RPT-Fitch rates Thailand's CP ALL 'A+(tha)'/stable
Aug 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings (Thailand) Limited has assigned Thailand-based retailer CP ALL Public Company Limited (CP ALL) a National Long-Term rating of 'A+(tha)' and a National Short-Term rating of 'F1(tha)'. The Outlook is Stable.
Key Rating Drivers
Dominant market position: CP ALL is the largest operator in Thailand's convenience store business with more than 7,000 stores nationwide. It has approximately a 60% market share of convenience stores in Thailand, far above that of the second-largest player. Despite keen competition, CP ALL is likely to maintain its dominant position, supported by its larger network and coverage as well as by its well-established infrastructure for the convenience store business, such as logistics, supply and maintenance and staff training and development.
Strong retail brand: CP ALL operates 7-Eleven stores, a leading international brand for convenience store chain. The company has been granted an area license agreement for Thailand from 7-Eleven, Inc., USA. with its first store opening in 1989. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan.
Diversify into wholesale: The acquisition of Siam Makro Public Company Limited (Makro), the sole market leader in Thailand's modern wholesale food retail market, will enable the company to expand to the wholesale food retail market. This should also enlarge its customer base. CP ALL will become the largest food retail company in Thailand, after the acquisition of Makro. Defensive but strong growth: The company's growth potential is underpinned by Thailand's less than mature market for modern food retail and by the defensive cash flows of this sector. Consolidating Makro is expected partly to drive sharp sales growth at CP ALL in 2013-2014. The agency expects CP ALL's sales to continue to grow at about 14%-15% per year in 2015-2017, supported by the openings of new stores and like-for-like (LFL) sales growth.
Weak credit metrics: Due to the leveraged buyout of Makro, Fitch expects the company's funds flow from operations (FFO)-adjusted net leverage to reach about 8.2x in 2013 (2012: net cash), and FFO fixed charge cover to decrease to 2.5x (2012: 4.5x). However, Fitch expects strong growth of operating cash flow and positive free cash flow generation will gradually reduce FFO-adjusted net leverage to below 5.0x by 2015 and below 3.5x by 2017.
Limited geographical diversification: CP ALL has so far concentrated in Thailand's food retail market, which still has plenty of scope to grow, relative to the developed markets. CP ALL has a plan to expand in Asia, especially in Southeast Asian countries, via Makro's expansion. However, contribution from international operations is likely to be small over the medium term.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A slower-than-projected de-leveraging with FFO-adjusted net leverage remaining above 5.0x in 2015 and above 3.5x in 2017
- A deterioration in EBITDAR margin to below 8.5% on a sustained basis (2012: 11%)
- Negative free cash flow generation for two consecutive years
A positive rating action over the next 12-24 months is unlikely due to the company's high financial leverage.
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