Bangkok--14 Nov--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Siam Makro Public Company Limited's National Long-Term Rating at 'A(tha)'. The Outlook is Stable.
KEY RATING DRIVERS
Overseas Expansion Drives Rising Leverage: Makro's funds from operations (FFO) adjusted net leverage is likely to rise to 2.0x-2.5x over the medium term due to its more aggressive overseas expansion, leaving it with less rating headroom than we previously expected, when we estimated financial leverage at not more than 2.0x. Over the next three to four years, the company plans to focus on overseas expansion as growth slows in Thailand's relatively mature market. At the same time, it will continue to open large-format stores, albeit fewer than historically, and more smaller-format stores catering to food services in Thailand. Fitch expects Makro's capex at THB8 billion-9 billion a year in 2019-2020. We believe that it will take some time for the overseas stores to achieve economies of scale and be earnings accretive.
Decreasing Margin: Makro's EBITDAR margin is likely to drop to 5.4%-5.6% over the next three years from 5.7%-6.0% in 2015-2017 as its new overseas stores post operating losses in their initial years of operation. Its EBITDAR margin from domestic operation should, nonetheless, continue improving with Makro's strategy to increase productivity.
Strong Sales Growth: Fitch expects Makro's sales to increase by 10%-13% a year in 2019-2020, supported by the improving domestic economy, continued growth in tourism as well as contribution from overseas stores. Makro's revenue increased by less than 3% in 1H18 due to a sharp decrease in prices of major food items and lower demand for local tobacco and alcoholic beverages after an increase in excise tax in 3Q17. The recovery in food prices in 3Q18 should support growth in 2H18. Makro continues to focus on customers in the hotel, restaurant and catering (HORECA) industries, who drive growth in the modern wholesale food market.
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, HORECA operators and institutional customers, which represent 75% of total revenue. "Makro" is an internationally known cash-and-carry wholesale brand in emerging markets. CP ALL Public Company Limited (A(tha)/Stable) 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.
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 formats 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. 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 about 24% of CP ALL's consolidated EBITDA in 2017. 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)/Stable) has a more diversified business model and geographic diversification than Makro. SCC also has significantly larger revenue and EBITDAR. 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. Given Makro's expansion plan, its financial leverage is likely to increase to close to that of SCC over the medium term. As a result, with SCC's stronger business profile, it is rated higher than Makro.
Similar to SCC, Siam City Cement Public Company Limited (SCCC, A(tha)/Negative) is exposed to cyclicality and commodity price risk in its main business of cement production. Makro has significantly larger revenue than SCCC but as a wholesaler, Makro earns significantly thinner EBITDAR margin. Both companies' EBITDAR over the medium term should be of similar size. SCCC's financial leverage is higher than Makro's. Both are rated at the same level, but SCCC is on Negative Outlook as it faces challenges in deleveraging to a level more consistent to its current rating.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Seven new stores a year in Thailand in 2018-2020;
- Three new overseas stores in 2018, and continue to expansion overseas (i.e. in Cambodia, India, China and Myanmar) with capex of THB3.0 billion-3.5 billion a year in 2019-2020;
- Total sales growth of 3%-4% in 2018 and 10%-13% a year in 2019-2020
- A decline in EBITDAR margin to 5.4%-5.6% in 2018-2020;
- Total capex of THB5.0 billion-5.5 billion in 2018 and THB8 billion-9 billion a year in 2019-2020, 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
- Negative rating action on CP ALL
- For Makro's standalone credit profile , the following developments may 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 (end-June 2018: 1.6x), or
- Deterioration in EBITDAR margin to below 4.5% on a sustained basis (1H18: 5.4%)
Nonetheless, one-notch downgrade Makro's standalone credit profile may not affect its final rating as Fitch will apply a one-notch uplift based on linkage with CP ALL.
LIQUIDITY AND DEBT STRUCTURE
Refinancing Ability Supports Liquidity: Makro had total debt of THB10.5 billion at end-June 2018. About 52% will be due within one year. Liquidity is mainly supported by the company's cash balance of THB2.5 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.
Additional information is available on www.fitchratings.com