ACRA affirms 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, medium quantitative assessment of leverage, and moderate cash flow.

Magnit is one of the two largest retail market players in Russia. As of the end of Q2 2020, the Company’s chain included 14,581 convenience stores, 472 supermarkets, and 5,841 drugstore format stores. The retail chain had 7.3 million sq. m of total sales space as of the end of Q2 2020 and employed around 316,000 people. The Company is present in all federal districts of Russia except the Far Eastern Federal District.

Key rating assessment factors

Magnit’s very strong business profile is driven by low cyclicality of demand (the Company’s core activity is retail trade in groceries and staple goods), very strong diversification by store formats as well as high brand strength. Convenience stores account for around 77–78% of the Company’s revenues and almost 68% of sales space. Magnit continues 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 very strong corporate governance assessment is underpinned by the high assessment of the group’s strategy and structure, as well as the very high assessment of the management structure, risk management policies and financial transparency. Magnit is successfully implementing a transformation strategy that aims to overcome the negative growth trends in like-for-like sales and traffic seen in recent years. Redesigned stores are exhibiting 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, financial markets, human resources and remuneration committees; and members of the board of directors have substantial expertise. Risk management procedures are documented and mitigate all major risk types. The Company’s FX risk is hedged and covers more than 50% of its net foreign exchange position depending on the market situation. The group’s structure is moderately complex; the main cash flow generating operations are attributable to a single legal entity. Financial transparency is very high and investor relations follow the best global practices.

Medium leverage and medium fixed charges coverage. As of the end of 2019, the total debt to FFO before net interest payments ratio was 2.3х, while the ratio of debt, adjusted for lease capitalization, to FFO before fixed charges was 4.42х. In 2020–2022, ACRA expects the latter ratio to range between 3.3–3.9х. The fixed charges coverage ratio stood at 1.8x as of December 31, 2019 and is expected to stay between 2.1–2.3x in 2020–2022.

Magnit’s very strong liquidity is driven by positive free cash flow expected in 2020–2022, as well as by substantial undrawn amounts under existing facilities exceeding the Company’s total debts. ACRA notes sufficient creditor diversification (the three largest creditors account for 47% of the debt portfolio) of the Company and its access to a wide range of external funding sources.

High profitability and very large size of business. Magnit’s 2019 revenues totaled RUB 1,369 bln. FFO before fixed charges and taxes reached RUB 149 bln. The FFO margin before fixed charges and taxes stood at 10.9% as of the end of 2019. ACRA expects the Company’s profitability to grow by 12% over the next three years thanks to improved operating efficiency and optimization of work with suppliers.

Key assumptions

  • Successful implementation of the Company’s strategy; the effects achieved in new pilot stores are scaled across the entire chain;
  • Gross margin 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 exceeding 2.5x and FCF margin exceeding 2%;
  • FFO before fixed charges to fixed charges ratio exceeding 2.5x and adjusted debt to FFO before fixed charges ratio declining below 2.0х.

A negative rating action may be prompted by:

  • Adjusted total debt to FFO before fixed charges ratio exceeding 4.0x and FFO margin before fixed charges and taxes declining below 10%;
  • FFO before fixed charges to fixed charges ratio falling below 1.5x.

Rating components

SCA: aa.

Adjustments: none.

Issue ratings

PJSC Magnit (ISIN RU000A101PJ1), maturity date: May 19, 2023, issue volume: RUB 15 bln — AA(RU);

PJSC Magnit (ISIN RU000A101MC3), maturity date: April 26, 2023, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A101HJ8), maturity date: March 2, 2023, issue volume: RUB 15 bln — AA(RU);

PJSC Magnit (ISIN RU000A1018X4), maturity date: December 22, 2022, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A100ZS3), maturity date: May 3, 2022, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A100H02), maturity date: December 24, 2020, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A1004G9), maturity date: February 23, 2021, issue volume: RUB 10 bln — AA(RU);

PJSC Magnit (ISIN RU000A1002U4), maturity date: February 1, 2022, issue volume: RUB 10 bln — AA(RU).

Rationale. The bond issues represent senior unsecured debt of PJSC Magnit. Due to the absence of either structural or contractual subordination of the issues, ACRA ranks them as 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.

Regulatory disclosure

The credit ratings have been assigned to PJSC Magnit and the bonds (RU000A1002U4, RU000A1004G9, RU000A100H02, RU000A100ZS3, RU000A1018X4, RU000A101HJ8, RU000A101MC3, RU000A101PJ1) issued by PJSC Magnit 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.

The credit ratings assigned to PJSC Magnit and the bonds (RU000A1002U4, RU000A1004G9, RU000A100H02) issued by PJSC Magnit were published for the first time on September 23, 2019. The credit ratings assigned to the bonds issued by PJSC Magnit (RU000A100ZS3, RU000A1018X4, RU000A101HJ8, RU000A101MC3, RU000A101PJ1) were published for the first time on November 5, 2019, December 25, 2019, March 5, 2020, April 29, 2020, and May 22, 2020, respectively. The credit rating of PJSC Magnit and its outlook and the credit ratings of the bonds (RU000A1002U4, RU000A1004G9, RU000A100H02, RU000A100ZS3, RU000A1018X4, RU000A101HJ8, RU000A101MC3, RU000A101PJ1) issued by PJSC Magnit are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned 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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