Fitch Revises Lotte Shopping's Outlook to Negative; Affirms at 'BBB'
OREANDA-NEWS. Fitch Ratings has revised the Outlook on South Korea-based Lotte Shopping Co. Ltd's (Lotte) Long-Term Issuer Default Rating (IDR) to Negative from Stable. The Long-Term IDR and senior unsecured debt rating are affirmed at 'BBB'.
Fitch's revision of the Outlook to Negative reflects the company's weak operations in 2015 and our view that recovery will be slow, especially in the company's domestic hypermarket and Chinese operations.
KEY RATING DRIVERS
Weak 2015 Performance: Lotte's 2015 operating profit (non-financial operations) fell 30% to KRW688bn after consumer sentiment was severely hit by the outbreak of Middle East Respiratory Syndrome in the country in 1H15. Same-store sales growth and profitability in the domestic department store segment rebounded in 2H15, especially towards 4Q15.
However other segments continued to lag, with the domestic hypermarket segment's same-store sales shrinking and continuing losses in overseas operations. Furthermore the company posted impairment losses of around KRW620bn in 4Q15 as it wrote off goodwill in its underperforming Chinese and domestic operations. As a result, the company posted a consolidated net loss of KRW346bn in 2015.
Challenging Operating Environment: Fitch expects Lotte's operations to improve in 2016, helped by the low base in 1H15. However lingering weakness in consumer sentiment, rising rental expenses, and competition from other retail formats are likely to continue to put pressure on its profitability, especially in its domestic hypermarket and Chinese retail operations. As such, Fitch expects the earnings recovery to be slow.
Capex to Remain Stable: Lotte cut its capex to below KRW1.4trn in 2015 during the challenging operating conditions, compared with capex of KRW1.8trn-2.0trn in 2012-2014. We expect capex to remain similar to 2015 levels in 2016-2017 at KRW1.4trn-1.5trn.
Credit Profile Under Pressure: Lotte's credit metrics deteriorated in 2015 after earnings came in lower than expected. Adjusted net debt to EBITDAR (non-financial) rose to 4.6x in 2015, above the 4.5x level at which Fitch would consider negative rating action. Although we expect the company's credit metrics to improve slightly from 2016, reflecting a low base effect and slight recovery in consumer sentiment, we believe the company's credit profile will remain under pressure amid a challenging operating environment in the company's key markets.
Fitch's key assumptions within the rating case for Lotte Shopping include:
- Non-financial revenue growth of around 4% in 2016 and 2017, reflecting the low base in 1H15 and modest demand growth
- Losses in overseas operations to continue but to narrow slightly in 2016-2017
- Capex in its non-financial operation to be around KRW1.4trn-1.5trn in 2016-2017
Negative: Future developments that may, individually or collectively, lead to negative rating action include;
- Adjusted net debt/EBITDAR from non-financial operations exceeding 4.5x on a sustained basis
Positive: Future developments that may, individually or collectively, lead to a revision to a Stable Outlook include;
- Adjusted net debt/EBITDAR from non-financial operations remaining below 4.5x on a sustained basis