The rating action follows the Outlook revision on Makro's parent, CP ALL Public Company Limited, to Negative from Stable, and the affirmation of CP ALL's 'A-(tha)' National Long-Term Rating. Makro's rating is based on the consolidated profile of its weaker parent due to moderate operational linkages, as defined in our Parent and Subsidiary Rating Linkage Criteria.
The Negative Outlook reflects CP ALL's slow deleveraging pace amid Thailand's Covid-19 pandemic-related lockdown, which was in place for most of 3Q21. This curbed store traffic and a sales recovery, and we believe there is a risk that further movement restrictions and a weak recovery in operating cash flow could further delay deleveraging in the next 12-18 months.
Makro's rating continues to reflect CP ALL's dominant market position in Thailand's food retail industry, where it has a 60% share of the country's convenience stores.
KEY RATING DRIVERS
Deleveraging Challenge at CP ALL: The Negative Outlook reflects the challenge CP ALL faces in deleveraging during 2021-2022. The resurgence of Covid-19 cases during 1H21, followed by the re-imposition of full lockdown measures in 3Q21, has disrupted our expectations of an earnings recovery at CP ALL and will delay its deleveraging by a further 18-24 months than what we previously expected.
Ratings to be Reassessed After Acquisition: CP ALL announced in August 2021 its intention to acquire a controlling stake in C.P. Retail Development Company Limited, which fully owns the operator of Lotus stores in Thailand and Malaysia. The transaction will transfer the operation of the Lotus stores to Makro, to be followed by a public offering of shares in Makro. CP ALL expects to complete the transaction in 2021, however, we believe the timing of the share issue is subject to market uncertainty and execution risk.
We expect the proposed transfer of the Lotus business to Makro to significantly strengthen its business profile, as it will double its sales, EBITDA and the number of stores. Customer concentration risk should also significantly decrease, as its customer base will extend to households and individual customers and its overseas contribution should increase to 10%-15% of total revenue, from less than 5%. However, the impact on Makro's financial leverage will depend on the use of proceeds from its proposed share issuance, the details of which are currently unavailable.
Makro Less-Affected by Pandemic: Makro's wholesale business has been less affected by the pandemic than its domestic peers. We expect Makro's revenue to remain flat in 2021, against falling revenue growth at other leading food retail stores. We attribute Makro's superior performance to its omni-channel sales as well as a larger portion of fresh food and groceries in its product mix.
Large Leverage Headroom: Barring the acquisition of Lotus, we expect Makro's FFO adjusted net leverage to remain below 1x over the next two years due to low capex after the company slowed the pace of organic expansion amid the weak operating environment. Makro's overseas expansion also slowed in 2021 due to restrictions on overseas travel.
Leading Food Wholesaler: Makro has been a leading operator in Thailand's modern food-wholesale market for over 30 years. Its target customers, which represent 70%-75% of its total revenue, include traditional retailers, distributors, hotel, restaurant and catering (HORECA) operators and institutional customers. Makro is also a known cash-and-carry wholesale brand in a number of emerging markets.
Concentration Risk: Makro, as a wholesaler, has higher customer concentration risk than food retailers that service consumers directly. The revenue contribution from traditional, independent retailers - a key customer segment - is also likely to shrink as consumers turn towards modern retail formats, such as supermarkets and mini-markets. However, Makro's strategy to tap more HORECA operators and its overseas expansion should mitigate this risk over the long term.
DERIVATION SUMMARY
Makro's National Long-Term Rating is driven by CP ALL's consolidated profile due to its moderate linkage with its parent. CP ALL has a strong domestic market position as Thailand's largest food retailer, with a significantly stronger competitive position than its closest rival. CP ALL's business profile is therefore comparable with that of other industry leaders, such as The Siam Cement Public Company Limited (SCC, A+(tha)/Stable), Thailand's largest cement and downstream petrochemicals producer. SCC has a larger operating scale and better diversification, but is exposed to cyclical demand patterns and commodity price fluctuations. CP ALL is rated two notches below SCC due to its significantly higher financial leverage.
