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Rating action

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

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BB- (unchanged). The issuer’s business risk profile continues to benefit from its leading position in the Georgian retail market in terms of sales and trading area. Nikora Trade’s market share stayed at 18%¹ in 2023 thanks to the solid development of its store network, which grew to 579 stores from 465 in 2022. Nevertheless, the issuer’s small size compared to European retail competitors and lack of geographic diversification continue to hold back its business risk profile assessment.

Strong operating performance has positively influenced the rating. In 2023, revenue increased by 31% year-over-year, driven by three key factors: i) organic growth from 114 newly opened stores, which are expected to reach full capacity by the end of 2024; ii) increased local purchasing power, as wage growth outpaced inflation; and iii) migration from neighbouring countries, whose residents have higher purchasing power. However, Scope anticipates that this positive impact on operating performance will diminish as some migrants are returning to their home countries, a trend partially reflected in the weaker performance in the first quarter of 2024. At the same time, the overall effect will be counterbalanced by a significant rise in tourism during the summer months.

Despite the ongoing risk related to reliance on Ukrainian and Russian suppliers, the company remains confident in its ability to source alternative suppliers, who are on standby should the current Ukrainian suppliers become unable to fulfil orders. If this situation arises, there may be a short-term impact on input prices, but it would not constrain operations in Scope’s view. This assumption is partly supported by the reduced bottlenecks in the supply of primary food products compared to the Covid years.

Scope believes that Nikora Trade will keep profitability margins at a comfortable level, with Scope-adjusted EBITDA maintained at around 8%. This is based on: i) historically stable gross margins of around 25%, benefitting from the group’s vertical integration with advantageous commercial terms; ii) the ongoing expansion phase with new stores, which Scope believes will continue to enhance the issuer’s bargaining power, potentially creating synergies, which will be reflected in higher margins. Inventory shrinkage and obsolete inventory costs remain at 2% of sales, which decreased gross margins by 200 basis points (negative ESG factor).

Financial risk profile: BB- (unchanged). Nikora Trade’s financial risk profile reflects solid credit metrics and moderate indebtedness. The main constraint is cash flow volatility.

The company’s strong growth helped credit metrics to remain at a moderate level in 2023 with leverage as measured by debt/EBITDA* stable at 2.0x. Funds from operations/debt exceeded 30% due to solid EBITDA growth in absolute terms, partially offset by increased debt from higher operating leases after new store openings.

In 2024, Georgia's central bank reduced the refinancing rate by 1 percentage point to 8.0%, which Scope expects will support Nikora Trade's EBITDA interest cover ratio. However, Scope projects that an additional debt issuance by the end of 2024 (to fund a greenfield warehouse project) will lower EBITDA interest cover to below 5.0x in 2025. Scope has also made conservative assumptions regarding future debt costs, considering that 2024 is an election year with ongoing political tensions. The agency's base case does not include severe impacts from the ‘Transparency of Foreign Influence’ law, which could lead to sanctions on Georgia and significantly restrict international capital inflows. Scope will closely monitor developments and adjust its base case if such material risks arise.

Cash flow cover remains the weakest element of Nikora Trade’s financial risk profile. However, Scope has not overweighted this metric in its analysis due to the company’s scale and financial flexibility in terms of capital spending. Nevertheless, the significant expansion programme in 2024-2025 will continue to hamper free operating cash flow/debt, with around GEL150m allocated to opening new stores and building a centralised warehouse in Tbilisi.

Liquidity: inadequate. Scope estimates that available cash levels only will be insufficient to fully cover (re)-financing needs, following expected significantly negative free operating cash flow in 2024 and 2025. Even accounting for the company’s undrawn committed lines of GEL 10m, the ratio remains inadequate, exposing Nikora Trade to continued external funding needs and a strong dependency on its banks.

Despite the inadequate liquidity, which is mainly due to the unique characteristics of the Georgian banking practices, with the majority of project investments being pre-financed, Scope does not anticipate significant refinancing risks associated with the bond maturity by the end of 2024. This is supported by the company's robust credit metrics, long-standing banking relationships and significant headroom to covenants.

Supplementary rating drivers: The ratings are unaffected by supplementary rating drivers.

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

Outlook and rating sensitivities

The Stable Outlook reflects Nikora Trade’s continued expansion strategy and related investments. Scope notes that the investments are dependent on available financing and will only be made if profitability is not negatively affected. Scope assumes that the company will draw adequately in advance its options to refinance the bond maturity in 2024 and the large capex planned for 2025. Credit metrics are expected to remain stable, with Scope-adjusted debt/EBITDA between 2.0x and 2.5x and Scope-adjusted fund from operations/debt above 30%. Foreign currency risk is reflected in the tighter debt thresholds than for other companies.

The upside scenario (deemed remote for the time being) for the rating and Outlook would require (collectively):

1. Significant growth of operations outside of Georgia
    
2. Sustainably improved liquidity (to adequate)
    
3. Credit metrics remaining at least in line with rating guidelines

The downside scenario for the rating and Outlook would require (individually):

1. Scope-adjusted debt/EBITDA to exceed 2.5x on a sustained basis
    
2. Scope-adjusted funds from operations/debt below 30%
    
3. Unsuccessful refinancing of the upcoming bond maturing in 2024

Debt rating

Scope has also affirmed senior unsecured debt at BB-. The recovery analysis is based on a hypothetical default scenario in 2025, which assumes outstanding senior secured loans, payables and guarantees ranked prior to senior unsecured debt, which results in an above average recovery rate. However, given high sensitivity to advance rates, Scope refrained from granting any up-notch to the issuer rating.

Environmental, social and governance (ESG) factors

ESG factors have negatively impacted this rating action. Scope remains concerned about Inventory shrinkage and obsolete inventory which still equate to 2% of sales and decrease gross margins. The cost to manage the food supply chain is too high; the company is seeking to address this by integrating SAP enterprise resource planning systems to track and organise stock and improve working capital management. Better access to available stock will increase operating efficiency. Although this credit-negative factor did not result in a negative rating adjustment under supplementary rating drivers, it impacts the rating somewhat negatively through Scope’s assessment of the company’s operating profitability and its overall blending in Nikora Trade’s competitive positioning.

All rating actions and rated entities

JSC Nikora Trade

Issuer rating: BB-/Stable, affirmation

Senior unsecured debt rating: BB-, affirmation

*All credit metrics refer to Scope-adjusted figures.

Rating driver references
1. 6 August 2024 FMCG Sector Overview

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, 16 October 2023; Retail and Wholesale Rating Methodology, 26 April 2024), 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 these 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 and/or Outlook 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, Director
Person responsible for approval of the Credit Ratings: Eugenio Piliego, Senior 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 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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