February 27, 2017 / 9:22 AM / 9 months ago

Fitch Affirms Alfamart at 'AA-(idn)'; Outlook Stable

(The following statement was released by the rating agency) JAKARTA, February 27 (Fitch) Fitch Ratings Indonesia has affirmed PT Sumber Alfaria Trijaya Tbk's (Alfamart) National Long-Term Rating at 'AA-(idn)'. The Outlook is Stable. At the same time, the agency has affirmed Alfamart's outstanding Indonesian rupiah-denominated senior unsecured bonds at 'AA-(idn)'. A full list of rating actions is at the end of this commentary. The affirmation is based on Alfamart's solid market position and robust store growth, while maintaining a financial profile consistent with its rating, resilient product composition, and strong competitiveness against larger modern retail formats. We expect the EBITDA margin to remain stable at around 6% in 2017 and 2018, but free cash flow to stay negative due to rapid store expansion. The increased scale will help Alfamart maintain its funds flow from operation (FFO) net leverage, adjusted for pre-paid rents, below 2.5x. 'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations KEY RATING DRIVERS Robust Store Growth: Fitch expects Alfamart to continue its store rollout at a rate of 1,200 stores per annum in 2017 and 2018 (2016: around 1,250 stores). Similarly, its Alfamidi store format will grow at a stable rate of 200 stores per annum during the same period. We expect more than 60% of the new stores to be located outside Java in areas with low modern retail penetration and higher growth rates. The high rate of store openings will help Alfamart maintain strong annual revenue growth of above 12% for the next two years - higher than Indonesia's modern trade and grocery sales growth, which Nielsen data shows at above 9% for 2016. We forecast Alfamart's consolidated revenue to double to more than IDR70trn by 2018, from less than IDR35trn in 2013. Strong Market Position: Robust expansion has helped Alfamart maintain its solid modern retail market position in Indonesia. The company is the second-largest mini-market operator in terms of store numbers, revenue and geographical presence - slightly behind PT Indomarco Prismatama's Indomaret stores. Fitch expects the mini-market format to remain the dominant modern retail format due to ability to penetrate rural areas that have less traffic and its favourable store offerings. Stable Profitability but Negative FCF: Fitch expects EBITDA margin to remain stable at around 6% in 2017 and 2018 as Alfamart implements cost controls and the utilisation of new warehouses built in 2016 increases. Nonetheless, cash flow from operations of around IDR3trn will be insufficient to pay annual capex of more than IDR3.5trn - necessitating additional borrowing to fund its expansion. However, EBITDA growth from new store openings will help Alfamart maintain FFO net leverage, adjusted for pre-paid rents, below 2.5x. Defensive Product Mix: Alfamart's credit profile is supported by its resilient product composition compared with larger retailers - stocking less non-discretionary products, such as electronics. Alfamart generates more than 68% of its revenue from food-related products, which are stable and defensive in nature. Structural Subordination at MIDI: Alfamart owns 86.72% of PT Midi Utama Indonesia Tbk (MIDI, not rated), which generates more than IDR800bn of EBITDA and accounts for more than 20% of Alfamart's consolidated EBITDA. However, MIDI also had outstanding banking facilities of more than IDR2trn to support its store expansion. Alfamart's creditors are structurally subordinated to those of MIDI as Alfamart can only access cash flows at MIDI after the latter services its debt, although the current level of structural subordination is not significant. However, further increase in debt at MIDI could affect Alfamart's credit profile. Regulatory Compliance Risk: Fitch sees evolving regulations as a major risk for Indonesian retailers. For example, Alfamart's franchised stores only made up 27% of its total stores at end-2016; insufficient to meet the minimum 40% ratio required by October 2017. We also do not currently expect any major monetary penalty that may materially impact the company's credit profile. DERIVATION SUMMARY Alfamart has lower FFO-adjusted net leverage, a less aggressive financial policy and stable revenue growth compared with PT Tower Bersama Infrastructure Tbk (TBI, AA-(idn)/Stable). These factors compensate for TBI's solid margin of above 80% and long-term contracted cash flows. Alfamart also compares well with PT Japfa Comfeed Indonesia Tbk (AA-(idn)/Stable). Both companies have solid market positions in their respective industries. Japfa's higher margin and cost pass-through ability are compensated by Alfamart's defensive cash flows and lower leverage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Addition of 1,200 Alfamart stores and 200 Alfamidi stores per annum in 2017 and 2018. - Year-on-year sales per-day growth of 3% for Alfamart stores. - Dividend payout ratio of 30% in 2017 and 2018 (2016: 40%). RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - FFO fixed-charge coverage rises above 3.0x on a sustained basis (2016: 2.9x) - FFO net leverage, adjusted for pre-paid rents, falls below 2.0x on a sustained basis (2016: 1.5x) Developments that May, Individually or Collectively, Lead to Negative Rating Action - FFO fixed-charge coverage falling below 2.5x on a sustained basis - FFO net leverage, adjusted for pre-paid rents, rises above 3.0x on a sustained basis LIQUIDITY Solid Liquidity and Funding Access: Alfamart had a IDR937bn cash balance and IDR2trn of unutilised committed facilities at end-2016, against approximately IDR1.5trn in short-term debt maturities - including the IDR1trn maturity of Indonesian rupiah bonds due on June 2017. We believe refinancing risk is low due to the company's strong access to bank funding and proven record of accessing the local bond market. FULL LIST OF RATING ACTIONS National Long-Term Rating affirmed at 'AA-(idn)'; Outlook Stable IDR1trn senior unsecured bonds due 2017 affirmed at 'AA-(idn)' IDR600bn senior unsecured bonds due 2018 affirmed at 'AA-(idn)' IDR400bn senior unsecured bonds due 2020 affirmed at 'AA-(idn)' Contact: Primary Analyst Olly Prayudi Associate Director +62 21 2988 6812 PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments - Fitch's total debt calculation deducts prepaid rents, which are normally funded by external borrowings. Fitch has capitalised annual rental payments by a multiple of 5.0x applicable for Indonesia. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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