November 20, 2017 / 10:23 AM / in a year

Fitch Affirms CP ALL's Ratings at 'A(tha)' with Stable Outlook

(The following statement was released by the rating agency) BANGKOK, November 20 (Fitch) Fitch Ratings (Thailand) Limited has affirmed retailer CP ALL Public Company Limited's (CP ALL) National Long-Term Rating at 'A(tha)' with a Stable Outlook. Fitch has also affirmed the National Long-Term Rating of its secured bonds at 'A(tha)', the National Long-Term Rating of its unsecured bonds at 'A-(tha)' and the National Long-Term Rating of its subordinated perpetual debentures at 'BBB(tha)'. Simultaneously, Fitch has affirmed the National Short-Term Rating of CP ALL at 'F1(tha)'. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS Expansion Slows Deleveraging: Fitch expects CP ALL's funds from operations (FFO) adjusted net leverage to decrease to 4.0x-4.5x in 2018, a level consistent with its current rating. The deleveraging is likely to be slower than we previously expected (i.e. to about 4.0x by 2018) mainly due to subsidiary Siam Makro Public Company Limited's (Makro; A(tha)/Stable) expansion. We expect Makro's expansion to cause CP ALL group's total capex to increase to THB19 billion-20 billion a year over 2018-2019 from our earlier forecast of THB14 billion-15 billion a year. Moderate-but-Defensive Growth: Fitch expects CP ALL's sales to increase by 7%-8% in 2017, which is slower than previously expected due to a slow recovery in consumer spending in 1H17. However, sales growth in 2018-2019 should improve to about 10% per year, mainly driven by new store openings and more apparent recovery seen in 3Q17. The company also continues to benefit from the defensive nature of its business, which sells daily essentials with low volatility in revenue and margins. Its medium-term growth potential is still supported by Thailand's immature market for modern-food retailing while its overseas expansion should provide long-term growth potential. Leading Market Position: We believe CP ALL is likely to maintain its leading position despite intense competition. The company has more than 10,000 stores nationwide and a more-than-60% share of the convenience-store market in Thailand, far more than its closest rival. Its dominance is supported by its 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. DERIVATION SUMMARY CP ALL has a strong domestic market position as the largest convenience store chain in Thailand and is therefore compared with other industry leaders such as The Siam Cement Public Company Limited (SCC, A(tha)/Positive), the largest cement and downstream petrochemicals producer in Thailand, and Thai Oil Public Company Limited (TOP, AA-(tha)/Stable), the largest oil refiner 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 also has lower business risk than SCC and TOP, which are exposed to cyclical demand for their products and fluctuations in commodity prices. This is reflected in CP ALL's more stable EBITDAR margin. CP ALL's financial leverage is, however, significantly higher than both peers, due to the debt incurred from the leveraged buyout of Makro in 2013. However, CP ALL's financial leverage should decrease over time due to the sector's low capital intensiveness. CP ALL's lower business risk should compensate for its higher financial leverage compared with SCC. However, the financial leverage of TOP, which is very low at about 1.0x, warrants a higher rating. TOP's credit rating also benefits from its linkage to its parent, PTT Public Company Limited (BBB+/Stable). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 7%-8% in 2017 and about 10% per year in 2018-2019; - EBITDAR margin to remain at 10.1%-10.3% in 2017-2019; - 700 new 7-Eleven stores per year in 2017-2019, five to six new large-format Makro stores a year in Thailand in 2017-2019; - One Makro store overseas in 2017 and continued expansion overseas with capex of about THB2 billion a year in 2018-2019; - Total capex of THB18 billion-20 billion a year in 2017-2019, including capex for Makro's overseas expansion RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO adjusted net leverage at less than 3.5x (end-September 2017: 5.2x) F uture Developments That May, Individually or Collectively, Lead to Negative Rating Action - A failure to reduce FFO adjusted net leverage to below 4.5x by 2018 - Deterioration in EBITDAR margin to below 7.5% on a sustained basis (9M17: 10.4%) LIQUIDITY Strong Liquidity: CP ALL had total interest-bearing debt of THB195 billion as of end-September 2017. About 8.9% will be due in the 12 months from end-September 2017. About 93% of total debt is in Thai baht bonds, 62% of which are secured by Makro shares. The liquidity is mainly supported by its cash balance of THB30 billion at end-September 2017, its strong cash flow generation as well as its strong access to debt capital markets. FULL LIST OF RATING ACTIONS CP ALL Public Company Limited --National Long-Term Rating affirmed at 'A(tha)' with Stable Outlook; --National Long-Term Rating of senior secured bonds affirmed at 'A(tha)'; --National Long-Term Rating of senior unsecured bonds affirmed at 'A-(tha)'; --National Long-Term Rating of subordinated perpetual debentures affirmed at 'BBB(tha)'; -- National Short-Term Rating affirmed at 'F1(tha)' Contact: Primary Analyst Somruedee Chaiworarat Director +66 2108 0160 Fitch Ratings (Thailand) Limited Level 17, Park Ventures, 57 Wireless Road, Lumpini, Patumwan, Bangkok 10330 Secondary Analyst Nichaya Seamanontaprinya Associate Director +66 2108 0161 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Summary of Financial Statement 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. Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA', and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(tha)' for National ratings in Thailand. Specific letter grades are not therefore internationally comparable. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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