.5% on a sustained basis
Nonetheless, a one-notch drop in Makro's Standalone Credit Profile may not affect its final rating as Fitch will apply a one-notch uplift provided the linkages between Makro and CP ALL remain intact.
LIQUIDITY AND DEBT STRUCTURE

Refinancing Ability Supports Liquidity: Makro had total debt of THB10.7 billion at end-June 2019. About THB3.7 billion will be due within one year. Liquidity is mainly supported by the company's cash balance of THB3.5 billion, its strong cash flow from operations as well as its relationship with banks with large uncommitted revolving facilities of about THB10.5 billion, and strong access to debt markets.

Additional information is available on www.fitchratings.com

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