The credit rating of Sanymon Corporation Limited (CYP), former Sanymon Corporation (BVI) (hereinafter, the Company) is driven by the strong operating risk profile assessment, very high business profitability, and positive assessment of the Company’s strategy flexibility relating to chain expansion plans. The credit rating is under pressure from the elevated leverage and the negative free cash flow.
The Company 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, 2019, the chain comprised 174 stores, including two AV Bistros and the Finch restaurant; according to the Company’s preliminary estimates, its revenues for the 2018 financial year (April 2017 through March 2018) will be RUB 61.4 bln excluding VAT (+14.7% against 2017). The Company is controlled by its founders Maxim Koscheenko and Oleg Lytkin, as well as by its top managers, while a blocking stake belongs to affiliates of Millhouse and Invest AG.
Key rating assessment factors
More cautious approach to the development strategy and fast response to market downslide. ACRA positively assesses the Company's approach to newly opened stores and bringing them up to the average level for the chain. At the end of 2017, the Company rented 20 stores of the Sedmoy Kontinent chain to open its Azbuka Vkusa and AV Daily stores, with the rent charges exceeding the chain average, which pushed up the expenses per one square meter of sales area. The like-for-like (LFL) sales of the Company have declined moderately to the average level of -0.7% in 2018 (against the 1% growth in 2017). It is worth noting that the decline in the LFL sales has affected the supermarket format in the Moscow Region only, while the LFL sales have grown in the minimarket format and in Saint Petersburg. In order to overcome the negative trend, the Company significantly revised its product range and product management policy and adjusted its plans to open new stores in 2019 (three Azbuka Vkusa stores). In ACRA's opinion, this will allow the Company to benefit from its advantages that include unique trade assortment and branded culinary products and will drive up the LFL sales (data for the second half of March 2019 indicate a positive trend). At the same time, the Agency still assesses the Company’s strategy as moderately aggressive because the Company has plans to expand its retail chain by 35–40 stores annually in 2020–2022. In ACRA’s opinion, such large-scale expansion may pose substantial risks caused by limited market capacity in the quality retail segment and heavy investments required to open each store.
Moderate free cash flow shortage. The Company decided not to pay dividend for 2018. Nevertheless, according to ACRA's estimations, the forecasted free cash flow will remain negative, as the operating cash flow will be insufficient to cover the entire investment program of the Company and to pay the dividend set forth by the shareholding agreement at 50% of the IFRS net income. According to ACRA’s estimates, if the profitability remains at the current level, the Company may experience the shortage of free cash flow at RUB 1.5–2.5 bln in 2019–2021.
Elevated leverage and moderate liquidity. According to ACRA’s estimates, Azbuka’s total debt may grow to RUB 15 bln by late 2021 (RUB 12.9 bln as at March 31, 2019), and the total debt to FFO before net interest payments may amount to 2.9-3.0x in 2020-2021 (3.6x as of March 31, 2019). The ratio of debt adjusted for operating lease to FFO before fixed charges may be somewhat elevated (5.3–5.6x), while the coverage of fixed charges may be as low as 1.3x (1.3x as of March 31, 2019). 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 loan limits (RUB 10.7 bln as at March 31, 2019).
Key assumptions
- The Company will open three stores in 2019 and 35–40 stores in 2020–2021;
- New stores will reach target sales within 18 months;
- Annual LFL sales and relevant costs grow on par with the inflation projected by ACRA (4.0-4.5%), taking into account the GDP growth of 1.2–1.5%;
- The current margin will remain at over 15% of FFO before fixed charges and taxes;
- Dividend payments will be at 50% of net profit under IFRS, except 2019.
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:
- Adjusted debt exceeding 6.0х of FFO before fixed charges, or deterioration of debt structure, or fixed charge coverage going below 1.0х;
- FFO margin before fixed charges going below 10%;
- LFL sales dropping by more than 5%, with sustained new store opening dynamics;
- Substantial deterioration of access to external liquidity sources;
- Further tightening of regulatory environment 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 Limited (CYP) 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 publication date of this press release.
The assigned credit rating is based on the data provided by Sanymon Corporation Limited (CYP), information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and Sanymon Corporation Limited (CYP) participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Sanymon Corporation Limited (CYP) in its financial statements have been discovered.
ACRA provided additional services to OOO City Supermarket, an affiliate of Sanymon Corporation Limited (CYP); no additional services were provided to Sanymon Corporation Limited (CYP). No conflicts of interest were discovered in the course of credit rating assignment.
