Singapore — Moody’s Investors Service has downgraded the corporate family rating of Matahari Putra Prima Tbk (P.T.) (MPPA) to B1 from Ba3. The rating outlook is stable.
MPPA’s rating downgrade reflects continued weakness in the company’s operating performance, impacted by sluggish sales, against the backdrop of weak industry demand and heightened competition.
In light of these challenges, in recent months MPPA has embarked on a
revised strategy to stabilize performance and preserve cash by cutting back on expansionary capex, and maintaining tighter cost controls. MPPA has also announced plans for a rights issue in early 2018, with the proceeds funding working capital and repaying debt.
“While proceeds from the rights issue will help meet near-term liquidity
requirements, we believe a turnaround in operations will likely take at least 12 months to achieve, especially given intense price competition from local minimarts,” says Maisam Hasnain, a Moody’s Analyst.
Accordingly, Moody’s expects MPPA’s credit metrics to remain stretched over the next 12-18 months, with adjusted EBIT to interest below 1.0x and adjusted EBIT margin below 2%. Furthermore, as profit margins are fairly
thin, operating performance remains susceptible to even small changes in
consumer sentiment and demand.
MPPA’s strategy in recent years — focused on inventory rationalization and increased sales growth through its SmartClub wholesale outlets — has not been sufficient to turn around performance.
For the 12 months ended 30 June 2017, MPPA’s adjusted EBIT margin fell to
1% from 3.9% for full-year 2015, due to lower revenue generation —
including year-on-year revenue declines in its last four consecutive quarters — and actions taken to refresh slow-moving inventory and excess stock.
In addition, adjusted debt to EBITDA increased to 4.4x for the 12 months to 30 June 2017 from 3.0x in 2015, and adjusted EBIT to interest fell to 0.5x from 2.1x during the same period, due to lower profitability and increased debt raised to fund operations. Consequently, MPPA’s financial profile is no longer in line with Moody’s expectations for its Ba3 rating.
Nonetheless, MPPA’s B1 rating reflects its leading market position in the
fast-moving consumer goods segment and its proven expansion capabilities.
“Over the longer term, MPPA remains well-positioned to benefit from Indonesia’s growing middle-income population and the urban consumers’
lifestyle shift to hypermarkets from traditional wet markets,” adds Hasnain, who is also Moody’s Lead Analyst for MPPA. “Hypermarkets also meet primary consumer needs, which are more stable and less susceptible to economic volatility.”
The rating outlook is stable, reflecting Moody’s expectation that MPPA
will maintain its leading market position and execute on its strategy to
gradually improve its financial metrics over the next 12-24 months.
A near-term rating upgrade is unlikely. However, upward rating momentum
could build over time, if the company experiences a sustained improvement
in operating performance with stronger financial metrics, while maintaining a prudent policy with respect to shareholder returns.
Credit metrics indicative of a rating upgrade include: (1) adjusted debt
to EBITDA of below 3.5x; and (2) adjusted EBIT to interest of more than
2.0x on a sustained basis.
On the other hand, MPPA’s rating could face downward pressure if: (1) its
strategies to revive operational performance are unsuccessful; (2) there
is evidence of cash leaking from MPPA to fund affiliated companies, for
example, through inter-company loans, aggressive cash dividends or
investments in affiliates; or (3) MPPA adopts more aggressive shareholder
return policies, thereby weakening its liquidity position or causing it
to incur additional debt.
Credit metrics indicative of a rating downgrade include: (1) an inability
to reverse declining operating margins; (2) adjusted debt to EBITDA above
5.0x; and (3) adjusted EBIT to interest below 1.0x on a sustained basis.
Matahari Putra Prima Tbk (P.T.) (MPPA) is a leading retailer in Indonesia
with multiple retail formats. At 30 June 2017, the company operated 117
Hypermarts, 26 Foodmarts, 30 Express stores, 112 Boston Health & Beauty
and 4 SmartClub wholesale outlets in more than 68 Indonesian cities.
PT Multipolar Tbk, a holding company that owns majority stakes in retail,
technology, media, and real estate investment companies in Indonesia and
China, owns a 50.2% stake in MPPA. Temasek Holdings (Private) Limited
(Aaa stable), through its subsidiary, Anderson Investment Pte. Ltd., has
exchangeable rights in MPPA. If such rights are exchanged in full, they
represent a 26.1% stake in MPPA.