CP ALL's business profile is stronger than that of SCG Packaging Public Company Limited (SCGP, A+(tha)/Stable; Standalone Credit Profile (SCP), a(tha)), a leading producer of paper-based packaging in south-east Asia. This is due to CP ALL's stronger market position and larger operating scale, though SCGP has a greater diversification by end users and geography. CP ALL's financial leverage is, nonetheless, significantly higher than that at SCGP and it is therefore rated one-notch below SCGP's SCP.
CP ALL is rated at the same level as the SCP of Global Power Synergy Public Company Limited (GSPC, A+(tha)/Stable; SCP, a-(tha)), which ranks among Thailand's top three largest private power-generation companies. In term of business profile, GPSC has strong cash flow visibility, supported by long-term power-purchase agreements with the Electricity Generating Authority of Thailand. This eliminates volume risk on the majority of its output. CP ALL's strong competitive position and the non-discretionary nature of most of its cash flow makes up for the lack of contractual revenue visibility. We expect similar financial leverage at both companies and therefore rate CP ALL at the same level as GPSC's SCP.
Makro has a stronger credit profile than its parent, CP ALL, as reflected in its SCP of 'a(tha)'. Makro's significantly lower leverage offsets its higher customer concentration and its revenue has been less affected by the pandemic-led downturn, despite a smaller operating scale.
We regard Makro's business risk to be similar to that of Siam City Cement Public Company Limited (SCCC, A(tha)/Stable). SCCC is exposed to end-market cyclicality and commodity-price risk, and its cash flow is concentrated in cement production. However, it benefits from greater geographic diversification than Makro, resulting in Makro's SCP and SCCC being rated at the same level.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Our projections do not incorporate the proposed acquisition of Lotus by Makro and the planned public offer.
- Revenue growth of less than 1% in 2021, increasing to 4%-5% a year in 2022 and 8%-9% in 2023.
- EBITDAR margin to decrease to about 5% in 2021 and to improve to 5.3%-5.5% in 2022-2023.
- Capex of THB2.4 billion in 2021, due to continued travel restrictions, and about THB6.0 billion a year in 2022 and THB7.0 billion-7.2 billion in 2023, including for overseas expansion.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Positive rating action on CP ALL, provided linkages between Makro and CP ALL remain intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Negative rating action on CP ALL, provided linkages between Makro and CP ALL remain intact.
Makro's SCP may be revised down upon the following developments:
- An aggressive debt-funded investment that results in FFO adjusted net leverage remaining above 2.5x.
- Deterioration in the EBITDAR margin to below 4.5% for a sustained period.
For the ratings on CP ALL, the following sensitivities were outlined by Fitch in the rating action
commentary published on 23 September 2021:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- For the Outlook to be revised to Stable, FFO adjusted net leverage to decrease to 6.0x by 2022;
- For an upgrade, sustained FFO adjusted net leverage below 5.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- FFO adjusted net leverage sustained above 6.0x beyond 2022;
- Sustained deterioration in the EBITDAR margin to below 7.5%
LIQUIDITY AND DEBT STRUCTURE
Healthy Liquidity: Makro had total debt of THB7.6 billion at end-June 2021, of which about THB2.6 billion was due within one year. Liquidity is supported by the company's cash balance of THB7.4 billion, strong cash flow from operations, its relationship with banks and strong access to debt markets.
ISSUER PROFILE
Makro is a leading modern-trade wholesaler in Thailand, mainly serving retailers, the HORECA segment and other service operators. Makro had 138 stores in Thailand and seven stores overseas, located in Cambodia, India, China and Myanmar, at end-June 2021.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The ratings on Makro are linked to those of its parent, CP ALL, under Fitch's Parent and Subsidiary Linkage Rating Criteria.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings