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Fitch Affirms Kingfisher at 'BBB'; Outlook Stable
October 20, 2015 / 10:49 AM / 2 years ago

Fitch Affirms Kingfisher at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 20 (Fitch) Fitch Ratings has affirmed UK-based home improvement retailer Kingfisher Plc's Long-term Issuer Default Rating (IDR) at 'BBB' with Stable Outlook. The Short term IDR has also been affirmed at 'F2' and the senior unsecured ratings at 'BBB' in line with the IDR. The agency has also withdrawn the 'F2' short-term senior unsecured instrument rating, due to a lack of debt instruments outstanding. The ratings continue to reflect Kingfisher's geographically diversified operations, benefitting from leading market shares and scale in selected European and international home improvement retail markets and an established brand portfolio. The ratings also reflect the group's demonstrated ability to absorb economic headwinds and to implement self-help measures, investments in an evolving business model and prudent financial policies. However, the ratings are constrained by significant operating leverage inherent within the business, leading to potential volatility in profitability, and by susceptibility to consumer spending cycles and the housing market. The Stable Outlook reflects Fitch's expectation that Kingfisher will continue to generate adequate funds from operations (FFO), despite continued headwinds in selected European and international markets and that capex and dividends will constrain free cash flow (FCF) generation. We expect financial headroom to decline in the near-term as the group undertakes its share buyback programme in 2015; however the affirmation reflects our belief that Kingfisher will pursue a financial policy within the parameters commensurate with the ratings. KEY RATING DRIVERS Evolving Strategy & Operational Model Fitch views the company's new strategic direction, aimed at unifying operations and leveraging the size of the group, initiated under the new leadership as a positive step towards addressing underlying changes in the retail market and consumer shopping habits. The strategic repositioning focuses on store formats and sizes, multi-channel offerings, range reviews, retail channel differentiation between consumer and trade offerings and associated brand communication. Central to the strategic repositioning will be greater integration of the regional businesses and brands, with the aim to simplifying the supply chain. Fitch expects this strategic development will require investment in integrated IT networks before full cost benefits can be achieved (which we expect to be after financial-year ending January 2017). Stable Profitability Fitch expects stable profitability in the near-term with EBIT margin just under 6.5%, which is weak for the ratings. Weaker performance in France and other international markets is eroding some of the positive effect from the initiated self-help measures and stronger performance in the UK. In addition, we do not see a near-term structural improvement in margins as we expect cost efficiencies to be reinvested in the business. We view a more favourable consumer environment in its key European and international markets as a prerequisite for a structural improvement in margins. FCF Generation & Capital Allocation Fitch expects neutral FCF and a near-term peak of FFO adjusted net leverage at 3.0x, as the group focuses on shareholder returns (dividends and buybacks) in 2015. This will result in limited near-term financial headroom for the rating. We assume that management will continue to manage capital allocation and shareholder distribution within communicated guidelines and rating sensitivities compatible with the rating, in turn supporting the Stable Outlook. In this context we also note the limited financial debt of the group, with leverage predominantly consisting of lease-adjustments for the group's property portfolio. Correlation to Consumer Spending Fitch observes a widening divergence of key macro-economic indicators for Kingfisher's operations, which we expect to remain a feature in the near-term. UK like-for-like sales are benefiting from an accelerating consumer-led economic recovery, which is also supported by a strong housing market. In France, however, the economic recovery is lagging behind European peers such as Germany and the UK, with consumer confidence less pronounced and volatile and a still weak housing and construction market translating into softer sales and profitability. The international operations, particularly in Russia and China, are also facing economic headwinds, with central and southern Europe experiencing slow growth and recovery. The international operations also are subject to increasing FX volatility. LIQUIDITY At FYE15, Kingfisher had a GBP200m undrawn committed bank facility, which has since been increased to GBP225m maturing in 2020, supported by readily available cash of GBP311m (as defined by Fitch and assuming GBP250m of not readily available cash absorbed by working capital swings intra-year). This was more than sufficient to cover maturing debt of GBP105m by January 2016. After that, the next maturity is a USD68m USPP maturing on 24 May 2016. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Key Fitch forecast assumptions include: -Group revenue under pressure over the next two years, before returning to modest growth in 2018, driven by continued recovery in the UK but offset by challenging operating conditions in France and other international markets; -EBIT margin to increase marginally to 6.3% in FY16 (from 6.2% in FY15). Near-term restructuring benefits are expected to be reinvested in customer offerings; -FX volatility (particularly USD, EUR and EM exposure) resulting in continued FX translation risks; -Capex at around 3.7% of sales; -Dividends of around GBP350m p.a. over a four-year rating horizon and completion of the announced share buy-back programme at GBP200m in FY15 with no additional share buy-backs thereafter; -Modest bolt-on acquisitions of GBP20m p.a. over a four-year rating horizon -Moderate working capital profile may weaken in the short-term due to product launches. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: -Structural deterioration in profitability, leading to EBIT margin below 6.5% and a decline in market share in core markets -Negative FCF generation and a more aggressive financial policy leading to FFO-adjusted net leverage above 3.5x (FY15: 3.0x) and FFO fixed charge coverage below 2.7x (FY15: 2.8x) both on a sustained basis Positive: A one notch upgrade to 'BBB+' would be contingent on an alignment of financial policies with the higher rating level, including: -Successful strategic repositioning leading to a structural improvement in profitability, with EBIT margin remaining sustainably above 9% and underpinned by strong market share and geographical diversification -Positive FCF generation and continued conservative financial policy leading to FFO-adjusted net leverage sustainably below 2x and FFO fixed charge coverage above 4.0x Contact: Principal Analyst Paula Murphy Director +44 203 530 1718 Supervisory Analyst Frank Orthbandt Director +44 203 530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=992569 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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