Rating action

Scope Ratings has today assigned a first-time issuer rating of BB- to Nikora JSC. The Outlook is Stable.

Rating rationale

The issuer rating mainly reflects Scope's perception of Nikora JSC as one of the national key players of the FMCG (fast-moving consumer goods) and retail industries. Scope views the high interest cover as a support to the rating but considers the low profitability, the negative free operating cash flow (FOCF) and low liquidity as negative rating drivers.

The rating benefits from Nikora JSC’s dominant market share within the country, bolstered by a considerable shop network (through its daughter company, Nikora Trade, rated B+) and by strong FMCG-producing entities with high national brand recognition. In detail, Nikora Trade owns close to 20% of the modern retail market share in the country, spearheaded by a high number of shops across all regions and all formats, ensuring a stable revenue stream. This shop network reinforces the market share of the group’s FMCG-producing companies, which sell to Nikora Trade (23% of sales). Scope's business risk profile analysis highlights the weight of the group’s meat production arm, which is a clear market leader with close to 30% of the national market. Although the rest of the entities are smaller in terms of size, they manufacture a large range of edible products, thus contributing to overall product diversification.

The group’s presence in two activities (FMCG and retail) supports its overall diversification. The fact that the group only offers edible products is not detrimental to the rating due to the high robustness of the food sub-industry. Scope considers Nikora JSC to be well positioned within this industry because its entities offer most edible products. Despite the weight of meat (66%), the group also offers dairy (3%), fish (6%) and other non-classifiable goods (25%). The agency assesses customer diversification as high because Nikora Trade sells to every category of the Georgian population through different shop formats. Additionally, the producing entities not only sell to Nikora Trade but also to the vast majority of the country’s retailers, ensuring a certain amount of customer flexibility and strong negotiating power. While the absence of e-commerce solutions could be viewed negatively, as it represents one of the key drivers of food retail going forward, Scope believes that the Georgian market is not yet sufficiently mature for e-commerce to play a role. The main weakness of Nikora JSC remains the lack of exports or footprint beyond the borders of Georgia, ultimately making it dependent on macro conditions in the country.

As regards profitability, Nikora JSC suffers from relatively low profitability (based on Scope-adjusted EBITDA) having reached around 12.5% in YE 2018, attributed at 66% to FMCG activities and 33% to retail (based on unconsolidated reported EBITDA). In detail, the overall profitability of FMCG is generated by the meat-producing entities (Nikora LLC and Nikora 7), representing 33% of total reported EBITDA and averaging 11% – versus 4% for Nikora Trade based on the same figures. Scope considers the profitability of FMCG activities to be relatively low compared to those of peers. This reflects a strategic choice to trade some profitability for volume and to support Nikora Trade JSC.

Scope forecasts that Nikora JCS will increase its level of indebtedness over 2019 and 2020 but will start to deleverage in 2021, in contrast to Nikora Trade, which started to reduce its debt level this year. Nikora Trade’s expected financial recovery should bolster the cash recorded on the balance sheet in 2020 by Nikora JSC, limiting the rise in net debt that the holding company is planning to issue. Scope also expects an increase in operating lease commitments, reflecting the rise in Nikora Trade’s number of shops and the creation of new meat processing facilities for Nikora LLC. In terms of profitability, the rating agency expects a stable EBITDA margin in 2019 at 7.8% (from 8.2% in 2018) and a stabilisation of this level going forward, despite the growth in revenues. Concerning cash flow generation, Scope expects funds from operations (FFO) to grow to GEL 51m in 2019 from GEL40 m, despite its expectations of lower EBITDA growth. FOCF is also forecasted to remain negative in 2019, reflecting the heavy investment phase last year. FOCF should turn positive from 2020 on as the group focuses on more organic development.

In terms of ratios, leverage (measured by FFO/Scope-adjusted debt [SaD] and SaD/EBITDA) is well within the BB range, reaching 24% and 3.1x respectively at YE 2018. Scope expects the two values to improve over the next year to 26% and 2.9x. The relatively high interest cover should continue to support the financial risk profile, as Scope forecasts a metric of 4.5x from 2019 on. As mentioned above, FOCF remains negative due to heavy capex originated by Nikora Trade and Nikora LLC, lowering the average of the metrics. Nonetheless, Scope expects a quick recovery from the -13% reached this year to -1% in 2019 and 15% in 2020.

Scope's assessment of liquidity is negative due to high short-term debt which is not covered by sufficient available liquidity. However, the agency expects this metric to recover somewhat to 8.3x at YE 2019, due to the repayment of the outstanding bond in June 2019 and other loans. Scope maintains a negative notch for liquidity because of limited visibility.

Due to the group structure, Nikora JSC is liable for the repayment of the debts of the entities within the group. In practice, TBC Bank (the main loan lender) has solely affirmed monitoring the covenants of Nikora JSC, Nikora LLC (representing 2% only of the gross debt of the group) and Nikora Trade.

Rating-change drivers

The rating Outlook is stable and incorporates Scope's view that Nikora Trade maintain an FFO/SaD of between 20% and 30%.

A positive rating action could be triggered if FFO/SaD reaches above 35% and liquidity improves sustainably.

A negative rating action is possible if FFO/SaD falls below 20% and liquidity does not improve sustainably.

Stress testing
No stress testing was performed.

Cash flow analysis
Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these ratings (Corporate methodology) is/are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and- policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents, and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. the information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Olaf Tölke, Managing Director
Person responsible for approval of the rating: Thomas Faeh, Executive Director
The ratings/outlooks were first released by Scope on 15.08.2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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