Fitch Ratings has affirmed CP All Plc's national long-term rating at A(tha) with an outlook of stable.
The affirmation reflects Fitch's expectation CP All will maintain its financial leverage at a level consistent with the current rating over the medium term, incorporating the proposed acquisition of 40% of Tesco Stores (Thailand) Ltd and Tesco Stores (Malaysia) Sdn Bhd (Tesco Asia).
CP All intends to use US$2.7 billion of debt to fund its 40% stake in Tesco Asia, while the rest is to be held by two other related entities within CP Group.
The newly established holding company, which will directly hold 100% economic value of Tesco Asia, will take on a further $4 billion of external debt.
Fitch expects CP All's post-acquisition funds from operations adjusted net leverage to increase to 5.5 to 6.0 times in 2021 -- the first full year after the acquisition -- before falling to 5.0 to 5.5 times in 2022.
The proposed acquisition should strengthen CP All's market position and improve diversification of products, service offerings and store formats.
CP All will hold a 40% interest and should benefit from synergies in common procurement and the rationalisation of its aggregate network of over 13,000 outlets across large-format stores, convenience stores and wholesale outlets.
Tesco Lotus is the leading network of large format retail stores in Thailand, with more than 1,900 outlets nationwide comprising more than 200 large and 1,700 small format stores.
CP All operates the largest convenience store network in Thailand and owns Makro stores, a leading wholesaler.
The pandemic is likely to result in CP All's consolidated sales falling by about 4% in 2020, the first decline in revenue in the past 10 years. The 7-Eleven stores posted a 12% decline in same-store sales in the first half because of the lockdown and curfew imposed in the second quarter, and a decrease in both local and inbound tourism since the first quarter.
On the other hand, Makro is less affected because of stable fresh food demand and increasing contribution from sales through omni-channels.
Fitch expects CP All's revenue growth to be 11%-12% in 2021 and 9%-10% in 2022, supported mainly by revenue recovery at both Makro and 7-Eleven stores.
The rebound in sales of 7-Eleven stores is likely to be supported by continued new store openings, although Fitch expects the sales per store to recover to pre-pandemic levels after 2022.
The store traffic recovery has been slow because of social distancing, working from home and prolonged overseas travel restrictions as well as the subsequent economic downturn.
Makro's sales growth in 2021 should depend on the recovery in tourism, which is highly related to its hotel, restaurant and catering customers.
Fitch expects CP All's Ebitdar (earnings before interest, taxes, depreciation, amortisation and restructuring or rent costs) margin to drop to 9% in 2020 before improving in 2021-2022, but remaining slightly under 10%.
In 2019 it was 10%. CP All has faced pressure on its margin in recent years because of rising operating costs from the move towards a higher mix of large-sized 7-Eleven stores, which carry higher personnel expenses, and low margin generation in the early years of Makro's overseas stores.
The impact of the pandemic on sales has further dampened its margin, given the fixed cost portion of about 60%, although a cost-saving strategy has softened the effect. However, Ebitdar margin should improve gradually over the medium term.