ACRA Trainings on Credit Analysis

ACRA assigns BBB-(RU) to Sanymon Corporation (BVI), holding entity for Azbuka Vkusa group, outlook Stable

The credit rating of Sanymon Corporation (BVI) (hereinafter — the Company, Azbuka Vkusa, or Azbuka) is based on its strong business profile, adequate corporate governance and very high business profitability. That said, the Company’s credit rating level is pressured by its aggressive development strategy and heightened debt burden.

Azbuka Vkusa is an omnichannel grocery network in the medium+ segment, relying on the supermarket and minimarket formats and focused in Moscow, the Moscow Region, and St. Petersburg. As of March 31, 2017, its network counted 110 physical stores and an online store AV.RU. Its current strategy envisages rolling out network's presence in St. Petersburg and proactive promotion of convenience and online stores. The Company is controlled by its founders Maxim Koscheenko and Oleg Lytkin, as well as by its management members, while a blocking stake belongs to affiliates of Millhouse and Invest AG.

Key rating assessment factors

Strong operating profile of Azbuka Vkusa rests on its dominant position in a particular segment of the Russian food retail sector, despite of being abated by high geographical concentration. Although the Company focuses on the audience with high or above average incomes, ACRA believes that this segment cyclicality in the key regions of Company’s presence (i.e. in Moscow and St. Petersburg) is moderate. Azbuka’s business profile is positively affected by promotion of its own production and private labels that account by now for some 20% of total turnover. The Company develops all key retail formats except hypermarkets and boasts leading positions in the segment of quality food retail in the regions of presence.

Adequate corporate governance. ACRA notes high management efficiency at Azbuka, as its key top managers have been working for the Company for 10-15 years fostering a rapid network development and successfully overcoming several economic crises. Operational planning and operational control are at a high level, although noteworthy is the fact that the formal financial risk management function is still at the formation stage, despite a visibly low degree of credit, currency and interest rate risks. The group structure is slightly complex, although financial transparency is acceptable, with the Company releasing IFRS statements on a quarterly basis and related party transactions beyond the group inexistent.

Aggressive development strategy. The Agency assesses the Company's strategy as relatively aggressive: by 2021, Azbuka plans to build up the store count and nominal revenues manifold, with key priorities being the development of the “AV Daily” convenience store format, which is slated to achieve up to 45% of revenues by 2021, and remote sales growth to up to 5% of revenues by the same year. According to the Agency, such a large-scale network development may pose significant risks because of both a limited capacity of the quality retail market and historically quite a long period needed for Azbuka outlets to attain the planned turnover figures. An extra risk is related to generally significant investments in each store opening (that said, the Agency notes relatively lower opening costs for «AV Daily» stores and a shorter period of those stores reaching maturity).

Heightened debt burden and moderate liquidity. The Agency expects a considerable loan portfolio increase while implementing its strategy, which may require material investments in 2017-2021. By our estimates, Azbuka’s total debt to FFO before net interest payments may amount to 3.4-3.6x in 2017-2018 (2.2x as of March 31, 2017). The ratio of debt, adjusted for operating lease, to FFO before fixed payments in 2017-2018 may land at an elevated level of 5.5x (4.8x as of March 31, 2017), while fixed payments coverage might fare low at 1.4 x (1.5 x as of March 31, 2017). That said, the Agency notes that the Company enjoys an acceptable liquidity level due to availability of significant unused credit line balances (RUB 10.6 bln accounting for an increase expected in 2К2017, and RUB 8.2 bln with no increase accounted for) and expects a further surge in credit limits in case of a successful strategy implementation.

Very high margin and moderate business size. By the Company’s preliminary estimates, its revenues in 2016 ran into RUB 50 bln net of VAT (up 10% vs 2015). Despite relatively high rental and labor costs, as well as an elevated goods write-down (4.1% in 2016), the Company has traditionally showed excellent profitability. Thus, its FFO margin before net interest payments and taxes fared 8.1% (RUB 4.1 bln), while its FFO margin before fixed charges and taxes ran into 16.5% (RUB 8.3 bln) at end-2016. Each square meter of trading space brought some RUB 108 th of EBITDAR in 2016, which is several times higher than the figures shown by all public peers. The Agency expects maintaining the achieved profitability levels over the forecast period with regard to an active growth phase of the Company.

Key assumptions

  • Network growth by over 100 stores per year till 2021, with new sales points reaching target sales volumes within 18 months.
  • Annual LFL sales and relevant costs growth on par with inflation expected by ACRA (4.0-4.5%).
  • Retaining the current FFO margin at over 15% before fixed charges and taxes.
  • Dividend payout at 50% of net income.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • A material decline in debt burden, with adjusted debt dropping below 4.5х of FFO before fixed charges, or fixed charge coverage climbing above 2.0х;
  • A strategy revision in favor of a less aggressive network rollout, or a successful implementation of the current strategy.

A negative rating action may be prompted by:

  • An increase in adjusted debt above 6.0х of FFO before fixed charges coupled with a simultaneous deterioration of debt structure, or a decline in fixed charge coverage below 1.0х;
  • A decline in FFO margin before fixed charges below 11%;
  • A drop in LFL sales by more than 10%, with sustained new store opening dynamics;
  • A material deterioration of access to external liquidity sources;
  • Further sector regulation tightening capable of affecting the Company’s financials.

Rating components

Standalone creditworthiness assessment (SCA): bbb-

Adjustments: none.

Issue ratings

The company has no securities issues outstanding.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

A credit rating has been assigned to Sanymon Corporation (BVI) for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (April 13, 2017).

The assigned credit rating is based on the data provided by Sanymon Corporation (BVI), information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Sanymon Corporation (BVI) participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Sanymon Corporation (BVI) in its financial statements have been discovered.

ACRA provided an additional service to OOO City Supermarket, a Sanymon Corporation (BVI) affiliate, in the form of informational support (a practical seminar). No conflicts of interest were discovered in the course of credit rating assignment.

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