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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable issuer rating on Nikora Trade JSC (Nikora Trade). Scope has also affirmed its BB- rating on senior unsecured debt.

Rating rationale

The rating affirmation is driven by the company’s resilient operating performance and stable growth reflected in faster-than-expected deleveraging after the lifting of Covid-19-related restrictions. Significant capex related to the opening of new points of sale has stretched liquidity. While this spending can be adjusted, Nikora Trade may still go ahead with the current level despite the refinancing event in 2024 and the financial covenants on spending under the terms of the bank loans and the GEL 35m bond.

Nikora Trade’s business risk profile (assessed at BB-) continues to benefit from its leading position on the Georgian retail market in terms of sales and trading area. Its 25% revenue growth in 2021 was primarily fueled by a ramp-up of new store openings, further supported by price adjustments to tackle inflation and the gradual substitution of unorganised fast-moving consumer goods retailers. H1 2022 showed stronger results than H1 2021 and an evolution of the company’s operating performance with an increase in Scope-adjusted EBITDA (in absolute volumes) and a 21% YoY revenue increase. Nikora Trade has opened 50 new stores in H1 2022 and expects to open 20-30 more in 2022. Growth excluding inflation stood at 5.5% for six months in 2022, mainly due to resumed substitution of unorganised fast-moving consumer goods market and the arrival of asylum seekers resulting from the Russia-Ukraine war.

Scope highlights the risk of depending on the Russian, Ukrainian and Belarusian markets for primary consumption food import. Management has confirmed that there will be no significant disruption or challenges in supply chain management as main suppliers have been delivering reliably. Alternatively, Nikora could turn to markets like Poland, Türkiye and/or Brazil to substitute or diversify suppliers, but at an increased cost.

Scope expects that Nikora Trade will be able to keep comfortable profitability margins. These will be supported by i) historically stable gross margins of about 25%, which benefit from advantageous commercial terms thanks to the group’s vertical integration; and ii) a resumed growth strategy after the Covid-19 crisis; partially confirmed by new stores opened in H1 2022, which should enhance the bargaining power of the company and potentially lead to synergies and higher margins.

While Nikora Trade’s heavy dependency on imported materials threatens the sustainability of gross margin development, Scope sees foreign exchange dependency as a common feature in the Georgian retail market, which is mitigated by the ability of companies to pass on increased costs to customers. Furthermore, while consumers may become more price conscious as inflation pressures increase, Scope does not expect any ‘sticker shock’ effect for Nikora Trade customers as its main product portfolio consists of non-discretionary products. The inventory shrinkage and obsolete inventory costs remain at 2% of sales, which decreases gross margins by 200 bp (ESG factor: credit negative). Adjusted EBITDA return on assets is gradually increasing and EBITDA growth is expected to remain at around 25%.

Nikora Trade’s financial risk profile (assessed B+) is supported by a sound cash conversion cycle, as reflected by substantial cash generation. Lower-than-expected leverage in 2021 is the result of solid EBITDA development coupled with foreign exchange gains on USD-denominated lease liabilities, which decreased overall reported debt by GEL 6m while bank loans remain at GEL 50m. Scope-adjusted debt/EBITDA stood at 3x at YE 2021 (down 1x YoY).

While cash flow cover remains the weakest element of Nikora Trade’s financial risk profile, Scope positively regards the company’s scale and financial flexibility in terms of capital spending and does not overweight this metric. Annual expected capex is expected around GEL 30m-35m), higher than the management guidance.

Scope-adjusted EBITDA interest cover is expected to remain above 3x (2021: 3.8x). The expected increase in EBITDA, thanks to an expanded operational scale and the ramp-up of new stores, will help to counteract an increase in interest rate payments. Interest payments are set to rise as the issuer will enter into more debt to finance its growth and the interest rate on the GEL 35m bond, tied to the three-month TIBR, will increase as monetary policy continues to tighten. The average annual rate for the year ended 31 December 2021 was 13.7%.

Liquidity is seen as inadequate. The committed credit line of GEL 10.6m remains undrawn as at end-2021 and appears to be insufficient to cover (re)-financing needs from expected negative free operating cash flow in 2022 of about GEL 10m, with short-term debt mainly compromised from the amortising nature of Nikora Trade’s financial debt. However, liquidity benefits from the bullet repayment structure of the new GEL 35m bond issued in 2021 maturing in 2024.

Scope notes that the flow of information between management and the rating agency has improved and concerns related to corporate governance and transparency are fading away (neutral ESG factor).

One or more key drivers of the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation that Nikora Trade’s Scope-adjusted debt/EBITDA will remain at around 3.0x and Scope-adjusted funds from operations/debt above 20%. The Outlook incorporates that the company can tackle inflation, keep its margins and operate business with very limited liquidity during a heavy investment phase. Scope does not expect any M&A activity or dividend payments.

A positive rating action could be the consequence of Scope-adjusted funds from operations/debt above 30% and Scope-adjusted debt/EBITDA below 3x and a sustained improvement in liquidity. This could be achieved via deleveraging while maintaining relatively high EBITDA. A positive rating action could also be warranted if the company were to grow significantly leading to higher market shares.

A negative rating action could result from a deterioration in credit metrics as indicated by Scope-adjusted funds from operations/debt falling below 15% or Scope-adjusted debt/EBITDA increasing above 4.0x on a sustained basis. Such weak financial performance could be triggered by greater competition on the market, putting operating profitability under pressure.

Long-term debt rating

Scope has affirmed senior unsecured debt at BB-, reflecting its expectation of an above-average recovery for senior unsecured debt positions in the hypothetical event of a company default. The recovery analysis is based on a hypothetical default scenario in 2024, which assumes outstanding senior secured loans and intercompany guarantees ranked prior to senior unsecured debt.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022; Retail and Wholesale Rating Methodology, 27 April 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Zurab Zedelashvili, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 March 2018. The Credit Ratings/Outlook were last updated on 2 September 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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