The rating on the senior unsecured bonds is one notch lower than CP ALL's 'A(tha)' National Long-Term Rating due to a significant amount of prior-ranking debt, which made up 3.5x of the company's EBITDA in 2016.
KEY RATING DRIVERS
High Financial Leverage: Fitch expects CP ALL's FFO-adjusted net leverage to remain high at above 3.5x beyond 2018. Deleveraging at CP ALL has been slower than we had expected because of a weak domestic economy in past two years. Sale of shares in subsidiary Siam Makro Public Company Limited (Makro) is also unlikely to take place in the next 12 months, in our view.
Moderate-but-Defensive Growth: Fitch expects CP ALL's sales to increase by 9%-10% a year in 2017-2018, 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 (2016: 2.4% and 4.1%, respectively), 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 still supported by Thailand's immature market for modern-food retailing.
Leading Market Position: We believe CP ALL is likely to maintain its leading position despite intense competition. The company has more than 9,500 stores nationwide, and a more-than-60% share of the convenience-store 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.
Strong Retail Brand: CP ALL operates 7-Eleven stores, a leading international brand of convenience chain stores. CP ALL was granted an area licence agreement for Thailand from 7-Eleven, Inc., USA, with the first store opening in 1989. Thailand is now the second-largest international licensee of 7-Eleven, Inc., after Japan.
DERIVATION SUMMARY
CP ALL has a strong domestic market position as the largest convenient store chain in Thailand, similar to The Siam Cement Public Company Limited (SCC, A(tha)/Positive), the largest cement and downstream petrochemicals producer in Thailand and Thai Oil Public Company Limited (TOP, AA-(tha)/Stable), the largest oil refiner in Thailand. However, CP ALL has a stronger competitive position with its market share significantly larger than that of its closest rival. CP ALL also has lower business risk than SCC and TOP, which are exposed to cyclical demand for their products and the fluctuation of commodity price, reflected by CP ALL's more stable level of EBITDAR margin. CP ALL's financial leverage is, however, significantly higher than both peers, due to the debt incurred from the leveraged buy-out of Makro in 2013. Given the sector's low capital intensiveness, CP ALL's financial leverage should decrease over time.
CP ALL's lower business risk should compensate for its higher financial leverage than SCC. On the other hand, the financial leverage of TOP, which is very low at about 1.0x, warrants its higher rating. TOP's credit rating is also notched up to reflect its linkage to the PTT group.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue growth of 9%-10% per year in 2017-2018;
- EBITDAR margin to improve to 10.2%-10.4% in 2017-2018;
- 700 new 7-Eleven stores per year in 2017-2018 and four new large-format stores per year for Makro in 2017-2018.
RATING SENSITIVITIES
Positive: Developments that may, individually or collectively, lead to positive rating action include:
- FFO-adjusted net leverage at less than 3.5x (end-2016: 5.4x).
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- A failure to reduce FFO-adjusted net leverage to below 4.5x by 2018.
- Deterioration in EBITDAR margin to below 7.5% on a sustained basis (2016: 10.1%).
LIQUIDITY
Strong Liquidity: CP ALL had total debt of THB199 billion as of end-2016. About 15.8% will be due in the next 12 months from end-2016. About 96% of its total debt is Thai baht bonds, 67% of which are secured by Makro shares. The liquidity is mainly supported by its cash and current investment of THB34.8 billion, its strong cash flow generation as well as its strong accessibility to debt capital market.