Bangkok--21 Nov--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Siam Makro Public Company Limited's National Long-Term Rating at 'A(tha)' with Stable Outlook and National Short-term Rating at 'F1(tha)'.
KEY RATING DRIVERS
Rising Financial Leverage: Makro's funds from operations (FFO) adjusted net leverage is likely to rise to about 2.0x over the medium term due to its overseas expansion, which started in 2017. Makro expanded aggressively in the domestic market after being acquired by CP ALL Public Company Limited (A(tha)/Stable) in mid-2013. The company plans to slow down its domestic expansion and focus on overseas expansion in 2017-2019. Its leverage increased to 1.7x at end-September 2017 from a net cash position before it was acquired.
Leading Food Wholesaler: Makro has been the sole operator in Thailand's modern-trade food wholesale market for over 25 years. Unlike other large food retailers, its target customers are traditional retailers, distributors, hotel, restaurant and catering operators (HORECA) and institutional customers, which represent 75% of total revenue. "Makro" is an internationally known cash and carry wholesaler brand in emerging markets. CP ALL has been granted the right to use this 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.
Continued Sales Growth: Fitch expects Makro's sales to increase by 10%-11% a year in 2018-2019, following slower growth of 8%-9% in 2017. The company's sales growth will be mainly be driven by new-store openings in the last two years as well as an expected recovery in the domestic economy and continued growth in tourism. The slower growth in 2017 is likely to be mainly caused by sluggish recovery in private consumption. The company has also adjusted its strategy to serve more HORECA customers, who form a growing segment of the market.
Narrow but Stable Margin: Makro's EBITDAR margin is relatively narrow at 5.5%-6.0%, compared with more than 10% of large food retailers. This is due to Makro's wholesale operations. However, its margin has low volatility, supported by the defensive nature of its business in sales of food products. Fitch expects its margin to stay in the narrow range of 5.6%-5.7% over the next three years.
Concentration Risk: As a wholesaler, Makro has higher concentration risk than other companies in the food retail industry in terms of number of customers and number of stores. In addition, one of Makro's key customer bases, traditional, independent retailers, is likely to shrink over the long term due to the continued transition towards modern retail format 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.
Links with CP ALL: Fitch considers the operational linkage between Makro and CP ALL to be moderate while Makro is of strategic importance to CP ALL. Siam Makro's rating enjoys a one-notch uplift to reflect this linkage, although that uplift is currently not applied because CP ALL's rating is equal to Makro's standalone credit profile.
DERIVATION SUMMARY
Makro accounted for 25% of CP ALL's consolidated EBITDA in 2016. Makro's business profile is weaker than that of CP ALL in terms of market position and concentration risk. Makro has far fewer stores and customers, and much small revenue and EBITDAR margin. However, Makro's financial leverage is significantly lower than that of CP ALL. Makro's rating, based on its standalone credit profile, is therefore equal to that of CP ALL.
The Siam Cement Public Company Limited (SCC, A(tha)/Positive) has a more diversified business model and a significantly larger revenue and EBITDAR than Makro. However, SCC is exposed to cyclicality and commodity price risk in most of its core businesses while Makro benefits from stable demand for food and daily-use items with low volatility in margin and revenue. SCC's financial leverage is also higher than that of Makro. As a result, they are rated at the same level. Nonetheless,the Positive Outlook on SCC reflects the company's improving business profile with its regional expansion and investment, which will support further improvements in SCC's credit profile once they generate meaningful cash flows.
Similar to SCC, Siam City Cement Public Company Limited (SCCC, A(tha)/Stable) is exposed to cyclicality and commodity price risk in its main business of cement production. Its EBITDAR over the medium term should be at a similar level to that of Makro, as both are expanding. Makro, as a wholesaler, earns significantly thinner EBITDAR margin than SCCC. SCCC's financial leverage is higher than Makro's after its aggressive expansion since 2015. Both are rated at the same level but SCCC has more limited rating headroom.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Opening five to six new large-format stores a year in Thailand in 2017-2019;
- Opening one store overseas in 2017, and continue to expand overseas with capex of about THB2 billion a year in 2018-2019;
- Total sales growth of 8%-9% in 2017 and 10%-11% a year in 2018-2019;
- EBITDAR margin stable at 5.6%-5.7% in 2017-2019.
- Total capex of THB4 billion-THB5 billion in 2017 (not including acquisition of Indoguna paid in 1H17) and about THB7 billion a year in 2018-2019, including capex for overseas expansion.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Positive rating action on CP ALL
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- An aggressive debt-funded investment leading to an increase in FFO-adjusted net leverage to above 2.5x on a sustained basis, or
- Deterioration in EBITDAR margin to below 4.5% on a sustained basis (9M17: 5.6%)
LIQUIDITY
Refinancing Ability Supports Liquidity: Makro had total debt of THB10.8 billion at end-September 2017. About 81% will be due within one year. Liquidity is mainly supported by the company's cash balance of THB2.4 billion, its strong cash flow from operations as well as its relationship with banks with large uncommitted revolving facilities, and strong access to debt capital markets.