Fitch drops CP All rating by a notch

Fitch drops CP All rating by a notch

Fitch Ratings (Thailand) has downgraded retailer CP All Plc and its cash and carry subsidiary Siam Makro Plc's national long-term rating by a notch to reflect the 7-Eleven convenient store chain operator's slower-than-expected deleveraging.

The downgrade reflects CP All's high financial leverage, which is unlikely to fall to a level commensurate with an 'A+(tha)' rating over the next two years, the credit rating agency said in a statement.

Fitch expects CP ALL's funds from operations (FFO)-adjusted net leverage to remain above 3.5 times beyond 2018.

"The deleveraging of CP ALL has been slower than previously expected because of a weak domestic economy over the past two years. Sales of shares in subsidiary Siam Makro are also unlikely to be carried out over the next 12-18 months," it said.

CP All's national long-term rating has been downgraded to 'A(tha)' from 'A+(tha)', the national long-term rating of its secured bonds to 'A(tha)' from 'A+(tha)', and the national long-term rating of its senior unsecured bonds to 'A-(tha)' from 'A(tha)'. The outlook is stable.

Fitch has simultaneously affirmed CP All's national short-term rating at 'F1(tha)'. It has also assigned CP ALL's new subordinated perpetual debentures a national long-term rating of 'BBB(tha)'.

CP All's sales are expected to increase by 9%-11% per year in 2016-18, driven mainly by new store openings and a recovery in same-store sales growth to 3-4% a year for both 7-Eleven and Makro stores, in line with the domestic economic recovery.

The company also continues to benefit from the "defensive" nature of its business, which sells daily essentials with low revenue and margin volatility. Its medium-term growth potential is further supported by Thailand's immature market for modern-food retailing.

"We believe CP All is likely to maintain its leading position despite intense competition. The company has more than 9,000 stores nationwide, and a more-than-60% share of the convenience-stores market in Thailand, far more than its closest rival.

"Its dominance is supported by its large network and coverage area, along with well-established functions such as logistics, supply and maintenance, and staff training and development," Fitch said.

The ratings agency lowered Makro's national long-term rating to 'A(tha)' from 'A+(tha)'. The outlook is Stable.

Simultaneously, Fitch has affirmed Makro's 'F1(tha)' national short-term rating.

As a wholesaler, Makro is more highly concentrated in terms of customers and stores than other companies in the food retail industry, Fitch said.

In addition, one of Makro's key customer bases, traditional retailers, is likely to shrink over the long term due to the continued transition of the retail industry towards modern formats like supermarkets and convenience stores, it added.

Makro's strategy to tap more hotels, restaurants and caterers, however, should mitigate this risk.

Makro's FFO-adjusted net leverage is likely to rise to 1.6-1.7 times at end-2016 due to its continued aggressive expansion.

Fitch expects its financial leverage to fall in 2017 as Makro plans to slow down large-format store expansion.

Makro has expanded rapidly since being acquired by CP ALL in mid-2013.

Fitch projects Makro's sales growth to be 9-10% a year over the next two years.

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