The rating actions on Makro follow the revision of parent CP ALL Public Company Limited's Outlook to Stable from Negative, and the affirmation of its National Long-Term Rating at 'A-(tha)'. Makro's rating is based on the consolidated profile of CP ALL due to our assessment of 'Open' legal ring-fencing and 'Open' access and control from its parent under Fitch's Parent and Subsidiary Linkage Rating Criteria.
We regard Makro as stronger than its parent, which drives its Standalone Credit Profile (SCP) of 'a(tha)'. This is underpinned by its enhanced business profile following the acquisition of a 100% stake in CP Retail Development Company Limited (CPRD), which owns a 100% stake in Lotus's, a leading business-to-consumer (B2C) food retailer in Thailand and Malaysia. We believe the stronger business profile could compensate for its rising leverage from higher debt.
Fitch has withdrawn all the ratings of Makro due to commercial reasons.
KEY RATING DRIVERS
Ratings Driven by Parent: Fitch believes the restructuring of CP ALL group's retail business will not significantly change the parent's influence over Makro, although CP ALL's stake in Makro has decreased to 60% from 93%. Makro's minority shareholders are mainly related companies in the CP group, with a combined shareholding of 26.5%. Makro is rated the same as CP ALL's consolidated credit profile due to our 'Open' assessment of the legal ring-fencing between Makro and CP ALL, and the access and control factor.
'Open' Legal Ring-Fencing: Our assessment is underpinned by our view of 'Open' self-imposed conditions in light of the absence of limitations on dividends and other intercompany flows between the two companies. We also regard regulatory ring-fencing as 'Open' due to the non-existence of externally imposed ring-fencing as both companies are not regulated entities.
'Open' Access and Control: We believe CP ALL has 'Open' effective control over Makro as it is Makro's single largest shareholder with no other significant minority investors. We assess Makro's funding and cash management policy as 'Porous' despite the two entities having separate funding arrangements.
This is because we think CP ALL has significant influence over Makro's long-term funding arrangements, reflected in the recent group restructuring where the Lotus's business was transferred from an associated company at the parent level to a fully owned subsidiary of Makro, which also provided a guarantee on short-term debt related to the acquisition.
Enhanced Operating Scale: We forecast Makro's EBITDA to nearly double to around THB30 billion in 2022 after its acquisition of Lotus's. Makro is now the largest retailer in large-format stores in Thailand, both in term of sales and store network. Its overseas network now includes Malaysia, in addition to Cambodia, India, China and Myanmar, improving its geographical diversity, with overseas revenue jumping to 10%-15% in 2022-2023 from less than 5% in 2020. Makro should also benefit from sharing its ecosystem with Lotus's.
Improved Customer Diversification: Makro's customers are mainly food and non-food retailers, hotel, restaurant and catering (HORECA) operators and other institutional customers, while Lotus's operates hypermarkets, supermarkets and mini-supermarkets that mainly serve households and individual customers. This improves the customer concentration in Makro's wholesale business.
Higher Leverage, Steady SCP: Fitch expects Makro's FFO adjusted net leverage to rise to 3.0x-4.0x over the medium term, from less than 1.0x in 2020, due to higher debt from the Lotus's acquisition. However, there is no change in Makro's 'a(tha)' SCP as we believe its stronger business profile counterbalances the higher leverage.
Steady Revenue Growth: Fitch expects Makro's revenue from the wholesale business to grow by about 8% in 2022 and 10% in 2023, supported by recovery in the HORECA sector after Thailand reopened its borders on 1 February 2022 and a resumption in store expansion. Makro's wholesale business has proven to be more resilient during the pandemic than that of its domestic peers, which we attribute to its omni-channel sales as well as a larger portion of fresh food and groceries in its product mix.
Lotus's Business to Recover: Fitch expects Lotus's business to recover with sales growth of 6%-7% in 2022 and about 9% in 2023. This will be underpinned by a rebound in the domestic economy as pandemic-led headwinds ease and Lotus's expands its stores. Lotus's EBITDA margin, including its mall rental income, is likely to hover around 8%-9% over the medium term, which is higher than the 5%-5.5% margin from Makro's wholesale business. Lotus's plans to open four hypermarkets, nine supermarkets and 230 mini-markets in Thailand, and 13 supermarkets in Malaysia in 2022.
DERIVATION SUMMARY
Makro's National Long-Term Rating is driven by CP ALL's consolidated profile. CP ALL has a strong domestic market position as Thailand's largest food retailer, with the biggest share in all 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 petrochemical 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 company 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 that of CP ALL over the medium term. Therefore, we rate CP ALL at the same level as GPSC's SCP.
CP ALL has a stronger business risk profile than Bangkok Aviation Fuel Services 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 affected to a greater degree by the pandemic than CP ALL. Both companies should have similar leverage over the medium term. BAFS's Negative Outlook reflects risks that the company may not be able to deleverage to a level commensurate with its current rating.
Makro has a stronger credit profile than its parent, CP ALL, reflected in its SCP of 'a(tha)'. Makro's significantly lower leverage offsets its smaller operating scale and weaker market position compared with CP ALL.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Total revenue growth of about 73% in 2022, driven by the first full-year consolidation of Lotus's, 9%-10% in 2023 and 7%-8% in 2024.
- EBITDAR margin to increase to about 8% in 2022, supported by the consolidation of the higher margin business of Lotus's, and remaining at about this level in 2023-2024.
- Capex of THB28.6 billion in 2022, THB22 billion in 2023 and THB18 billion-THB19 billion in 2024, mainly for store expansion of both Makro and Lotus's, while the amount in 2022-2023 includes store renovation and rebranding capex.
RATING SENSITIVITIES
No longer relevant as the ratings have been withdrawn.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Makro (including Lotus's) had total debt of THB136 billion at end-December 2021, of which about THB31.2 billion will be due within 2022, mainly short-term debt at the CPRD level. Makro's liquidity is mainly supported by its large cash balance and liquid investments of THB68.5 billion at end-December 2021. The large cash balance included the THB33 billion proceeds from Makro's public offering of shares in late December 2021, part of which the company will use to repay debt.
Makro's large cash balance is sufficient to fund its near-term maturities and our estimate of negative free cash flow of THB11 billion in 2022.
ISSUER PROFILE
Makro, a leading modern-trade wholesaler in Thailand, serves retailers, the HORECA segment and other service operators. Makro had 142 stores in Thailand and seven stores in Cambodia, India, China and Myanmar at end-December 2021. Makro acquired Lotus's operations in October 2021. Lotus's has 2,618 stores in Thailand and 62 in Malaysia.
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
Makro's ratings 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