ACRA Modelling Day - 2018

ACRA upgrades the credit rating of Sanymon Corporation (BVI), holding entity for Azbuka Vkusa group, to BBB(RU), outlook Stable

The credit rating upgrade of Sanymon Corporation (BVI) (hereinafter, the Company, Azbuka Vkusa, or Azbuka) is driven by a positive assessment by ACRA of the Company’s development strategy flexibility, in particular, by a significant schedule revision for new store openings. The credit rating is based on its strong business profile, adequate corporate governance, and very high business profitability. The credit rating is under pressure from the heightened leverage coupled with the negative free cash flow.

Azbuka Vkusa is a multi-channel grocery chain in the medium+ segment, relying on the supermarket and minimarket formats and focused in Moscow, the Moscow Region, and St. Petersburg. As at March 31, 2018, the chain comprised 163 stores; according to the Company’s preliminary estimates, revenues for the 2017 financial year (April 2017 through March 2018) totaled RUB 53.7 bln excluding VAT (+8% vs 2016). 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

Significant revision of the development strategy. ACRA positively assesses the significantly revised plans of the Company with regard to opening new stores: from over 100 new stores as previously planned to 12 in 2018 and 30-35 a year in 2019-2020. At the same time, the Agency still assesses the Company’s strategy as moderately aggressive. In ACRA’s opinion, a large-scale expansion of the chain may pose substantial risks by virtue of both limited market capacity in the quality retail segment and heavy investments required for opening each new store.

Successfully closed deal to lease 20 supermarkets of the Sedmoy Kontinent chain. In late 2017, Azbuka Vkusa signed a pool of long-term lease contracts (7 years) for 20 outlets of the Sedmoy Kontinent chain (over 34,000 sq m), that now accommodate Azbuka Vkusa and AV Daily stores. ACRA notes that synchronous opening of that many stores contributed significantly to the decline in like-for-like sales in 2017 financial year (-1.9%; +2.5% in traffic and -4.3% in average spend). However, the average spend figure recovered somewhat as early as in March 2018 (-1.5% vs -7.6% in February and -12.3% in January), which would continue throughout the year, in the Agency’s opinion.

Moderate free cash flow deficit. Despite a slight adjustment of the profitability indicators following the deal with Sedmoy Kontinent, Azbuka still demonstrates high profitability. FFO margin before net interest payments and taxes fared 6.6% in 2017 (8.0% in 2016), while its FFO margin before fixed charges and taxes ran into 16.2% (15.5% in 2016). However, the operating cash flow does not fully cover the investment program and Company’s dividends (fixed at 50% of IFRS net income by the shareholders’ agreement). According to ACRA’s estimates, if profitability remains at a comparable level Company’s free cash flow deficit would run into RUB 5-6 bln in 2018-2019.

Heightened debt burden and moderate liquidity. According to ACRA’s estimates, Azbuka’s total debt may grow to RUB 18 bln by end-2019 (RUB 12.2 bln as at March 31, 2018), and its total debt to FFO before net interest payments may amount to 3.4-3.6x in 2018-2019 (3.6x as of March 31, 2018). The ratio of debt, adjusted for operating lease, to FFO before fixed payments in 2018-2019 would be elevated ranging 5.6-5.7x (5.6x as of March 31, 2018), while fixed payments coverage would fare low at 1.3x (1.3x as of March 31, 2018). The short average repayment period of the loan portfolio (just over one year) constitutes a constraining factor for leverage assessment. However, the Agency notes an acceptable liquidity of the Company resulting from a substantial amount of unused credit limits (RUB 10.4 bln as at March 31, 2018).

Key assumptions

  • Opening 12 outlets in 2018 and 30-35 stores in 2019-2020;
  • New stores reaching projected sales within 18 months;
  • Annual LFL sales and relevant costs grow on par with inflation as projected by ACRA (4.0-4.5%);
  • Retaining the current FFO margin at over 15% of FFO before fixed charges and taxes;
  • Dividend payments are at 50% of net profits under IFRS.

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 leverage, with adjusted debt dropping below 4.0х of FFO before fixed charges, or fixed charge coverage climbing above 1.5х;
  • Free cash flow becomes consistently positive (above 2% of revenues).

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 13%;
  • A drop in LFL sales by more than 5%, 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..

The credit rating of Sanymon Corporation (BVI) was published by ACRA on April 17, 2017 for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (April 12, 2018).

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 additional services to OOO City Supermarket, as Sanymon Corporation (BVI) affiliate; no additional services were provided to Sanymon Corporation (BVI). No conflicts of interest were discovered in the course of credit rating assignment.

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