OREANDA-NEWS. Fitch Ratings (Thailand) Limited has assigned a 'A+(tha)' National Long-Term Rating and 'F1(tha)' National Short-Term Rating to Siam Makro Public Company Limited (Makro). The Outlook is Negative.


Leading Food Wholesaler: Makro has been the sole player in Thailand's modern-trade food wholesale market for more than 25 years. Unlike other large food retailers, Makro's target customers are operators, eg traditional retailers; distributors; hotels, restaurants and catering operators (HORECA) and institutional customers, which represented about 75% of its total revenue in 2015.

Low Leverage but Rising: Fitch expects Makro's financial leverage (measured by FFO net adjusted leverage) to increase to 1.3x-1.4x over the next two years as its aggressive expansion is likely to continue. Makro has expanded aggressively after being acquired by CP ALL Public Company Limited (CP ALL, A+(tha)/Negative) in mid-2013. Its FFO net adjusted leverage had increased to 1.1x by end-2015 from a net cash position prior to the acquisition.

Strong Sales Growth: Makro's sales growth is likely to be at a 9%-10% rate per year over the next two years, driven mainly by new stores opened in the last two years and those still to be opened. Makro plans to open about 10 stores per year in 2016-2017. The growth has also been supported by an expected recovery in the domestic economy and continued growth in Thailand's tourism.

Narrow but Stable Margin: Makro's EBITDAR margin is relatively narrow at 5.5%-6.0% - reflective of its wholesaler operations - compared with those of other large food retailers with margins wider than 10%. Nonetheless, its margin has low volatility, supported by the defensive nature of its businesses which are mainly selling food products. Fitch expects its margin to hover in a narrow range of 5.7%-5.9% over the next three years.

Concentration Risk: As a wholesaler, Makro has higher concentration risk than other players in the food retail industry in terms of the number of customers and stores. In addition, one key customer base - traditional retailers - is likely to shrink over the long term, given the continued transition of traditional trade to modern trade. However, Makro's strategy to tap more HORECA operators should partly help in mitigating this risk.

Strong Brand Recognition: "Makro" is an internationally known brand in emerging markets for cash & carry wholesalers. CP ALL has been granted the right to use this brand in 11 countries in Asia, including Thailand and China, by SHV Group of the Netherland (the former, major shareholder of Makro). This supports Makro's medium-term plan to expand into other ASEAN countries. Makro also owns several house brands.

Linkage with CP ALL: Makro's National Long-term Rating incorporates a one-notch uplift from its standalone credit profile. This is to reflect Makro's strategic importance to its 98%-holding parent company, CP ALL, in the food retail market both in Thailand and in the region. The Negative Outlook reflects the Outlook on CP ALL.


Fitch's key assumptions within our rating case for the issuer include:
- Opening of 10 new large-format stores a year in 2016-2017
- Total sales growth of 9%-10% a year in 2016-2017
- A slight narrowing in the EBITDAR margin to 5.7%-5.9% in 2016-2017
- No capex for offshore expansion in 2016-2018.


Positive: Developments that may, individually or collectively, lead to revision of the Outlook to Stable from Negative include:
- A positive action on CP ALL

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- An aggressive debt-funded investment leading to an increase in FFO-adjusted net leverage to above 2.5x on a sustained basis, or
- A deterioration in EBITDAR margin to below 4.5% on a sustained basis, or
- A negative rating action on CP ALL, or
- Weakening ties with CP ALL.