Wesfarmers Ltd. Outlook Revised To Stable On Improved Credit Ratings Affirmed At #A-/A-2#

Stocks and Financial Services Press Releases Wednesday September 13, 2017 09:25
MELBOURNE--13 Sep--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Sept. 13, 2017--S&P Global Ratings said today that it had revised its outlook on Australia-based Wesfarmers Ltd. to stable from negative. At the same time, we affirmed our long-term and short-term corporate credit ratings and related issue ratings on the company at 'A-/A-2'.

We affirmed the ratings on Wesfarmers reflecting the improved credit metrics in fiscal 2017 and our expectation that the company's operating strategy will remain unchanged. Management's commitment to maintain a diversified business model, with a retail emphasis, supports the 'A-' rating. The outlook revision to stable reflects our view that the company's growing earnings in its established Australian businesses and its debt reduction initiatives have combined to improve its credit metrics to be consistent with our rating expectations.

Although the group has solid positions in several key market segments, its strong business risk profile reflects primarily the strength of its supermarket and home improvement retailing operations, and its business diversity. These strengths help to moderate the group's exposure to economic cycles and operational risks at individual businesses. Although the group derives more than 80% of its EBITDA from the Australian and New Zealand retailing sector, its retail operations are diversified across a range of brands, formats, as well as discretionary and nondiscretionary retailing segments. Wesfarmers also has a material exposure to nonretailing businesses, including resources, chemicals, and industrial products, which should help to temper its exposure to individual businesses and markets. In our opinion, the group's business diversity should also help to mitigate the short-term earnings volatility of the group's resources division, which we expect to be a material but volatile provider of cash flow to the group over the long term. In fiscal 2017, the resources sectors contributed to the improvement in group earnings over the previous fiscal period, reflecting the strong market and pricing conditions for coal. The other nonretailing businesses also contributed to improved earnings.

Our management and governance assessment supports the rating, reflecting our belief that Wesfarmers has displayed solid strategic positioning, risk management, and organizational effectiveness in managing its diverse business lines. The smooth transition to a new CEO and CFO is supportive of this strong assessment. In addition, we have no concerns regarding the group's governance structure.

Underpinning the intermediate financial risk profile is the strong cash flow generation from the group's diversified portfolio of businesses. We expect sustained levels of funds from operations (FFO), in combination with a reduced lease adjusted debt burden, will assist Wesfarmers' adjusted credit metrics to remain below a debt-to-EBITDA ratio of 2.5x and above an FFO-to-debt ratio of 28%. The debt reduction in 2017 was achieved with the sale of the credit cards business, managing the operating lease liability profile, improved cash flow from operations, and a reduced net capital expenditure.

The stable outlook reflects our expectation that Wesfarmers' diversified operations, strong cash flow generation, effective management, and disciplined capital management will underpin credit quality at the 'A-' rating. A financial risk profile consistent with the 'A-' long-term rating would include debt to EBITDA of about 2.5x or below and FFO to debt above 28%. Additional factors supporting the 'A-' rating would include a well-spread debt-maturity profile and positive free-operating cash flow generation.

Downward rating pressure could arise if significant operational underperformance or a large debt-funded acquisition caused the group's ratio of debt to EBITDA to be sustained above 2.5x, or if FFO to debt was sustained below 28%, or if such an acquisition reweights the group's operations toward more volatile revenue streams. Other factors that could lead to a lower rating include the divestment of some of the group's stronger businesses, such as the Coles supermarket business or Bunnings home improvement business, without a commensurate improvement in the group's financial risk profile.

We consider an upgrade unlikely given the group's capital-management objectives, which probably will result in surplus capital at the 'A-' rating level being reinvested in its existing businesses, used to fund acquisitions, or returned to equity holders.


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