Fitch Affirms Siam Makro at 'A(tha)'; Outlook Stable

Stocks and Financial Services Press Releases Friday March 20, 2020 15:09
Bangkok--20 Mar--Fitch Ratings
Fitch Ratings (Thailand) has affirmed Siam
Makro Public Company Limited's 'A(tha)' National Long-Term Rating and 'F1(tha)'
National Short-Term Rating. The Outlook is Stable.
The affirmation follows the affirmation of
the ratings of Makro's parent, CP ALL Public Company Limited (A(tha)/Stable),
after it announced that it intends to acquire a 40% stake in Tesco Stores
(Thailand) Limited and Tesco Stores (Malaysia) Sdn. Bhd. We assess overall
linkages between Makro and CP ALL as moderate under our Parent and Subsidiary
Rating Linkage criteria; therefore, action on CP ALL's ratings will result in
corresponding action on Makro's ratings, provided linkages remain intact.
We consider CP ALL's proposed acquisition
to be highly strategic and believe it will strengthen the group's competitive
position in Thailand's food retail sector via post-acquisition synergies and
cost savings from common procurement and store-network rationalisation.
However, this is counterbalanced by the expected increase in CP ALL's leverage,
since the company intends to fund the purchase using USD3 billion of debt. We
may revise the Outlook on CP ALL's and Makro's ratings to Negative if we believe
there are material risks to CP ALL's ability to reduce its post-acquisition
leverage to below 5.0x over a prolonged period.
COVID-19 to Slow Revenue Growth: We expect
revenue to grow at a slower clip of around 4%-5% in 2020 amid the COVID-19
outbreak, which is still healthy given Makro's sales stem from demand for
essential items. Revenue growth should normalise at 9%-10% from 2021, supported
by our belief that domestic sales will recover and sales from overseas stores
will gain traction. Makro's omni-channel services, launched in late 2018,
include online orders, pick-up services, credit sales and delivery, which
should also mitigate an impact from low traffic to physical stores.
Moderate Linkage with Parent: Makro's
National Long-Term Rating is driven by its Standalone Credit Profile (SCP).
Nonetheless, Fitch regards the linkage between Makro and CP ALL to be moderate,
stemming from moderate operational linkage and Makro's strategic importance to
its parent. Therefore, Fitch will apply a one-notch uplift to reflect the
moderate linkages if Makro's SCP is lowered, provided linkages remain intact.
On the other hand, negative rating action on CP ALL could result in negative
rating action on Makro.
Slower Overseas Expansion: Makro's slower-than-expected
overseas expansion plan should widen rating headroom over the medium term. We
expect funds from operations (FFO) adjusted net leverage to rise, but to remain
below 2.0x. Makro slowed its overseas expansion due to difficulties in securing
adequate locations and plan to focus on improving the productivity and
efficiency of existing stores.
Leading Food Wholesaler: Makro has been
the sole operator in Thailand's modern food-wholesale market for over 30 years.
Unlike other large food retailers, its target customers are traditional
retailers, distributors, hotels, restaurants and catering operators (HORECA
operators) as well as institutional customers, which represent 70%-75% of its
total revenue.
Makro is also an internationally known
cash-and-carry wholesale brand in a number of emerging markets. Its 93% parent,
CP ALL, was granted rights to use the brand in 11 Asian countries by SHV Group
of the Netherlands, Makro's former major shareholder. This supports Makro's
medium-term plan to expand in the region. Makro also owns several house brands.
Concentration Risk: Makro, as a
wholesaler, has higher customer-concentration risk than other companies in the
food-retail industry. In addition, the revenue contribution from one of Makro's
key customer bases - traditional, independent retailers - is likely to shrink
over the long term, as consumers transition towards modern retail formats, such
as supermarkets and mini-markets. However, Makro's strategy to tap more HORECA
operators and its overseas expansion should mitigate this risk.
We expect Makro to account for around
20%-25% of CP ALL's consolidated EBITDA over the medium term. Makro's business
profile is weaker than that of CP ALL due to its smaller operating scale and
higher counterparty concentration risk. Makro has fewer stores and customers
than CP ALL. However, Makro's leverage is significantly lower than that of CP
ALL, which counterbalances its weaker business profile, resulting in both being
rated the same on a standalone basis.
The Siam Cement Public Company Limited
(SCC, A+(tha)/Negative) is rated one-notch higher than Makro due to its more
diversified operating cash flow and larger operating scale, which mitigate
SCC's exposure to the higher demand cyclicality of its end-markets, commodity
price fluctuations and slightly higher leverage.
We regard Makro's business risk to be
similar to that of Siam City Cement Public Company Limited (SCCC,
A(tha)/Negative). SCCC is exposed to end-market cyclicality and commodity-price
risk and its cash flow is concentrated in cement production. However, SCCC
benefits from greater geographic diversification than Makro, resulting in both
being rated the same. The Negative Outlook on SCCC's rating reflects the risk
that it may not be able to deleverage to a level that is more appropriate for
its rating over the next few years.

Revenue growth of 4%-5% in 2020 and increasing to 9%-10% a year in 2021-2022EBITDAR margin to remain at about 5.6% in 2020 and gradually improve in 2021-2022Total capex of THB7.5 billion-8 billion a year in 2020-2021 and THB5 billion-6 billion in 2022, including capex for overseas expansion

Developments that May, Individually or
Collectively, Lead to Positive Rating Action
Positive rating action on CP ALL, provided linkages between Makro and CP ALL remain intact.
Developments that May, Individually or
Collectively, Lead to Negative Rating Action
Negative rating action on CP ALL, provided linkages between Makro and CP ALL remain intact.
Makro's SCP may change upon the following
An aggressive debt-funded investment that increases FFO adjusted net leverage to above 2.5x for a sustained periodDeterioration in EBITDAR margin to below 4.5% for a sustained period
Nonetheless, a one-notch drop in Makro's
SCP may not affect its rating, as Fitch will apply a one-notch uplift for
parent support, provided linkages between Makro and CP ALL remain intact.
Refinancing Ability Supports Liquidity:
Makro had total debt of THB7.8 billion at end-2019. About THB842.6 million is
due within one year. Liquidity is supported by the company's cash balance of
THB4.8 billion, strong cash flow from operation, its relationship with banks
and strong access to debt markets.
There are moderate linkages between CP ALL
and Makro. However, the SCP's are the same on the national rating scale,
therefore, we can only apply a one-notch uplift if Makro's SCP falls below that
of CP ALL. Conversely, a negative action on CP ALL's ratings will result in
corresponding negative action on Makro's ratings, provided linkages remain
Additional information is available on

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