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Nov 11 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Dutch food retailer
Royal Ahold N.V.'s (Ahold) Long-term Issuer Default Rating (IDR) and senior
unsecured ratings at 'BBB'. The Outlook is Stable.
The Stable Outlook reflects Fitch's expectation that despite the continuously
weak trading environment and more aggressive financial policy, Ahold will
maintain sufficient rating headroom under the 'BBB' rating level thanks to its
strong financial flexibility, reflected in high liquidity reserves and cash
conversion ratio as well as low leverage. The IDR affirmation reflects the
company's leading position and relatively resilient business model in its core
Netherlands and north-east US markets.
However we believe that Ahold's current financial policy, although not
endangering the company's credit profile, is not compatible with a higher rating
since it does not contribute to alleviate what we consider as material rating
constraints, i.e. the group's moderate scale and low geographic diversification
outside mature markets.
KEY RATING DRIVERS
Challenging Trading Environment:
Fitch does not expect trading pressure to abate in the near term and assumes
margin stability at best in 2014. The company's EBIT margin has been declining
since 2009, down to 4.3% in 2012 from 4.8%. Ahold's subdued like-for-like sales
are hampered by the weak consumer confidence in all its markets, combined with
high price competition. The group is still gaining market share in its core
markets through bolt-on acquisitions and strong investments in gross margin,
albeit at the detriment of its profitability.
Operating Margin Pressure:
Fitch expects no material improvement in the group's EBIT margin from the
current 4.3% level to 2015 despite the "Reshaping Retail" strategy (including
various measures to support sales such as price cuts and higher share of
private-labels in the offer together with cost savings initiatives targeting a
EUR600m cost reduction between 2012 and 2014). Profit margins showed some
stabilisation in the Netherlands and in Eastern Europe in 1H13, reflecting
Ahold's strong leadership in its native country and cost optimisation headroom
in Czech Republic. However the US margin continues to decline as cost savings
measures do not offset significant price investments and rising staff costs.
Still Limited Geographic Diversification:
Geographic diversification is at an early stage and currently only concerns
other mature European countries such as Belgium (16 Albert Heijn stores at end
1H13) and Germany, while Eastern Europe's contribution remains fragile and
marginal. Although market entry success is likely in culturally-close countries,
in the longer term Ahold's lack of scale and geographic diversification outside
mature markets will act as a rating constraint, in particular in terms of sales
and profit growth prospects.
M&A, Returns to Shareholders:
The group's financial policy will continue to be shareholder-friendly over the
next two years, in line with management's strategy of liquidity optimisation.
However, Ahold's relaxed debt maturity profile, high cash reserve and solid free
cash flow (FCF) generation capacity provide sufficient liquidity to prevent a
significant leverage increase (lease-adjusted net funds from operations (FFO)
leverage forecast at 2.7x in 2014 against 2.6x in 2012). Following the sale of
Ahold's 60% stake in ICA Gruppen AB for EUR2.4bn, management increased the
existing EUR500m share buyback programme to EUR2.0bn over 2013-2014. Additional
announcements will be made concerning the use of excess cash by year-end 2013;
this could include some bolt-on acquisitions.
Comfortable Rating Headroom:
Ahold's business risk profile is average compared with 'BBB' rated peers, mainly
due to its moderate scale and geographic diversification. Nonetheless, and
despite adverse market conditions in core markets, the group has enough headroom
in its present rating to withstand any further profit margin pressure and
finance aggressive distributions to shareholders. Fitch forecasts sustained
strong FCF generation (average close to EUR400m p.a. to 2015) and liquidity,
which should prevent any significant deterioration in key financial metrics.
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
- EBIT margin falling consistently below 4.0%
- FFO fixed charge coverage falling below 2.5x
- FFO lease-adjusted net leverage above 3.5x driven by either sustained
operating underperformance or a more aggressive financial policy and acquisition
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include:
- Demonstrated capacity to restore profitability in core markets to pre-crisis
(2008) levels and increase profitability outside core markets, resulting in
group EBIT margin sustainably above 5.0%.
- FFO fixed charge coverage at or above 3.5x on a sustained basis
- Financial policy and acquisition activity remaining consistent with
lease-adjusted net FFO leverage permanently below 2.5x