TRIS Rating Affirms Company Rating and Outlook of “ICC” at “AA/Stable”

Wednesday 11 March 2015 15:43
TRIS Rating has affirmed the company rating of I.C.C. International PLC (ICC) at “AA” with “stable” outlook. The rating reflects the company’s position as Thailand’s leading distributor of lingerie, men’s apparel, and cosmetics; a diverse portfolio of products and brands; intra-group supply chain; and nationwide distribution coverage. The rating also takes into consideration ICC's conservative financial policies and sufficient liquidity. These strengths are partially constrained by ICC's declining profitability, sluggish economic impacting consumer spending, and the challenge to revive brand popularity. The “stable” outlook reflects TRIS Rating’s expectation that ICC will maintain its strong market positions in its major product lines. TRIS Rating expects ICC to improve its operating performance and its cash-flow generative ability in order to maintain current credit profile.

ICC's potential rating upgrade is limited over the next 12-18 months, given the lack of robust growth momentum amid competitive pressure and an uneven economic recovery. The rating downside stems from weaker-than-expected profitability for a prolonged period of time and an aggressive shift in leverage policy.

ICC was established in 1964 as a distributor of fashion products within Saha Group. ICC is one of leading distributors of lingerie, men’s apparel, and cosmetics products in Thailand. The company offers more than 80 brands, covering international licensed brands and its own brands. The licensed brands, such as Wacoal, Arrow, Lacoste, Guy Laroche, and ELLE, are well-accepted by Thai consumers, and contributed approximately 67% of total revenue in 2014. ICC’s products are available in department stores, discount stores, and ICC’s own shops, covering about 3,700 points of sales nationwide.

ICC’s business profile is considered strong, supported by its diverse portfolio of products and its strong position in the lingerie, men’s apparel, and cosmetics segments in Thailand. The company’s long-track record of distributing fashion products, together with the support provided by suppliers within the Saha Group, help maintain ICC’s competitive edge. Onward, ICC will focus on internal process re-structuring such as adjusting production plan and reducing duplicate processes in logistics, in order to create efficiency and minimize inventory. ICC is also developing its online sales channels and expanding abroad. ICC has faced challenges to modernize brands and launch a new marketing initiative to enhance its top line and profitability.

In 2014, the Thai economy was negatively affected by political instability. Although the private consumption was reported a flat growth of 0.3% compared with the previous year, the retail sales index dropped by 6%. The men’s apparel market and the lingerie market were substantially affected from the economic downturn, slipping by about 13% and 9%, respectively. Although being resilient to economic cycle, the cosmetics market in 2014 dropped by 3%. In 2015, the economic recovery is projected at the moderate growth rate, considering high household debt. According to office of the National Economics and Social Development Board (NESDB), the Thai private consumption is expected to expand by 2.9% in 2015.

“Wacoal” is ICC's key lingerie brand. Wacoal remained the market leader of lingerie brands sold through department stores, holding about 50% of market share in 2014. Total ICC’s lingerie brand portfolio held nearly a 60% share in the middle- to high-end lingerie segment. ICC maintained its competitive positions in the men’s apparel segment and the cosmetics segment, considered its strong brands such as “Arrow” and “Lacoste” in the men’s wear market, and “BSC Cosmetology” in the cosmetics market.

In 2014, ICC generated Bt12,033 million in revenue, a 10% drop compared with the previous year. ICC's major contributors are the lingerie segment (28%), the men's apparel segment (27%), and the cosmetics segment (12%). The operating income before depreciation, and amortization as a percentage of sales softened from an average of 5% to 3% in 2013 and to 2.4% in 2014, as selling and administrative expenses remained high.

During 2015-2017, TRIS Rating’s base-case expects ICC’s revenue growth at about 5% per annum. The key growth driver is the reviving economic condition, but pressured by high household debt. Potential growth could come from ICC’s expansion in international markets and online-shopping sales. The operating margins are expected to improve to about 4%-5% over the medium term, given an attempt to re-process the production and inventory management, as well as continue cost saving effort.

ICC’s debt incurred from guarantees to related companies which increased slightly in 2014 to support Tsuruha (Thailand) Co., Ltd., a chain of pharmacy and beauty product stores of the Saha Group. ICC invested 15% in Tsuruha’s shares. TRIS Rating expects no significant change in ICC’s capital structure during the medium term. In addition, the company’s financial policy remains to be a debt-free company. ICC plans total capital expenditures of Bt950 million during 2015-2017, mainly to renovate and expand shop outlets and build new office building.

In 2014, ICC set up a new property development subsidiary, WBRE Co., Ltd. ICC targets to maximize benefit from un-utilized asset. WBRE's first project is to develop about 230-unit townhouse, located near the Saha Group’s industrial estate in Chonburi province. Total project value is about Bt450 million. TRIS Rating expects no increase in debt from the property development segment. ICC gradually recognizes revenue from property sales. ICC will roll out the cash flow generation from the early phase to fund the next phase development. However, TRIS Rating views that the residential property industry is intensely competitive which has higher risk than the consumer product industry. Aggressive expansion in property development may negatively affect ICC's financial profile.

ICC’s liquidity profile is ample, supported by its conservative financial policy and debt-free position. Funds from operations (FFO) dropped to Bt736 million in 2014, compared with the average of Bt900 million per annum during 2010-2013. During 2015-2017, FFO is expected to range from Bt800-Bt1,000 million per annum. TRIS Rating expects ICC’s liquidity profile to remain strong over the medium term as the residential project remains small.

ICC and other Saha Group companies have complex cross-holding structures. TRIS Rating expects that all transactions between ICC and other companies in the Group should conform to the regulations of the Stock Exchange of Thailand (SET) and the Securities and Exchange Commission (SEC).

I.C.C. International PLC (ICC)

Company Rating: AA

Rating Outlook: Stable