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Fitch Affirms Arcelik at 'BB+', Outlook Stable
June 22, 2017 / 11:09 AM / 6 months ago

Fitch Affirms Arcelik at 'BB+', Outlook Stable

(The following statement was released by the rating agency) BARCELONA/LONDON, June 22 (Fitch) Fitch Ratings has affirmed Arcelik A.S.'s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB+' and National Long-Term rating at 'AA(tur)'. The Outlooks are Stable. Fitch has also affirmed Arcelik's senior unsecured rating at 'BB+'. The affirmation reflects Fitch's expectation that Arcelik will maintain FFO adjusted net leverage below 1.5x in the medium term despite increased expansion efforts, which will keep FCF generation under pressure until the end of 2018. Fitch believes that the current expansion plans into ASEAN markets will reduce the company's exposure to the Turkish market, but Arcelik's exposure to emerging markets continues to be higher than its peers'. KEY RATING DRIVERS Weak FCF Generation: Arcelik has accelerated its investments in ASEAN markets to improve its geographic diversification, which has historically been focused on Turkey and Europe. Increased capex in new factories and investments had an impact on FCF margins in 2016 (-0.2%), and Fitch expects this to continue through 2017 (-3.2%) as well. We expect capex to normalise after the current investment phase, and forecast the company to turn FCF positive from end-2018 (0.2%). Leverage Commensurate with Ratings: Arcelik has financed its new investments internally by releasing cash through better working-capital management and asset sales, keeping leverage metrics in line with the current ratings. We forecast that FFO adjusted (for receivables) net leverage will remain below 1.5x until 2020, staying below its negative rating sensitivities. Arcelik's FCF generation is still weak compared with its peers' in spite of stable leverage metrics, and a sustainable improvement would be needed for a positive rating action. Emerging-Market Exposure: The recent investment/expansion plans in the ASEAN region are a positive step towards reducing Arcelik's exposure to the Turkish economy, which has been a constraint on its ratings. Arcelik has become a more geographically diverse white-goods manufacturer in the past 10 years, with revenues from the domestic market declining to 40% in 2016 from 50% in 2008, backed by solid market share gains in Europe and expansion into new emerging markets. However, Arcelik's emerging-market presence is still high compared with peers like Whirlpool and Electrolux, which remains a credit concern. Growing Market Shares: Arcelik has achieved strong international revenue growth in the past few years, by taking advantage of the more price-conscious consumers in western Europe and by capitalising on its strong marketing and distribution network, allowing it to become one of the top-three white-goods manufacturers in Europe. We believe that Arcelik will be able to maintain and build on its market shares further, through its low-cost manufacturing, strong R&D, and solid product line. We expect international revenue growth to be the main revenue driver beyond 2017, as Arcelik has targeted markets where appliance penetration rates are lower than in the rest of the world. Expanding into India: In May 2017 Arcelik signed a deal with Voltas, part of the Tata Group, India's largest conglomerate, to establish a joint venture in India. The JV, with an equity capital of USD100 million, will launch a refrigerator production facility which is aimed at being operational by the end of 2018. The JV will also sell other major domestic appliances in India, produced in various Arcelik facilities around the world. The partnership will leverage the Beko brand and its expertise in the major domestic appliance sector across the globe, as well as Voltas' strong brand presence and wide sales and distribution network in India. Financial Services Adjustments: Arcelik's reported leverage is affected by its higher than average working-capital needs, as a significant portion of durable goods are sold on credit in Turkey. This is partly financed by Arcelik, but the consumer credit risk is covered by banks' letters of credit and mortgages. Fitch assumes approximately 120 days of domestic receivables come from this business practice in Turkey and adjusts debt accordingly to reflect a more accurate peer comparison. Based on its financial services criteria, Fitch applies a 3x debt/equity multiple for these receivables. DERIVATION SUMMARY Arcelik has strong market shares in Turkey and Europe, which drive stable EBITDA (around10.5%) and FFO margins ( around 8%), that are commensurate with a 'A' rating median in our capital-goods Navigator, and are also in line with higher-rated peers like Whirlpool (BBB) and Panasonic (BBB). However, these strengths are mitigated by weak FCF generation, driven by intense capex in new markets, and the structurally high working-capitall needs of the company. Despite the current investment phase, Arcelik's leverage metrics adjusted for financial services remain below its negative rating sensitivities and conform to a 'A' rating median in our capital-goods Navigator. Arcelik's technological content and R&D record are more or less in line with Whirlpool, Electrolux and the broad white-goods industry. However, compared to higher-rated white-goods manufacturers, Arcelik's revenues are mainly derived from emerging markets. Arcelik is expanding its geographical diversification away from Turkey, but the company remains vulnerable to macroeconomic, political and FX risks in emerging markets. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - double-digit revenue growth in international markets; - short term growth in domestic market supported by government incentives - stable profitability margins in line with historical performance; - sizeable capex outlay for 2017 and 2018, in line with acquisition and expansion plans; - additional financing to fund M&A and expansion activities; - financial services adjustment, assuming 120 days of domestic receivables, (see working-capital and financial services adjustments sections) RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Receivable-adjusted FFO net leverage ratio below 1.5x. (1.3x end-2016) -FFO margins consistently above 10%. (10.6% end-2016) -FCF margin above 2% on a sustainable basis. (-0.2% end-2016) Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Receivable-adjusted FFO net leverage ratio above 2.5x. -FFO margin below 8%. -Consistently negative FCF. LIQUIDITY Low Liquidity Score: Historically, Arcelik's liquidity score has been below 1x, as a result of the use of short-term debt to finance its high working-capital needs. Cash on the balance sheet (TRY2,120 million as of end- 2016) matches short-term debt of TRY2,181 million for 2017, but it falls short of covering our minus TRY577 million FCF forecast for 2017. Fitch believes that this risk is mitigated by Arcelik's comfortable (uncommitted) lines from Turkish banks which were available even in 2008-2009. The liquidity score of below 1x is not considered adequate for the current rating levels, but the risk is partly mitigated by customer receivables financing that is deemed self-liquidating. Contact: Principal Analyst Shrouk Diab Associate Director]+971 4 424 12 00 Supervisory Analyst Cigdem Cerit Associate Director +93 93 467 88 40 Fitch Ratings Espana S.A.U. Av. Diagonal 601 planta 2 08028 Barcelona Spain Committee Chairperson Raymond Hill Senior Director +44 203 530 10 79 Summary of Financial Statement Adjustments - - Fitch assumes approximately 120 days of domestic receivables comes from this business practice in Turkey and adjusts debt accordingly to reflect a more accurate peer comparison (TRY1.6 billion for end-2016). - Fitch also restricts 2% of cash/revenues as restricted cash required for operational needs. (TRY322 million for end- 2016). - Fitch considers TRY615 million factoring receivables as debt, and adjusts its debt ratios accordingly. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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