TRIS Rating has assigned the rating of “A+” to the proposed issue of up to Bt54,000 million in senior unsecured debentures of Berli Jucker PLC (BJC). At the same time, TRIS Rating has affirmed the company rating of BJC at “A+”. The outlook remains “stable”. The new issue rating replaces the issue rating previously assigned on 8 August 2016 to a bond issue of up to Bt50,000 million, following BJC’s request to increase the issue size to up to Bt54,000 million. The proceeds from the new debentures will be used for debt repayment. The ratings reflect BJC’s strong competitive positions in its major business lines, diverse range of businesses and sources of income, wide market coverage, and portfolio of strong brand names. The ratings also take into consideration BJC’s latest move to acquire 97.9% of the equity of Big C Supercenter PLC (BIGC) and the synergies that may arise from integration of BJC's existing businesses with the newly-acquired retail outlets of BIGC. These factors are partly offset by intense competition, the current economic slowdown which has crimped consumer spending, and the rise in leverage needed to support BJC’s growth strategy.
The “stable” outlook reflects the expectation that BJC will maintain the competitive positions in its key business segments. TRIS Rating believes the integration of operations with BIGC will proceed smoothly, without pushing costs or capital expenditures higher than the expected levels. TRIS Rating also assumes BJC will quickly make sustained improvements in its financial profile.
Any downside pressure on the ratings would arise if the recapitalization, and the resultant deleveraging of the balance sheet, proceeds more slowly than expected or if BJC’s operating performance is significantly weaker than expected, which can result in a weaken capital structure and deterioration of cash flow protection for a long period of time. The potential for a rating upgrade will likely be limited during the medium term, given BJC's sizable debt burden. However, the ratings could be upgraded should the post-merger integration provide meaningful synergies to the BJC Group.
As of June 2016, TCC Corporation Limited (TCCC), a large Thai conglomerate, owned about a 74% stake in BJC. BJC’s range of business covers the production and distribution of glass bottles, aluminum cans, consumer products, and medicine and medical equipments. In 2016, BJC has expanded into hypermarket business through the acquisition of BIGC, a leading retailer of food, consumer goods, and other products in Thailand. BJC has consolidated BIGC's performance as the modern retail segment on its financial statements since late-March 2016.
In 2015, BJC generated Bt42,893 million in revenue. The packaging supply chain segment was the major contributor, generating 41% of the company's total revenue. For the first six months of 2016, BJC generated Bt58,080 million in revenue from sales and rental income. The major revenue contribution was the modern retail supply chain segment which generated about 65% of total revenue. The packaging supply chain segment was the second-largest (16%), followed by the consumer supply chain segment (14%).
BJC’s strong business profile reflects its diverse portfolio of businesses, sources of income, and geographic coverage. BJC’s market coverage is wide, extending most of Southeast Asia. BJC's products in its major lines of business have solid competitive positions, an important source of strength. BJC is one of the leading producers and distributors in the Thai packaging industry (glass bottles and aluminum cans) and the consumer product industry (tissue, snacks, and personal care products). The strength of BJC’s consumer products portfolio is attributed to its flagship brands, such as Cellox, Zilk, Tasto, Dozo, and Parrot.
BJC acquired a 97.9% interest in BIGC. This move is in line with BJC's strategy to become a leading regional wholesaler and retailer. The investment cost was nearly Bt210,000 million, funded initially by bridge loans. BJC is now recapitalizing through a combination of newly-issued shares and refinancing of long-term loans. The company received about Bt83,600 million in cash from two rights offerings. BJC plans to draw down the long-term loans and/or issue new debentures totaling Bt130,000 million. The recapitalization will reduce the amount of outstanding debts and the interest burden and BJC will mitigate the financial risks arising from the sizable acquisition-related loans it took on. BJC is expected to strengthen its operating performance and deleverage in the medium term, in order to restore its financial profile to be closer to its pre-acquisition profile.
The integration of BIGC will strengthen BJC's profile and competitive position. BIGC currently operates 127 hypermarkets and a number of small-format stores. BIGC’s competitive position is strong as it is one of two major hypermarket operators in Thailand. In 2015, BIGC's revenues was about Bt129,000 million and earnings before interest, tax, depreciation, and amortization (EBITDA) was nearly Bt13,000 million. BJC’s total consolidated revenue (annualized) in 2016 is expected to reach about Bt170,000 million. The annualized EBITDA in 2016 will reach nearly Bt20,000 million. After the consolidation of BIGC, the modern retail trade segment will generate about 75% of BJC’s total revenue.
Operating margin (operating income before depreciation and amortization as a percentage of sales) for the first six months of 2016 was 9.5%, after the consolidation of BIGC, compared with 10%-12% during 2013-2015. BIGC, by nature of trading company, has a lower profit margin than the BJC's existing lines of business. In addition, the rise in some of raw materials for the consumer products also crimp the profit. Funds from operations (FFO) was nearly 5,200 million for the first six months of 2016 and is expected to reach about Bt14,000 million in 2016 full year. The debt to capitalization ratio is likely to stay around 60% in 2016. The merger with BIGC will benefit BJC in terms of economies of scale and cost effectiveness. Potential synergies involve pooling purchasing, cash management, logistics, data integration, as well as information technology resources. BJC also expects to increase its house brands for consumer products and food products in BIGC’s stores. However, the expected cost savings from synergies and economies of scale may take time to materialize.
During the next three years, BJC's consolidated revenue is expected to grow at a rate in the mid-single digits, driven by growth in the packaging supply chain segment and group-wide synergies. The operating margin is expected to gradually improve, benefitting from cost savings derived from synergies and improved asset utilization. Operating margin is expected to stay around 10%-11%. TRIS Rating expects BJC to make nearly Bt30,000 million in capital expenditures during 2016-2018. The major investments are expanding retail outlets as well as increasing production capacities in the packaging supply chain segment and the consumer supply chain segment. TRIS Rating does not expect BJC to make any other huge investments or large acquisitions during the next three years. The net debt to EBITDA ratio is expected to stay at about 7 times in 2016 and will decline below 4 times over the medium term.
Given the current balance sheet structure of BJC and its subsidiaries, BJC's liabilities are structurally subordinated to those of BIGC. However, BJC’s board of directors resolved in July 2016 that BJC will be sourcing part of the external financing needs of its subsidiaries. Under this plan, BIGC’s external borrowings will be partially refinanced with loans taken out by BJC. This move will mitigate the impact of the structural subordination on the issue rating of BJC’s debentures. Accordingly, BJC’s newest debenture issue is rated at the issuer’s credit rating, based on this expectation.
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