Bangkok--6 Oct--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed the 'A+(tha)' National Long-Term Rating on CP ALL Public Company Limited (CP ALL), and revised the Outlook to Negative from Stable.
Fitch has also affirmed the rating on CP ALL's outstanding secured bonds at 'A+(tha)' and the rating on its senior unsecured bonds at 'A(tha)'. The National Short-term Rating has also been affirmed at 'F1(tha)'.
The Outlook revision to Negative reflects weak economic growth in Thailand, which meant CP ALL is taking longer than expected to reduce its leverage to below Fitch's threshold for negative rating action.
KEY RATING DRIVERS
Slower Deleveraging Expected: Fitch now expects CP ALL's FFO-adjusted net leverage to be around 6.0x by end-2015 and remain above 3.5x beyond 2017, which is not compatible with its 'A+(tha)' rating. The pace of develeraging has been hampered by weaker-than-expected profitability and cash generation in a challenging operating environment. However, CP ALL plans to divest a portion of its interest in cash and carry wholesaler Siam Makro PCL (Makro) and use the proceeds to reduce debt. This should trim its leverage to below 3.5x.
Moderate but Defensive Growth: Fitch expects CP ALL's sales to increase by 10%-11% in 2015-2016, mainly driven by new store openings, while 7-Eleven's same-store sales growth is likely to be about 1% in 2015 and 2.5%-3.0% in 2016. The company continues to benefit from the "defensive" nature of its business, which sells daily essentials with low revenue and margin volatility, amid a weaker-than-expected recovery in the Thai economy. Its medium-term growth potential is still supported by Thailand's immature market for modern food retail.
Leading Market Position: CP ALL is the largest operator in Thailand's convenience store business. It is likely to maintain its leading position despite intense competition. CP ALL has more than 8,400 stores nationwide; it has a market share of more than 60% of all convenience stores in the country, far more than the second-largest operator. Its dominance is supported by a large network and coverage area, along with well-established functions such as logistics, supply and maintenance, and staff training and development.
Strong Retail Brand: CP ALL operates 7-Eleven stores, a leading international brand of convenience chain stores. CP ALL was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, with the first store opening in 1989. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan.
Proven Competitive Advantage: CP ALL's acquisition of Makro, the market leader in modern food wholesaling stores in Thailand, increases and broadens the company's customer base to create Thailand's largest company in the food retail sector. The leadership and synergy have enabled both CP ALL and Makro to post a stronger growth than other large food retailers with no deterioration in margin amid the weak operating environment over the past 12-18 months.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- 10%-11% revenue growth a year in 2015-2016;
- EBITDAR margin in the range of 9.5%-10.0% in 2015-2016;
- 650 new 7-Eleven stores and 13-14 new Makro stores per year in 2015-2016;
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Failure to divest Makro shares or take other initiatives to reduce its FFO-adjusted net leverage to below 3.5x by 2017. (1H15: 6.6x)
- Deterioration in EBITDAR margin to below 8.5% on a sustained basis (1H15: 10.1%)
- Negative free cash flow generation for two consecutive years
Positive: Future developments that may, individually or collectively, lead to revision of the Outlook to Stable include:
- FFO-adjusted net leverage at less than 3.5x.