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Fitch Publishes 'AA-(idn)' Rating on Alfamart's Bond Programme
April 12, 2017 / 12:42 AM / 8 months ago

Fitch Publishes 'AA-(idn)' Rating on Alfamart's Bond Programme

(The following statement was released by the rating agency) JAKARTA, April 11 (Fitch) Fitch Ratings Indonesia has published the 'AA-(idn)' national long-term rating of PT Sumber Alfaria Trijaya Tbk's (Alfamart; AA-(idn)/Stable) proposed IDR3 trillion bond programme and proposed IDR1 trillion senior unsecured bond issued under the programme. Alfamart will use issue proceeds to refinance existing debt. 'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations. KEY RATING DRIVERS Robust Store Growth: Fitch expects Alfamart to continue its store rollout at a rate of 1,200 stores per year in 2017 and 2018 (2016: around 1,250 stores). Similarly, the agency expects its Alfamidi store format to expand at a stable rate of 200 stores per annum over the same period. We expect more than 60% of the new stores to be located outside Java in areas with low modern retail penetration and higher revenue growth rates. The high rate of store openings should help Alfamart maintain strong annual revenue growth of above 12% for the next two years - higher than Indonesia's modern trade and grocery sales growth, which Nielsen data shows at above 9% for 2016. We forecast Alfamart's consolidated revenue to double to more than IDR70 trillion by 2018, from less than IDR35 trillion in 2013. Strong Market Position: Robust expansion has helped Alfamart maintain its solid modern retail market position in Indonesia. The company is the second-largest mini-market operator in terms of store numbers, revenue and geographical presence; slightly behind PT Indomarco Prismatama's Indomaret stores. Fitch expects the mini-market format to remain the dominant modern retail format, due to its ability to penetrate rural areas that have less traffic, together with its favourable store offerings. Stable Profitability; Negative FCF: Fitch expects Alfamart's EBITDA margin to remain stable at around 6% in 2017 and 2018, as the company implements cost controls and increases the use of its new warehouses built in 2016. Nonetheless, cash flow from operations of around IDR3 trillion will be insufficient to pay annual capex of more than IDR3.5 trillion, necessitating additional borrowing to fund expansion. However, EBITDA growth from new store openings will help Alfamart maintain FFO net leverage, adjusted for pre-paid rents, below 2.5x. Defensive Product Mix: Alfamart's credit profile is supported by its resilient product composition compared with larger retailers - stocking less non-discretionary products, such as electronics. Alfamart generates more than 68% of its revenue from food-related products, which are stable and defensive in nature. Structural Subordination at MIDI: Alfamart owns 86.72% of PT Midi Utama Indonesia Tbk (MIDI, not rated), which generates more than IDR800 billion in annual EBITDA and accounts for more than 20% of Alfamart's consolidated EBITDA. MIDI had outstanding banking facilities of more than IDR2 trillion at end-2016 to support its store expansion. Alfamart's creditors are structurally subordinated to those of MIDI, as Alfamart can only access cash flows at MIDI after the latter services its debt; although the current level of structural subordination is insignificant. However, further increase in debt at MIDI could affect creditors at the Alfamart level. Regulatory Compliance Risk: Fitch sees evolving regulations as a major risk for Indonesian retailers. For example, Alfamart's franchised stores only made up 27% of its total stores at end-2016; insufficient to meet the minimum 40% ratio required by October 2017. We do not expect any major monetary penalty that may affect the company's credit profile. DERIVATION SUMMARY Alfamart has lower FFO-adjusted net leverage, a less aggressive financial policy and more stable revenue growth compared with PT Tower Bersama Infrastructure Tbk (TBI, AA-(idn)/Stable). These factors compensate for TBI's solid margin of above 80% and long-term contracted cash flows. Alfamart also compares well with PT Japfa Comfeed Indonesia Tbk (AA-(idn)/Stable). Both companies have solid market positions in their respective industries. Japfa's higher margin and cost pass-through ability are compensated by Alfamart's defensive cash flows and lower leverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Addition of 1,200 Alfamart stores and 200 Alfamidi stores per annum in 2017 and 2018. - Year-on-year sales per-day growth of 3% for Alfamart stores. - Dividend payout ratio of 30% in 2017 and 2018 (2016: 40%). RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - FFO fixed-charge coverage rising above 3.0x on a sustained basis (2016: 2.9x). - FFO net leverage, adjusted for pre-paid rents, falling below 2.0x on a sustained basis (2016: 1.5x). Developments that May, Individually or Collectively, Lead to Negative Rating Action - FFO fixed-charge coverage falling below 2.5x on a sustained basis. - FFO net leverage, adjusted for pre-paid rents, rising above 3.0x on a sustained basis. LIQUIDITY Solid Liquidity and Funding Access: Alfamart had a IDR937 billion cash balance and IDR2 trillion of unutilised committed facilities at end-2016, against approximately IDR1.5 trillion in short-term debt maturities, including the IDR1 trillion maturity of Indonesian rupiah bonds due in June 2017. We believe refinancing risk is low due to the company's strong access to bank funding and proven record of accessing the local bond market. Contact: Primary Analyst Olly Prayudi Associate Director +62 21 2988 6812 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments - Fitch's total debt calculation deducts prepaid rent, which is normally funded by external borrowings. Fitch has capitalised annual rental payments by a multiple of 5.0x applicable for Indonesia. 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(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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