ACRA assigns AA(RU) to PJSC Magnit, outlook Stable, and AA(RU) to bond issues

The credit rating of PJSC Magnit (hereinafter, Magnit, or the Company) is based on its very strong operating profile, very large size, high profitability, and very strong liquidity. The rating is constrained by medium coverage and moderate cash flow.

Magnit is one of the two largest retail market players in Russia. As of year-end 2018, the Company’s chain included 13,427 convenience stores, 467 supermarkets, and 4,505 drugstore format stores. The retail chain had 6.4 million sq. m of total sales space as of year-end 2018 and employed around 298,000 people. The Company is present in all federal districts of Russia excluding the Far Eastern Federal District.

Key rating assessment factors

Very strong business profile of Magnit is driven by low cyclicality of demand (the Company’s principle activity is retail trade in groceries and staple goods), very strong diversification by store formats as well as high brand strength. Until recently, the Company was a dominant player in a number of regions, which required no dedicated brand promotion campaigns. However, intensifying competition changed the situation. In response, Magnit developed a set of measures to increase its brand awareness including redesigned stores, complete overhaul of its product offering, and customer loyalty programs. Convenience stores account for around 75% of the Company’s revenues and almost 70% of sales space. Magnit continues to invest and develop this segment as one of the most in-demand retail formats in the market. Drugstores (Magnit Cosmetics-branded non-food stores featuring a wide offering of cosmetics, household chemicals, and homeware) represent the fastest growing format exhibiting the highest profitability. The Company also plans to grow a pharmacy chain which is expected to increase traffic in its major retail segments.

Very strong corporate governance is underpinned by high assessment of the group’s strategy and structure as well as very high assessment of the management structure, risk management policies and financial transparency. Magnit is successful in implementing a transformation strategy that aims to overcome the negative growth trends in like-for-like sales and traffic seen in recent years. From late 2018, Magnit’s average spend has been growing faster than that of its competitors (for comparable store formats), which was driven, among other things, by the overhaul of the chain’s offering done as part of the corporate strategy. Redesigned stores exhibit a substantial increase in sales. The Company’s management structure is in line with the best global practices: five of the nine members of the board of directors are independent; the board of directors has audit, strategy, human resources and remuneration committees established; members of the board of directors have substantial expertise. Risk management policies are formalized and standardized and mitigate all major risk types; the Company’s FX risk is hedged and covers 70-80% of its net foreign exchange position. The group’s structure is moderately complex; all cash flow generating operations are attributable to a single legal entity, while there are no related party transactions. Financial transparency is very high; investor relations follow the best global practices.

Low leverage and medium fixed charges coverage. As of the end-2018, the total debt to FFO before net interest payments ratio was 1.9х, while the ratio of debt, adjusted for lease capitalization, to FFO before fixed charges was 3.81х. In the forecast period, ACRA expects that the latter ratio will range 3.3–3.7х as debt to finance the Company’s investment needs will increase. The fixed charges coverage ratio stood at 2.25x as of December 31, 2018 and is expected to stay between 2.1-2.4x in 2019-2021.

Very high liquidity of Magnit is driven by its strong free cash flow as well as by substantial undrawn amounts under existing facilities exceeding the Company’s total debt amount. ACRA notes sufficient creditor diversification (three largest creditors account for 65% of the debt portfolio) of the Company and its access to a wide range of external funding sources. A high safety margin for covenants in loan agreements represents an additional positive factor.

High profitability and very large size of the business. Magnit’s 2018 revenues totaled RUB 1,237 bln. FFO before fixed charges and taxes reached RUB 141 bln. The FFO margin before fixed charges and taxes stood at 11.5% as of year-end 2018. ACRA expects the Company to sustain its current profitability level in the forecast period at 11.5%-11.9%.

Key assumptions

  • The number of stores, total sales space and capital expenditures will increase in line with the announced plans;
  • The Company successfully implements the announced strategy; the effects achieved in new pilot stores are scaled over to the entire chain;
  • Gross margin is at 23-25%;
  • Dividend payments remain at levels recorded in the previous periods.

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:

  • FFO before fixed charges to fixed charges ratio exceeds 2.5x, while FCF margin exceeds 2%;
  • FFO before fixed charges to fixed charges ratio exceeds 2.5x, while adjusted debt to FFO before fixed charges ratio declines below 2.0х.

A negative rating action may be prompted by:

  • Adjusted total debt to FFO before fixed charges ratio exceeds 4.0x, while FFO margin before fixed charges and taxes declines below 10%;
  • FFO before fixed charges to fixed charges ratio falls below 1.5x.

Rating components

Standalone creditworthiness assessment (SCA): aa.

Adjustments: no.

Issue ratings

Rationale. The bond issues represents senior unsecured debt of PJSC Magnit. Due to the absence of either structural or contractual subordination of the issue, ACRA ranks them pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the bond issues are rated AA(RU), i.e. on par with PJSC Magnit.

Key issue properties

Issuer

PJSC Magnit

Issuer’s credit rating

АA(RU), outlook Stable

Actual issuer

PJSC Magnit

Type of security

Exchange-traded interest-bearing certified unregistered bond, series BO-003P-01

RegS / ISIN

4B02-01-60525-P-003P / RU000A1002U4

Issue volume

RUB 10 bln

Final placement date

February 5, 2019

Maturity date

February 1, 2022

 

Issuer

PJSC Magnit

Issuer’s credit rating

АA(RU), outlook Stable

Actual issuer

PJSC Magnit

Type of security

Exchange-traded interest-bearing certified unregistered bond, series BO-003P-02

RegS / ISIN

4B02-02-60525-P-003P / RU000A1004G9

Issue volume

RUB 10 bln

Final placement date

February 26, 2019

Maturity date

February 23, 2021

 

Issuer

PJSC Magnit

Issuer’s credit rating

АA(RU), outlook Stable

Actual issuer

PJSC Magnit

Type of security

Exchange-traded interest-bearing certified unregistered bond, series BO-003P-03

RegS / ISIN

4B02-03-60525-P-003P / RU000A100H02

Issue volume

RUB 10 bln

Final placement date

June 27, 2019

Maturity date

December 24, 2020

 

 

Regulatory disclosure

The credit ratings have been assigned to PJSC Magnit and its bonds (RU000A1002U4, RU000A1004G9, RU000A100H02) under the national scale for the Russian Federation 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. To assign сredit ratings to the above bond issues, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied.

The credit ratings have been assigned to PJSC Magnit and to bonds (RU000A1002U4, RU000A1004G9, RU000A100H02) issued by PJSC Magnit for the first time. The credit rating of PJSC Magnit and its outlook and the credit ratings assigned to bonds (RU000A1002U4, RU000A1004G9, RU000A100H02) issued by PJSC Magnit are expected to be revised within one year following the publication date of this press release.

The assigned credit ratings are based on the data provided by PJSC Magnit, information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and PJSC Magnit participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by PJSC Magnit in its financial statements have been discovered.

ACRA provided no additional services to PJSC Magnit. No conflicts of interest were discovered in the course of credit rating assignment.

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