Bangkok--7 Nov--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed food retailer CP ALL Public Company Limited's National Long-Term Rating at 'A(tha)' with a Stable Outlook. The agency has upgraded the National Long-Term Rating of its unsecured bonds to 'A(tha)' from 'A-(tha)' and the National Long-Term Rating of its subordinated perpetual debentures to 'BBB+(tha)' from 'BBB(tha)'.
CP ALL's 'A(tha)' National Long-Term Rating is driven by its strong market position as the largest convenience-store operator in Thailand, with a network of over 11,000 7-Eleven outlets. The company's network is substantially larger and has performed better than its closest rivals despite rising competition due to the strategic locations of most of its stores, which makes it the key beneficiary of the ongoing shift in domestic consumption patterns. These strengths are counterbalanced by the company's moderately high leverage, although we expect leverage to drop over the next two to three years.
KEY RATING DRIVERS
Continued Deleveraging: Fitch expects CP ALL's funds from operations (FFO) adjusted net leverage to continue to fall to around 3.5x by 2021 from 4.2x in 2018. Deleveraging will primarily be driven by the slower-than-planned overseas expansion of its wholesale subsidiary, Siam Makro Public Company Limited (Makro; A(tha)/Stable). We expect EBITDA to rise by 8%-10% per year in the next three years, supported by store expansion including a higher mix of standalone format stores with larger space that offer a wider suite of services. We expect CP ALL to strike a balance between capex and shareholder returns in line with its record, and continue to generate positive free cash flows (FCF) over the medium term.
Moderate Sales Growth: We forecast CP ALL's consolidated sales to rise by 9%-10% in 2019 and 8%-9% a year in 2020-2021, supported by new store openings. 7-Eleven's same-store sales should rise 2%-3% a year over the next two to three years in line with Thai GDP growth and an increasing preference for convenience stores over traditional retail formats. Makro's revenue is also likely to be supported by the recovery in its domestic store sales from the ongoing implementation of its omni-channel services to offer multiple shopping avenues, and increasing contribution from overseas stores.
Short-Term Margin Pressure: Fitch expects CP ALL's EBITDAR margin to decrease to 9.8%-9.9% in 2019-2020 from higher operating costs related to the move towards a higher mix of larger-sized stores, which carry higher personnel expense, as well lower revenue generation and the higher start-up costs of Makro's overseas expansion. However, its EBITDAR margin is likely to improve gradually starting 2021, supported by an increase in the gross margin from its product-mix management as well as its stores' increasing efficiency and productivity.
Unsecured and Perpetual Debt Upgraded: CP ALL's senior unsecured debt has been upgraded to reflect our view that unsecured creditors' interests are no longer materially subordinated to that of its prior-ranking or secured creditors. CP ALL's prior-ranking debt has fallen to about 2.0x of trailing 12-month EBITDA by end-June 2019, the threshold above which subordination is considered to be material. We expect CP ALL to continue to repay its secured bonds over the next two to three years amid Makro's less aggressive expansion. Similarly, the upgrade of CP ALL's perpetual debentures also reflects the reduced significance of secured debt in the company's capital structure and the consequent improvement in the recovery prospects of subordinated creditors.
DERIVATION SUMMARY
CP ALL's strong domestic market position can be compared with that of peers such as The Siam Cement Public Company Limited (SCC, A+(tha)/Stable), the largest cement and downstream petrochemicals producer in Thailand. CP ALL has a stronger competitive position, with a market share that is significantly larger than that of its closest rival. CP ALL's cash flows are also more stable across the cycle as they stem from largely non-discretionary demand while SCC's cash flows are more exposed to cyclical demand and fluctuations in commodity prices, although somewhat offset by SCC's higher business diversification. Nevertheless, CP ALL's stronger business risk profile is more than offset by its higher leverage versus SCC, resulting in the one-notch lower rating.
CP ALL has a significantly stronger business risk profile than Siam City Cement Public Company Limited (SCCC, A(tha)/Negative), the second-largest cement producer in Thailand. This more than compensates for CP ALL's higher financial leverage, resulting in both companies being rated at the same level. The Negative Outlook on SCCC's A(tha) National Long-Term Rating nevertheless reflects the challenges it faces in deleveraging to a level more consistent with its rating.
CP ALL is rated in line with the Standalone Credit Profile of Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable, Standalone Credit Profile: a(tha)), the second-largest privately held power-generation company in Thailand. GPSC has slightly more stable revenue and margins than CP ALL, supported by long-term power purchasing agreements with Electricity Generating Authority of Thailand, and customers with strong credit profiles, which protect the company against volume risk. However, CP ALL's strong competitive position and the stable demand for daily essential goods enable it to have low volatility in its revenue and margins. GPSC's slightly stronger business profile is offset by its marginally higher leverage than CP ALL due to the power-generation company's recent acquisition of GLOW Energy Public Company Limited, another Thai power and steam producer, and large planned investments. GPSC's final rating of 'A+(tha)' incorporates a one-notch uplift from moderate linkages with its parent, PTT Public Company Limited (AAA(tha)/Stable).
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue growth of 9%-10% in 2019 and 8%-9% per year in 2020-2021;
- EBITDAR margin to decrease slightly to 9.8%-10.0% in 2019-2021;
- CP ALL to open 700 new 7-Eleven stores per year in 2019-2021 and five to eight large-format Makro stores a year in Thailand in 2019-2021;
- Three Makro stores to open overseas in 2019 and continued expansion overseas with capex of about THB2.6 billion in 2020 and about THB1.6 billion in 2021;
- Total capex of about THB19 billion in 2019 and about THB22 billion a year in 2020-2021, including capex for Makro's overseas expansion.
RATING SENSITIVITIES
- Developments That May, Individually or Collectively, Lead to Positive Rating Action
- FFO adjusted net leverage at less than 3.5x on a sustained basis
- Developments That May, Individually or Collectively, Lead to Negative Rating Action
- FFO adjusted net leverage above 4.5x on a sustained basis
- Deterioration in the EBITDAR margin to below 7.5% on a sustained basis
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: CP ALL's liquidity is mainly supported by its cash balance of THB32 billion at end-June 2019, its robust FCF generation as well as its strong access to debt markets. CP ALL had total interest-bearing debt of THB177 billion as of end-June 2019, including perpetual bonds of THB20 billion. About 10% of its interest-bearing debt will be due in the 12 months from end-June 2019. About 93% of total debt is in Thai baht bonds, out of which about 45% is secured by Makro shares.
CP ALL's debt covenants are not affected by the implementation of the new Thai Accounting Standards for the treatment of perpetual bonds (TAS 32) starting 1 January 2020. Under TAS 32, most of the existing perpetual bonds will be re-classified from equity to debt in the financial statements and may cause some issuers to breach debt-to-equity covenants on their loan agreements.
SUMMARY OF FINANCIAL ADJUSTMENTS
The outstanding amount of subordinated perpetual debentures is based on the face value due at maturity, instead of net of issuance cost shown in the audited financial statements.
Additional information is available on www.fitchratings.com