Fitch Ratings has revised the Outlook on
Fitch has also affirmed
The Outlook revision reflects the high impact of the coronavirus outbreak on the retail sector, and uncertainty over the timing of recovery.
KEY RATING DRIVERS
Challenging Retail Environment: Retail sales in
Coronavirus Pressures Financial Profile: Fitch expects leverage and profitability metrics to exceed our downgrade trigger temporarily. Fitch estimates payables-adjusted FFO net leverage to reach 5.1x in 2020 from 3.2x in 2019 due to weak cash flow from operations. Leverage could decline to 4.5x in 2021, based on our assumption of significant growth in 2021 against a weak 2020.
Fitch expects the EBITDA margin to deteriorate amid declining revenue. Cost-reduction measures carried out by the company in response to the pandemic and low rental expenses thanks to a high proportion of self-owned stores will support recovery in profitability, but a shift in sales mix towards revenues other than concessionaire sales will weigh on the EBITDA margin in the medium term.
Business Profile Intact:
The company has also enriched merchandise selection and service offerings. Lifestyle elements contribute increasingly to total revenue, with direct sales and rental income accounting for 60% of total revenue in 2019, up from 47% in 2015. However, the company remains very geographically concentrated, with the bulk of revenue generated from the
Sufficient Near-Term Liquidity:
DERIVATION SUMMARY
No Country Ceiling, parent/subsidiary or operating environment aspects have an impact on the rating
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Gross sales proceeds to decline by a quarter in 2020, with rental income and concessionaire declining by more than direct sales (2019: -1% excluding sale of properties)
EBITDA margin relative to operating revenue of 38% in 2020 and improving to 41% in 2023 (2019: 42%), excluding the contribution related to property development
Capex of
55% dividend payout rate annually (2019:50%)
RATING SENSITIVITIES
Developments That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Operating performance avoiding the negative sensitivities below for a sustained period may lead to a revision of the Outlook to Stable
Developments That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Payables adjusted FFO net leverage (adjusted for lease, payables and customer deposits) sustained above 4.5x (2019: 3.2x)
EBITDA margin sustained below 40% (2019: 42%)
Sustained negative free cash flow
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Sufficient Liquidity:
SUMMARY OF FINANCIAL ADJUSTMENTS
Leases: Fitch has adjusted the debt by adding 8x annual fixed operating lease expenses (2019: fixed rental expense of
Payables-Adjusted Net Leverage: Fitch subtracts customer prepayments and 85% of trade payables from readily available cash. This metric applies mainly to Chinese department stores operating under the concessionaire model
Operating EBITDA: Fitch treats the sale of properties and cost of properties sold as non-operating items and cash flow from the sale of properties as non-operating cash flow
Readily available cash: Fitch has classified structured deposits as readily available cash (2019:
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Golden Eagle Retail Group Limited LT IDR BB Affirmed BB
senior unsecured
LT BB Affirmed BB
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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