Tris confirms high opinion of CP All, debt Ch.Karnchang retains A-

Tris Rating has affirmed its A+ rating on CP All Plc, and the rating on the company’s outstanding senior unsecured debentures at A.

The rating reflects CP All’s market position and proven record as the dominant operator of convenience stores in Thailand, the cash-based nature of its business, nationwide store network and wellestablished support facilities.

But these strengths are partially offset by high financial leverage and intense competition. The rating takes into account the slow pace of the economic recovery in Thailand and its effect on consumer spending.

CP All enhanced its growth opportunities through the acquisition of Siam Makro Plc in late 2013. Makro is one of the leading food wholesalers in Thailand. Unlike 7-Eleven, Makro’s key customers are resellers, as well as operators in hotel, restaurant and catering businesses. CP All can also leverage Makro’s brand equity and expertise to expand overseas.

Tris Rating suggests that the same-store sales growth of 7-Eleven and Makro will stay at a low-single-digit percentage over the next three years. Sales edged up by 8.4% year-on-year to 471 billion baht in 2017, lower than the 10% growth rates achieved in 2015 and 2016.

New store openings drove growth, while same-store sales grew at a lower rate. Samestore sales at 7-Eleven grew by 1.6% in 2017, compared with 2.4% in 2016. Same-store sales at Makro rose by 1.3% in 2017, compared with a 4.1% rise in 2016.

In the first quarter of 2018, CP All’s consolidated sales rose by 9.1% year-on-year to 123.7 billion baht. Two factors pushed growth higher: more new 7-Eleven stores and a hike in the excise tax on cigarettes that pushed prices higher.

Success in improving efficiency and increasing sales of high-margin products attributed to the widening margin. Ebitda margin, including adjustments for operating leases, continued to grow from 9.6% of sales in 2016 to 9.9% in 2017 and the first quarter of 2018.

Ebitda increased steadily from 36.8 billion baht in 2016 to 41.1 billion in 2017 and 10.9 billion in the first quarter of 2018.

CP All will continue to benefit from economies of scale and higher operating efficiency, according to the ratings agency. Sales will increase from 471 billion baht in 2017 to 580 billion in 2020. Ebitda will grow from 41 billion baht in 2017 to 52 billion in 2020.

CP All’s total debt to capitalisation will improve gradually, according to Tris. Total debt had increased considerably to pay for the acquisition of Makro in 2013. Cash flow rose significantly over the past five years. Nevertheless, CP All’s total debt remains high, owing to sizeable capital expenditures for new store openings, both 7-Eleven and Makro.

The ratio of total debt to capitalisation (total debt includes perpetual debentures outstanding and adjustments for operating leases) was 77.5% in 2017 and 73.3% at the end of March 2018.

Over the next three years, the company expects between 17 billion and 18 billion baht for capital expenditure per year. CP All will add 700 7-Eleven stores and 8-10 Makro stores a year in Thailand and abroad.

Operating cash flow will be sufficient to fund the capital spending plans. Tris expects total debt to capitalisation to decline to 65% in 2019, assuming CP All doesn’t divest of its equity holding in Makro.

Tris doesn’t expect significant adverse change in CP All’s consolidated sales, as counter service income accounts for only 1% of total revenue. The ebitda interest coverage ratio will improve to 5-8 times in 2018-20, the agency said. FFO to total debt will increase to about 20% in 2018-20.

CP All’s rating or outlook could be revised upward should capital structure and cash flow protection improve substantially. On the contrary, the rating or outlook could be revised downward if the operating performance is weaker than expected or there are huge investments, which would result in the deterioration of capital structure and debt serviceability. Tris Rating has affirmed the company rating of Ch.Karnchang Plc (CK) and its outstanding senior unsecured debentures at A-.

Tris also assigned a rating of A- to CK’s proposed issue of up to 2 billion baht in senior unsecured debentures, due within 10 years. The company will use the proceeds from the new debentures to refinance existing debentures.

The ratings reflect CK’s position as a top-tier contractor, its ability to undertake large-scale and sophisticated construction projects, as well as the synergy and financial flexibility the company gains from its strategic investments.

But the ratings are constrained by the company’s high leverage, as well as the cyclical nature of and competitive threats in the engineering and construction industry.

CK’s operating performance in the first quarter was below Tris’s expectation. Revenue was 7.4 billion baht, down 8% from a year earlier. Gross profit margin in the first quarter rose to 8.6% from 8.3% in 2017.

CK generated funds from operations (FFO) in the first quarter of 518 million baht, up 22% from the same period last year. CK’s backlog as of March 2018 stood at 65.4 billion baht. Major projects in the backlog include MRT Orange Line project contracts worth a combined 24.8 billion baht, the maintenance and engineering equipment contract for the MRT Blue Line worth 13.9 billion and the Xayaburi hydropower dam project worth 11.6 billion.

Tris sees CK remaining competitive in securing new projects. In its base-case scenario, the agency expects CK revenue of 35-38 billion baht a year during 2018-20.

CK’s strong backlog should secure future revenue. Moreover, CK will probably sustain its gross margin above 8% on average despite stiff competition, and the total debtto-capitalisation ratio could stay below 65% over the next three years.

A credit upside is possible if CK could significantly enhance cash flow protection by generating stronger than expected FFO, as well as maintain its debt-to-capitalisation ratio below 60% for a sustained period.

A credit downside will be caused by significant cost overruns in major projects or unanticipated, extensive financial support to affiliates.