October 2018 profit warning

Ceconomy management has just announced a profit warning reducing the EBITDA guidance provided in September 2018 by about 10%. This is surprising as the new ad hoc statement follows less than four weeks after the board’s last communication on this matter. However, it also reflects the very tough trading conditions in consumer electronics retail markets. It remains to be seen whether these conditions will also affect Ceconomy’s European competitors and whether pure online peers, such as Amazon, will emerge as the eventual winners of market share lost by shop-based traditional competitors like Ceconomy.

While the ‘loss’ of about EUR 60m in EBITDA in fiscal 2018 is a disappointment for equity investors (as it is also likely to impact next year’s dividend payment), credit perspectives are more balanced. The downturn in operating cash flows is likely to be softer. Ceconomy has already announced an improved working capital cash flow contribution compared to fiscal 2017. The likely net loss for fiscal 2018 is due to the non-cash depreciation of the company’s Metro stake. A further stabilising effect in fiscal 2018 is the equity increase of July 2018 (freenet AG subscribed for a 10% equity increase leading to an assumed cash inflow of more than EUR 250m in the second half of fiscal 2018). Further credit metric stabilisation is provided by Ceconomy’s announced divestiture of its Metro stake which Scope believes may fetch over EUR 450m.

Based on the above, Scope believes that key credit metrics for fiscal 2018 are unlikely to change significantly from the levels previously communicated by the agency, namely Scope-adjusted debt to Scope-adjusted EBITDA of 2.2x and funds from operations to SaD of 35%.

Realised and envisaged cash inflows are likely to increase group cash levels significantly in the near future. As financial debt is considerably lower than cash, Scope will be closely monitoring management’s plans to use that cash. Overall, Scope projects that Ceconomy’s financial performance for the next two years will be in line with its ratio guideline for the present ratings, namely funds from operations to Scope-adjusted debt of 35%-40% and leverage of below 2.5x.

Rating implications

Scope continues to view Ceconomy management’s financial policy as strongly supportive of the ratings. Both the decision to consider a sizeable equity issuance and the divestiture of its Metro stake are likely to more than counterbalance the operating deterioration in the short term. This commitment to its investment grade rating is incorporated into Scope’s rating assessment.

This publication does not constitute a credit rating action. For the official credit rating action release click here. On 27 June 2017, Scope assigned Ceconomy AG an issuer rating of BBB-. The short-term rating is S-2. The Outlook is Stable.