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July 9 (The following statement was released by the rating agency)
Fitch Ratings says, in a report it has just released, that while Woolworths Limited (Woolworths) is well entrenched and is investing in growth, its financial risk profile however is weakened by the capital intensity of that growth, high dividend payout and the risk of contingent payments.
Woolworths aims to defend its top spot in the Australian supermarket trade and its No. 2 position in New Zealand, in addition to increasing both revenues and margins by rolling out more stores. Woolworths faces stiff price competition in both its Australian and New Zealand supermarket segments. Store growth has been particularly noticeable in the supermarket segment and in the loss making, home improvement segment.
Store growth provides both scale and footprint and supports Woolworth's objective of lowering unit costs. However, the capital intensity of the store roll-out and improvement in logistics, and in concert with Woolworths' high dividend payout has negative implications for both its free cash flow and its leverage.
Fitch expects Masters Home Improvement (Woolworths' home improvement and hardware chain) to lose a combined Earnings Before Interest and Tax (EBIT) of AUD300m in FY14 and FY15. Moreover, Lowes - Woolworths' partner in the Masters and Danks hardware joint venture (JV) has an option to "put" its 33% stake in the JV to Woolworths. The option expiry date was extended by 12 months to October 2014, whereupon Woolworths may have to pay Lowes as much as AUD800m (17% of current adjusted debt).
The Woolworths Limited, Unrated Issuer Report is available at www.fitchratings.com.