November 20, 2017 / 4:28 PM / in 25 days

Fitch Affirms BUT at 'B'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, November 20 (Fitch) Fitch has affirmed French furniture, electrical and decoration retailer Mobilux 2 SAS's (BUT) IDR at 'B'. The Outlook remains Stable. Fitch has also affirmed Mobilux Finance SAS's EUR380 million senior secured notes rating at 'B+'/ 'RR3' (54%). BUT's IDR is supported by a strong business profile compared to 'B' rated peers in non-food retailing. The company benefits from a sustainable business model supported by its leading position in the French market, moderate execution risk in strategy and strong cash-flow generation capacity. This compensates for its lack of geographic diversification and weak financial structure. The high leverage results from BUT's buyout in November 2016 and operating underperformance in the financial year ended 30 June 2017 (FY17). The Stable Outlook reflects Fitch's expectation that the group will deleverage towards levels consistent with an acceptable refinancing risk for a 'B' rating. Together with healthy free cash flow (FCF) generation capacity, we assume a conservative financial policy. A more aggressive stance towards M&A or dividends leading to reduced financial flexibility could put downward pressure on the rating. KEY RATING DRIVERS Recovering Demand, Strong Competition: The French furniture market is recovering, following a rather depressed performance in the year ended June 2017. This trend should be sustainable as underpinned by positive factors such as increasing consumer confidence and a recovery in the construction sector. However, Fitch forecasts conservative like-for-like sales growth for BUT over the next four years, at a maximum of 1.5% per annum. The group has to face both the fast development of pure online players and aggressive growth strategies from its most direct competitors Ikea and Conforama, enabled by a greater spending power. For example, Conforama recently took a 17% share in Showroom Priv? (online discounter) and announced the development of three new store formats. FY17 Underperformance: In FY17 BUT's EBITDA underperformed Fitch's forecasts, with margin estimated at 5.8% versus the 6.5% expected. Fitch considers this as a one-off, as margins were affected by higher advertising expenses and the cost of BUT's new distribution platform established in June 2016 not yet fully offset by higher gross margin. The high advertising expenses followed weak summer sales impacted by the Nice terrorist attacks and hot weather. They should decrease in FY18 as the market recovers. The cost of BUT's new distribution centre, set up to develop online sales and improve product availability should be progressively absorbed by growing sales. Profitability to Recover: Fitch forecasts BUT's EBITDA margin will return towards 6.5% by FY20, mainly driven by gross margin improvement deriving from sourcing synergies with owner XXXLutz (EUR6 million secured as of June 2017, to increase thereafter). Other supporting factors include moderate like-for-like sales growth and growing operating leverage on BUT's new distribution centre. Solid FCF Generation Capacity: Fitch expects BUT to generate average annual free cash flow (FCF) of 3% pa over FY18-FY20, which compares well with 'B' non-food retailers. Aside from slowly growing EBITDA and the absence of dividend payments, Fitch assumes the sustainability of BUT's working-capital past optimisation, which should lead to consistent inflows over FY18-FY21. It could be further enhanced by the purchasing agreement with XXXLutz. Fitch believes the FY17 outflow, which was the main driver behind BUT's negative FCF in FY17, is a one-off as it mainly resulted from delayed summer regulated sales, which started only two days before BUT's financial year-end. Stable Financial Flexibility: Fitch forecasts BUT's FFO fixed charge cover to remain stable at 1.6x (FY17: estimated at 1.5x) over FY18-FY21. This level remains weak compared to 'B' rated peers and reflects BUT's asset-light business model and increased share of directly owned stores following the acquisition of the previously franchised Yvrai stores on 1 September 2016. However, in our view this is counterbalanced by the group's adequate liquidity buffer, supported by a cash-generative profile along with an expected moderate appetite for acquisitions. Acceptable Refinancing Risk: The November 2016 buyout and the FY17 operating underperformance drove leverage metrics above Fitch's expectations, with both gross and net FFO adjusted leverage ratios estimated at 6.6x at FYE17. Fitch expects FFO adjusted leverage to fall only slowly (6.0x by FY21) but deleveraging should be quicker net of cash, due to consistently positive FCF. Net leverage at 5.0x by FY21 constitutes a manageable refinancing risk assuming a conservative financial policy. The natural exit of the current LBO is XXXLutz's full buyout of BUT, therefore the likelihood of an aggressive policy that could prevent deleveraging is low. DERIVATION SUMMARY BUT's strong business profile balances a weak financial profile relative to rated non-food retail peers in the 'B' category. The group has small scale and limited geographic diversification, but enjoys healthy sales and profitability growth prospects and a demonstrated track record of gaining market share. Its financial leverage and FFO fixed charge cover are more comparable with 'B-' peers, although comfortable liquidity underpins financial flexibility at the 'B' rating level. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenues of 3% to 3.5% annual growth, driven by moderate lfl growth and moderate network expansion; - EBITDA margin recovering to 6.5% in FY20 (FY17: estimated at 5.8%), driven by gross margin improvement and to a lesser extent positive operating leverage; - large working-capital inflow in FY18 following one-off outflow in FY17, moderate inflows thereafter; - average annual capex at 2% per annum over FY18-FY20 (FY17: estimated at 2%); - no dividend payments over FY18-FY20; - average annual FCF of 3% over FY18-FY20, driven by increase in profitability, working-capital inflows and moderate capex needs; - M&A activity limited to small bolt-on acquisitions. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Further improvement in scale and diversification leading to EBITDA margin above 8% and FCF margin above 4% on a sustainable basis - FFO fixed charge cover sustainable above 2.0x - FFO-adjusted gross leverage below 4.5x (net: 4.0x) on a sustained basis Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A significant deterioration in revenues and profitability reflecting for example an increasingly competitive operating environment or a too ambitious, ill-executed expansion plan - FFO fixed charge cover below 1.5x on a sustained basis - Adjusted FFO gross leverage above 6.5x (net: above 6.0x) on a sustained basis - Average three-year FCF below 2% of sales LIQUIDITY Comfortable Liquidity: Fitch expects liquidity to remain adequate over the next four years. Fitch estimates readily available cash on balance sheet (total cash excluding estimated cash necessary to fund intra-year working-capital needs and restricted cash related to consumer financing) to be at its lowest at EUR12 million at end-FY17. This low level results from the buyout transaction, the acquisition of 18 Yvrai franchised stores, and a one-off high working capital outflow resulting from the time shift in summer regulated sales. From FY18 liquidity should be supported by consistent positive FCF and the EUR100 million revolving credit facility (undrawn at FYE17). Furthermore, BUT's liquidity is supported by the bullet maturity profile of its core debt. Contact: Principal Analyst Anne Porte Director +33 1 44 29 91 36 Supervisory Analyst Sophie Coutaux Senior Director +33 1 44 29 91 32 Fitch France SAS 60, rue de Monceau 75008 Paris Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments This summary refers to the FY16 audited financial statements. Operating Leases: In accordance with Fitch's corporate rating criteria, Fitch adjusts the debt by adding a multiple of 8x of yearly operating leases expense related to long-term assets (FY16: property leases of EUR73 million). Readily Available Cash: At 30 June 2016 Fitch estimated EUR40 million of the group's reported cash and cash equivalents deemed as not readily available for debt service, split between EUR30 million used to fund intra-year working-capital needs and EUR10 million in relation to the group's consumer financing activity. Fitch retains the same assumption in its forecasts. FFO: Fitch excludes from its FY16 FFO calculation estimated non-recurring cash acquisition and disposal costs of EUR5.6 million. Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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