The latest information on the rating, including rating reports and related methodologies, is available at this LINK.

Rating action

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

Rating rationale

The issuer rating upgrade reflects Nikora Trade’s strong operating performance while keeping indebtedness stable. Credit metrics also improved faster than expected, with leverage decreasing to 2.1x and funds from operations/debt reaching above 35%. The rating action also reflects the issuer’s strong expansion strategy targeting unorganised regions, which will help to maintain EBITDA growth in absolute terms, along with its top position in the Georgian retail market.

Nikora Trade’s business risk profile (assessed at BB-) continues to benefit from the issuer’s leading position in the Georgian retail market in terms of sales and trading. The issuer’s market share stayed at 18% in 2022 thanks to its solid store network, which grew to 465 stores from 372 in 2021. Nevertheless, the issuer’s small size compared to European retail competitors and lack of geographic diversification continue to hold back the business risk profile assessment.

The issuer’s operating performance has benefitted the issuer rating. Revenue grew 38% YoY in 2022, driven by: i) organic growth with 93 newly opened stores; ii) higher local purchasing power due wage growth outpacing inflation; and iii) migration from bordering countries whose populations have higher purchasing power. H1 2023 results were also stronger YoY, with revenue growth at double digits and Scope-adjusted EBITDA maintained at 9% of revenues.

Scope highlights the risk of import dependency of primary consumption food products from Russia, Ukraine and Belarus. However, management has confirmed that deliveries from main suppliers continued unimpeded during 2022 and the first half of this year. The issuer has also found new suppliers, though with higher cost inputs, which are on standby in the event current Ukrainian suppliers can no longer deliver.

Scope believes that Nikora Trade will keep profitability margins in a comfortable level with Scope-adjusted EBITDA maintained at around 9%. This view is supported by i) the historically stable gross margins at around 25%, benefitting from the group’s vertical integration with advantageous commercial terms; ii) the ongoing expansion phase with new stores, which Scope considers will continue to enhance the issuer’s bargaining power, potentially creating synergies that will be reflected in higher margins. The inventory shrinkage and obsolete inventory costs remain at 2% of sales, which decreased gross margins by 200 bp (negative ESG driver). In addition, the adjusted EBITDA return on assets peaked at 31% in 2022 and Scope expects the ratio to gradually reach 25% thanks to sustained EBITDA levels.

Nikora Trade’s financial risk profile (revised to BB- from B+) reflects its strong operating performance thanks to a sound cash conversion cycle reflected in substantial cash generation. The company’s strong growth helped credit metrics to strengthen in 2022, with leverage decreasing towards 2.0x (from 3.0x in 2021) and funds from operations exceeding 30%, the latter due to solid EBITDA growth in absolute terms and foreign exchange gains on USD-denominated leases.

Issuer’s fast deleveraging is one of the main positive drivers on the financial risk assessment. Scope foresees leverage maintained at around 2.0x thanks to solid operating performance, with the momentum already evident in H1 2023. Scope does not expect a significant increase in indebtedness, including new leases. Additionally, a similar trend is expected for Scope-adjusted funds from operations/debt, expected to stay above 30% in 2023.

EBITDA interest cover increased to above 5.0x in 2022 from 3.8x in 2021. Scope expects similar levels in the medium term thanks to easing inflation, a looser domestic monetary policy, and the likelihood that the bond maturing in 2024 will be refinanced at the same or lower rate.

While cash flow cover remains the weakest element of Nikora Trade’s financial risk profile, Scope acknowledges the company’s scale and financial flexibility in terms of capital spending and therefore does not overweight this metric in the analysis. Nevertheless, the significant expansion programme will continue to hamper Scope-adjusted free operating cash flow/debt, with around GEL 220m allocated for opening new stores during 2023-2025.

Liquidity is inadequate, despite strong results in 2022 improving liquidity above expectations. Scope expects negative free operating cash flow and high short-term debt to continue to drain liquidity. The GEL 10.6m committed credit line remains undrawn as of 2022.

Scope expects the bond to be refinanced in 2024 based on the company’s durable relationship with banks and a better-than-expected credit profile. Information flow between management and Scope has also improved, alleviating previous concerns over governance and transparency.

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

Outlook and rating-change drivers

The Stable Outlook reflects Scope's view that JSC Nikora Trade will continue its expansion strategy with related investments. Scope notes that the investments are dependent on available financing and will only be carried out if profitability is not negatively affected. Credit metrics are expected to remain stable, with Scope-adjusted debt/EBITDA between 2.0x - 2.5x and Scope-adjusted fund from operations/debt above 30%. The foreign currency risk is reflected in the tighter debt thresholds compared to other companies. Scope expects that high interest rates are likely to decline in the medium to long term as local inflation rapidly eases, helping to keep interest cover close to 5.0x.

A positive rating is considered unlikely but could be justified if the company grows significantly outside Georgia, while credit metrics remain at least in line with rating guidelines and liquidity improves sustainably.

A negative rating action could result from a deterioration in credit metrics indicated by Scope-adjusted funds from operations/debt falling below 30% or Scope-adjusted debt/EBITDA rising above 2.5x on a sustained basis. Such weak financial performance could be triggered by a slowdown in sales momentum, putting operating profitability under pressure.

Long-term debt rating

Scope has affirmed the senior unsecured debt rating at BB-, reflecting the 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 2025, 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 2023), 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: Daniel Felipe Gomez Reyes, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 March 2018. The Credit Ratings/Outlook were last updated on 1 September 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.