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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer rating on Georgian holding company JSC Nikora. Scope has also affirmed the rating on senior unsecured debt at BB-.

Rating rationale

The rating action reflects Scope’s view that JSC Nikora will maintain a solid operating performance and moderate credit metrics due to its organic expansion. The rating action also incorporates the group’s huge investment to develop its capacities in fast-moving consumer goods (FMCG) and retail outreach. This will allow it to maintain EBITDA but will constrain improvements in liquidity and free operating cash flow.

JSC Nikora’s business risk profile (assessed as BB-) continues to be backed by its competitive position, which benefits from its solid market share in the FMCG and retail industries in Georgia. The issuer’s producing entities have a good record and high brand recognition in non-discretionary consumer goods, including in meat and baked goods. The group’s vertical integration also benefits its business risk profile. Nevertheless, the issuer’s small size at the European level and exposure to only one market limit its business risk profile assessment.

Scope highlights that input costs are heavily influenced by exchange rates as subsidiary INTRADE imports some of its products. The issuer is also facing latent risks from the current war in Ukraine due to its dependency on imports of primary raw materials from Russia, Ukraine and Belarus.

At the beginning of Russia’s full-scale invasion of Ukraine in 2022, the group experienced procurement disruptions and high transport fees. These were ultimately passed on to customers, avoiding any impact on margins. Management has confirmed that suppliers continue to deliver the main raw materials, with no major supply chain disruptions. The issuer has also brought in suppliers from South America, Poland, and Turkey as backup in case bordering countries cannot deliver the needed raw materials.

Scope’s base case sees the gross margin maintained at 29% of revenues, based on the issuer’s ability to manage input costs without any major disruption in the supply chain. Scope-adjusted EBITDA is forecast to stay close to 11% as the main driver of the business is the organic development of subsidiary Nikora Trade, which had solid performance in H1 2023. However, Scope flags that a sudden substitution of suppliers might hamper operating performance.

Nikora’s financial risk profile (assessed at BB-) reflects the stronger credit metrics due to the group’s solid operating performance, with Scope-adjusted EBITDA and the cash conversion cycle both improving and leading to substantial cash flow. The group’s leverage, exemplified by Scope-adjusted debt/EBITDA, decreased for the second consecutive year to 2.0x (from 3.0x in 2021) thanks to the solid performance of Nikora Trade and FMCG activities, while Scope-adjusted debt remained stable. Scope’s other leverage metric, funds from operation/debt, also improved, ending the year at 39%.

Results in the first half of 2023 consolidated the double-digit revenue growth. Leverage remained at around 2.0x thanks to a relatively high Scope-adjusted EBITDA of GEL 70.8m (up 37% YoY). Scope foresees stable leverage metrics, with Scope-adjusted debt/EBITDA at between 2.0x-2.5x and Scope-adjusted funds from operations/debt of above 30% in the medium term. This will be mainly supported by the group’s strategy to increase the organic growth of its FMCG and retail arms that will benefit the group’s performance.

However, the growth strategy will also constrain improvements in free operating cash flow and liquidity, with capex to increase to around GEL 340m for the next three years (vs GEL 60m in 2022). Free operating cash flow is the weakest element of the financial risk profile, expected to be negative in 2023-2024 before turning slightly positive from 2025. Nevertheless, the issuer’s financial flexibility in terms of capital spending is beneficial as it can adapt capex to operating performance. Therefore, this metric is not overweighted in the financial risk profile assessment.

Liquidity remains inadequate. The current debt structure with significant short-term debt, though common in Georgia, is a drain on liquidity. The committed credit line of GEL 15m remains undrawn in 2022 but will not fully cover the negative free operating cash flow expected from 2023. Liquidity will, however, benefit from the likely refinancing of Nikora Trade’s bond in 2024 and Nikora’s in 2025. Scope does not anticipate any difficulties thanks to Nikora’s well-established relationships with local banks, resilient business model and improved credit metrics.

Outlook and rating-change drivers

The Stable Outlook reflects Scope's view that JSC Nikora 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 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 at BB-. This reflects Scope’s expectation of an average recovery for senior unsecured debt positions in the hypothetical event of a group default. The recovery analysis is based on a hypothetical default scenario in 2025, which assumes outstanding senior secured debt of GEL 70m, payables and fully drawn committed credit lines.

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; Consumer Products Rating Methodology, 4 November 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 15 August 2019. 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
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