The revision of the Outlook reflects Fitch's view of diminishing risks to CP ALL's ability to deleverage in the next 12-18 months to a level commensurate with its rating, following improvement in the operating environment. The prospects of a recovery in CP ALL's cash flows have improved in light of Thailand's easing Covid-19 curbs and the re-opening of international borders in February 2022. CP ALL's rating is supported by its solid market position as Thailand's largest food retailer with a leading share in the key segments of convenience stores, hypermarkets and modern wholesale.
Fitch has chosen to withdraw the ratings on CP ALL for commercial reasons.
KEY RATING DRIVERS
Revenue Rebound Aids Deleveraging: Fitch expects CP ALL's FFO net adjusted leverage to fall to about 6.5x by 2022 and below 6.0x by 2023 (2021: 8.1x) on a strong revenue rebound due to easing Covid-19 curbs and rising vaccination rates. Deleveraging will also be helped by consolidation of a full year of cash flows from Lotus's stores in Thailand and Malaysia, which will offset debt used to fund the acquisition and related renovation and rebranding expenses. The same-store sales of subsidiary Siam Makro Public Company Limited and CP ALL's 7-Eleven stores rose in 4Q21, and we expect this trend to continue.
Tourism Recovery Benefits Makro: Fitch expects CP ALL's consolidated revenue to rise by around 40% in 2022, mainly driven by the full-year consolidation of Lotus's. Revenue growth is likely to slow to around 10% a year in 2023 and 2024. Excluding Lotus's, CP ALL's consolidated revenue should increase by 9%-10% a year in 2022-2023, driven in part by the return of hotel, restaurant and catering operator (HORECA) customers that drive Makro's revenues. Makro accounts for about 30% of CP ALL's consolidated revenues.
We expect some pressure on Makro's online channel-sales as pandemic fears ease, but this should be more than made up for by growth in sales via physical stores. Makro's EBITDAR margin is likely to increase by around 200bp following the inclusion of the higher-margin business-to-consumer operation of Lotus's. However, we expect margin improvement in the first 12-18 months after the acquisition to be tempered by expenses related to system integration and rebranding.
Structural Changes to Demand: We forecast CP ALL's convenience-store revenue to gradually reach pre-pandemic levels over the next 18-24 months, with structural changes in consumer behavior likely to weigh on the recovery. Consumer demand has shifted towards food delivery and bulk purchases of daily use items from hypermarkets or cash-and-carry stores during the last two years amid the pandemic.
Margins to Expand: We expect CP ALL's EBITDAR margin to continue improving in 2022-2023 to 7.0%-7.5% from 6.9% in 4Q21. We think CP ALL will be able to pass on some portion of rising input costs to customers and suppliers. The company should benefit from increased cost efficiencies from higher sales at reopened stores, especially in tourism-dependent areas of the country.
Strengthening Market Position: Fitch expects CP ALL's competitive position to improve as a result of the acquisition of Lotus's and the group's business restructuring over the past 12-18 months. This will widen the group's product and service offering, and diversify its store formats. CP ALL's 7-Eleven has more than 60% share of the convenience stores in Thailand. Makro is a leading operator in the modern food-wholesale market, while Lotus's is a leading operator in hypermarkets.
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 development. Its cash flows should also benefit from sharing the group's ecosystem and the rationalisation of its aggregate store network of over 15,000 outlets.
Hybrid Securities: CP ALL's perpetual debentures are rated two notches below the company's National Long-Term Rating to reflect their deep subordination. The perpetual debentures qualify for 50% equity credit under Fitch's criteria as it has junior subordination priority, a deemed effective maturity of more than five years and the issuer has the right to defer coupon payments. Equity credit is limited to 50% as the coupon deferral is cumulative and has to be settled in cash.
DERIVATION SUMMARY
CP ALL has a strong domestic market position as Thailand's largest food retailer, with the largest market share in key store formats. 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 slightly larger EBITDA scale and better diversification, but is exposed to more cyclical demand and commodity price fluctuations. Nonetheless, CP ALL is rated two notches below SCC due to its significantly higher leverage.
CP ALL's business profile is slightly weaker than that of Global Power Synergy Public Company Limited (GSPC, A+(tha)/Stable; SCP, a-(tha)), which is a leading private power-generation companies in Thailand. This is because GPSC has strong cash flow visibility, supported by long-term power-purchase agreements with the Electricity Generating Authority of Thailand. However, GPSC's leverage should be higher than CP ALL's over the next two to three years. Therefore, we rate CP ALL at the same level as GPSC's standalone credit profile.
CP ALL has a stronger business risk profile than Bangkok Aviation Fuel Services Public Company Limited (BAFS, BBB+(tha)/Negative) and is therefore rated one notch higher. BAFS is the sole operator of the fuel depot and hydrant system and a major fuelling service provider at Thailand's two largest airports. Its cash flows were suffered more during the pandemic than that of CP ALL. Both companies should have similar leverage over the medium term. BAFS' Negative Outlook reflects risks that the company may not be able to deleverage to a level commensurate with its current rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Total revenue growth of 38%-39% in 2022, driven by first full-year consolidation of Lotus's. Revenue to increase by 9%-10% in 2023 and 7%-8% in 2024.
- EBITDAR margin to increase to 9.0%-9.5% in 2022-2023 and 9.5%-10% in 2024, supported by higher margin from Makro after consolidating Lotus's and improving profitability of 7-Eleven stores from sales recovery.
- Total capex of around THB40 billion in 2022, and around THB35 billion a year in 2023-2024, mainly to expand the number of 7-Eleven, Makro and Lotus's stores, as well as renovation of Lotus's stores and rebranding.
RATING SENSITIVITIES
No longer relevant as the ratings have been withdrawn.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: CP ALL's liquidity is supported by its cash balance of THB97 billion as of end-December 2021, which is more than adequate to cover its THB62.1 billion interest-bearing borrowings due over the 12 months to end-2022. The large cash balance includes the proceeds of THB33 billion from Makro's public offering of shares in late December 2021, which will be used in part to repay debt incurred from the acquisition of Lotus's.
CP ALL's liquidity is further supported by its robust free cash flow generation and strong access to debt markets. It had total interest-bearing debt of THB393.9 billion as of end 2021, including perpetual bonds of THB20 billion and debt at the Lotus's level of about THB128 billion. About 62% of the total debt comprises Thai baht bonds, of which about 17% is secured by Makro shares, held by CP ALL.
ISSUER PROFILE
CP ALL operates 7-Eleven stores, the largest convenience store chain in Thailand. CP ALL also held 59.9% of Makro, the country's leading modern-trade wholesaler. In December 2020, CP ALL acquired Tesco's business in Thailand and Malaysia, and renamed it Lotus's.
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.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings