Fitch Ratings (Thailand) has affirmed CP ALL Public Company Limited's National Long-Term Rating at 'A(tha)'. The Outlook is Stable. The affirmation reflects Fitch's expectation that CP ALL will maintain its financial leverage at the level consistent with the current rating over the medium term, incorporating the proposed acquisition of 40% of Tesco Stores (Thailand) Limited and Tesco Stores (Malaysia) Sdn. Bhd. (together, Tesco Asia). A full list of rating actions can be found at the end of this commentary.
KEY RATING DRIVERS
Rising Financial Leverage: CP ALL intends to use USD2.7 billion of debt to fund its 40% stake in Tesco Asia while the rest is to be held by two other related entities within the CP Group. The newly established holding company, which will directly hold 100% economic value of Tesco Asia, will take on a further USD4 billion of external debt. We expect CP ALL's post-acquisition funds from operations (FFO) adjusted net leverage to increase to 5.5x-6.0x in 2021 - the first full-year after the acquisition - before falling to 5.0x-5.5x in 2022.
Stronger Diversification and Market Position: The proposed acquisition should strengthen CP ALL's market position and improve diversification of products, service offerings and store formats. CP All will hold a 40% interest and should benefit from synergies in common procurement and the rationalisation of its aggregate network of over 13,000 outlets across large-format stores, convenience stores and wholesale outlets.
Tesco Lotus is the leading network of large format retail stores in Thailand, with more than 1,900 outlets nationwide comprising more than 200 large and 1,700 small format stores. CP ALL operates the largest convenience store network in Thailand and owns Makro stores, a leading wholesaler.
Pandemic-Related Sales Impact: The coronavirus pandemic is likely to result in CP ALL's consolidated sales falling by about 4% in 2020, the first decline in revenue in the past 10 years. The 7-Eleven stores posted about a 12% decline in same store sales in 1H20 because of the lockdown and curfew imposed in 2Q20 and a decrease in both local and inbound tourism since 1Q20. On the other hand, Makro is less affected due to stable fresh food demand and increasing contribution from sales through omni channels.
Revenue Recovery: Fitch expects CP ALL's revenue growth of 11%-12% in 2021 and 9%-10% in 2022, supported mainly by revenue recovery in both Makro and 7-Eleven stores. The rebound in sales of 7-Eleven stores is likely to be supported by continued new store openings, although Fitch expects the sales per store to recover to pre-pandemic levels after 2022. The store traffic recovery has been slow due to social distancing, working from home and prolonged overseas travel restrictions as well as the subsequent economic downturn. Makro's sales growth in 2021 should depend on the recovery in tourism, which is highly related to its hotel, restaurant and catering operator (HORECA) customers.
Continued Margin Pressure: Fitch expects CP ALL's EBITDAR margin to drop to about 9% in 2020 before improving in 2021-2022 but remaining slightly under 10% (2019: 10%). CP ALL has faced pressure on its margin in recent years due to rising operating costs from the move towards a higher mix of large-sized 7-Eleven stores, which carry higher personnel expenses, and low margin generation in the early years of Makro's overseas stores.
The impact from the pandemic on sales has further dampened its margin, given the fixed cost portion of about 60%, although a cost-saving strategy has softened the effect. However, the EBITDAR margin should improve gradually over the medium term, supported by recovery in sales, a widening gross margin from CP ALL's product-mix management and its stores' increasing efficiency and productivity.
DERIVATION SUMMARY
CP ALL has a strong domestic market position as Thailand's largest convenience-store chain and is therefore comparable with other industry leaders, such as The Siam Cement Public Company Limited (SCC, A+(tha)/Negative), 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 flow stems mostly from demand for essential goods, while SCC's cash flow is exposed to cyclical demand patterns and fluctuations in commodity prices. However, SCC is rated one-notch higher than CP ALL to reflect its significantly lower financial leverage.
CP ALL is rated at the same level as Siam City Cement Public Company Limited (SCCC, A(tha)/Negative), the second-largest cement producer in Thailand. CP ALL's higher financial leverage than SCCC is counterbalanced by its dominant market position in Thailand's food retail space.
Global Power Synergy Public Company Limited (GSPC, A+(tha)/Stable; Standalone Credit Profile: a(tha)), Thailand's second-largest private power-generation company, is rated the same on a standalone basis as CP ALL. GSPC has strong cash flow visibility, supported by long-term power-purchasing agreements with the Electricity Generating Authority of Thailand, eliminating volume risk on the majority of its output. CP ALL's dominant competitive position and the nondiscretionary nature of most of its cash flow makes up for the lack of contractual revenue visibility. Both companies have similar financial leverage.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue decreasing by about 4% in 2020 and revenue growth of 11%-12% in 2021 and 9%-10% in 2022;
- EBITDAR margin decreasing to about 9.0% in 2020, and improving to 9.7%-9.8% in 2021-2022;
- Total capex of THB18 billion-21 billion a year in 2020-2022, including capex for Makro's overseas expansion;
- Investment in a 40% stake in Tesco Asia at THB86 billion (equity method), fully financed via debt and no dividend received from Tesco Asia over 2020-2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- FFO adjusted net leverage at less than 3.5x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- 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 supported by its cash balance of THB29.5 billion at end-June 2020, robust free cash flow (FCF) generation and strong access to debt markets. It had total interest-bearing debt of THB183.5 billion as of end-June 2020, including perpetual bonds of THB20 billion. About THB41.2 billion of its interest-bearing debt is due over the next 12 months from end-June 2020.
CP ALL has successfully issued new debentures of THB25 billion in September 2020. The proceeds of the debentures will be used partly for refinancing the maturing debentures in 4Q20 and1Q21. About 87% of CP ALL's total debt is in Thai baht bonds, of which about 43% is secured by CP ALL's shares in its subsidiary, Siam Makro Public Company Limited (A(tha)/Stable).
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.
Additional information is available on www.fitchratings.com