March 9, 2017 / 6:59 AM / 5 months ago

Fitch Affirms Wesfarmers at 'BBB+'; Withdraws Rating

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(The following statement was released by the rating agency) SYDNEY/SINGAPORE, March 09 (Fitch) Fitch Ratings has affirmed Australia-based retailer Wesfarmers Limited's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Outlook on the IDR is Stable. At the same time, Fitch has chosen to withdraw the ratings of Wesfarmers for commercial reasons. KEY RATING DRIVERS Defensive Cash Flows: Wesfarmers' rating is supported by significant contributions from the defensive, mature and stable supermarket division. Supermarkets sell products that are essential for everyday life and exhibit low volatility in revenue and margins. By diversifying into alcohol, fuel and financial services, the Coles grocery and convenience store division has trapped a greater share of customer spending. Leading Market Share: Wesfarmers benefits from a strong market positions in its key retail segments - supermarkets (Coles Group Limited) and home improvement (Bunnings Warehouse) - that account for more than 80% of its consolidated EBIT. Coles and its main competitor, Woolworths Limited, account for a majority of supermarket and alcohol retail sales in Australia, as well as a large proportion of retail petrol sales. The market structure gives Coles and Woolworths significant market power and the ability to drive down the cost of doing business. However, we expect competition in Australian supermarkets to remain elevated, particularly as new entrants, including David Jones' expansion into food retailing and smaller players like Aldi, increasingly look to increase market share. Diversified Earnings Stream: Wesfarmers' earnings are diversified by industry and geography, with its retail business spanning all eight Australian states and territories. Wesfarmers also has a presence in the UK following completion of the Homebase acquisition. Strong retail performance has offset an earnings decline experienced in the industrial division in the past few years caused by resource-sector losses and restructuring costs in other areas. Stable Credit Metrics: Fitch believes that Wesfarmers' leverage peaked at 3.9x in the financial year to 30 June 2016 (FY16) as a result of the debt-funded acquisition of the Homebase business, the increase in off-balance sheet debt reflecting future operating lease payments on Homebase's network and a decline in the FY16 EBIT margin. While these factors are likely to weigh on Wesfarmers' credit profile over the medium-term, we believe that Wesfarmers' leverage will improve through to FY20 based on the strength of the company's Australian retail businesses. Retail Price Deflation: Revenue from Wesfarmers' Coles supermarket business is exposed to deflationary risks owing to ongoing price-based competition with major competitor Woolworths. Wesfarmers' supermarket earnings are sensitive to gross margin fluctuations. However, the risk is mitigated by product inelasticity in the supermarket space and the strong market presence of Wesfarmers' retail businesses. This allows a pass-through of the majority of cost increases and helps Coles negotiate lower supplier prices. DERIVATION SUMMARY Wesfarmers rating of 'BBB+' is well-positioned relative to peers. Wesfarmers does not have the scale or geographical diversification of global peer Carrefour SA (BBB+/Stable), but its better margins, due in part to the success of its high-margin Bunnings business, leading position in the stable Australian market and historically better credit metrics, leads to the equalisation of both entities' ratings. Wesfarmers' better margins and historically less aggressive financial policy support its higher rating than Ahold Delhaize NV (BBB/Stable), despite it not being as geographically diversified. Wesfarmers' better credit metrics and profitability, combined with its larger scale, underscores the ratings differential with Casino Guichard-Perrachon SA (BBB-/Negative). KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Wesfarmers include: - Revenue for FY17 of around AUD70 billion, with an EBIT margin of around 6%. - Flexible dividend policy. - Not including the sale of Officeworks or resource business. - Net capex of around AUD1.5 billion in FY17, gross capex of around AUD2.0 billion - 2.5 billion from FY18 to FY20. RATING SENSITIVITIES Rating sensitivities are not applicable as the rating has been withdrawn. LIQUIDITY Well-Managed Debt Structure: Wesfarmers has a well-laddered debt maturity profile, utilising several sources, including capital market issuance (domestic, US and Euro bonds) and bank bilateral facilities. Wesfarmers prefunds debt maturities. Off-Balance Sheet Financing: Wesfarmers engaged in a substantial capital expenditure programme over the past few years, including significant investment in the Coles and Bunnings store networks and accelerated Kmart store refurbishment. A large portion of this investment was funded through the sale and leaseback of assets, such as its Bunnings stores. As a result, operating leases comprised around 70% of Fitch-defined financial obligations as FYE16, with the remainder made up of bonds, bilateral and syndicated facilities. Contact: Primary Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Hasira De Silva, CFA Director +65 6796 7240 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020273 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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