OREANDA-NEWS. Fitch Ratings (Thailand) Limited has downgraded Siam Makro Public Company Limited's (Makro) National Long-Term Rating to 'A(tha)' from 'A+(tha)'. The Outlook is Stable. Simultaneously, Fitch has affirmed Makro's 'F1(tha)' National Short-Term Rating.

This follows a downgrade of the National Long-Term Rating of CP ALL Public Company Limited (CP ALL), which owns 98% of Makro, to 'A(tha)' from 'A+(tha)'.


Links with CP ALL: The downgrade of the National Long-Term Rating on CP ALL makes it equivalent to Makro's standalone credit profile. As a result, a one-notch uplift to reflect Makro's strategic importance to its parent is no longer relevant.

Leading Food Wholesaler: Makro has been the sole operator in Thailand's modern-trade food wholesale market for over 25 years. Unlike other large food retailers, its target customers are traditional retailers, distributors, hotel, restaurant and catering operators, and institutional customers, which represent 75% of total revenue.

Low but Rising Leverage: Makro's funds from operations (FFO) net adjusted leverage is likely to rise to 1.6x-1.7x at end-2016 due to its continued aggressive expansion. Fitch expects its financial leverage to decrease in 2017, because Makro plans to slow down large-format store expansion. Makro has expanded rapidly after being acquired by CP ALL in mid-2013. Its leverage had increased to 1.1x at end-2015 from a net cash position before the acquisition.

Strong Sales Growth: Fitch expects Makro's sales growth to be 9%-10% a year over the next two years, mainly due to new store openings in the last two years and in 2016. Makro aims to open 13-14 large-format stores in 2016 before reducing the number in 2017. Sales growth has also been supported by a recovery in the domestic economy and continued growth in tourism.

Narrow but Stable Margin: Makro's EBITDAR margin is relatively narrow at 5.5%-6.0%, compared with those of other large food retailers, which have margins of more than 10%, due to its wholesaler operations. However, its margin has low volatility, supported by the defensive nature of its business, which mainly sells food products. Fitch expects its margin to stay in the narrow range of 5.6%-5.7% over the next three years.

Concentration Risk: As a wholesaler, Makro is more highly concentrated in terms of customers and stores than other companies in the food retail industry. In addition, one of Makro's key customer bases, traditional retailers, is likely to shrink over the long term due to the continued transition of the retail industry towards modern formats like supermarkets and convenience stores. However, Makro's strategy to tap more hotels, restaurants and caterers should mitigate this risk.

Strong Brand Recognition: Makro is an internationally known cash and carry wholesaler brand in emerging markets. CP ALL has been granted the right to use this 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 members of the Association of Southeast Asian Nations. Makro also owns several house brands.


Fitch's key assumptions within our rating case for the issuer include:

- opening 13 new large-format stores in 2016 and four stores in 2017

- total sales growth of 9%-10% a year in 2016-2017

- EBITDAR margin of 5.6%-5.7% in 2016-2017

- No capex for offshore expansion in 2016-2018


Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- A positive rating action on CP ALL

Factors that may lead to negative action on Makro's standalone credit profile include:

- An aggressive debt-funded investment leading to an increase in FFO-adjusted net leverage to above 2.5x on a sustained basis (end-June 2016: 1.6x),

- Deterioration in EBITDAR margin to below 4.5% on a sustained basis (1H16: 5.2%)

Fitch will provide a one-notch uplift to Makro's National Long-Term Rating if its standalone rating falls below CP ALL's National Long-Term Rating of 'A(tha)' to reflect Makro's strategic importance to CP ALL in the food retail market both in Thailand and in the region, under Fitch's Parent Subsidiary Linkage methodology.