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

Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB-/Stable issuer rating on Nikora JSC (Nikora). 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). Nikora’s business risk profile 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 in the local market, especially for meat and baked products. The group’s vertically integrated business model also supports the business risk by limiting volatility in gross margins. Nevertheless, its small size at a European level and exposure to only one market are rating constraints.

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

Scope sees Nikora’s gross margin maintained at 28%-29% of revenues, based on the issuer’s ability to manage input costs without any major disruption in the supply chain. EBITDA margin is forecast to stay close to 10% (10.8% in FY 2023), as the main driver of the business is the organic development of subsidiary Nikora Trade, which performed solidly in H1 2024. However, inventory shrinkage and obsolete inventory costs increased to 2.2% of sales (from 1.8% in 2022), which decreased gross margins by 200bps (negative ESG factor).

Financial risk profile: BB- (unchanged). Nikora’s financial risk profile reflects solid credit metrics due to good operating performance, with EBITDA* and the cash conversion cycle both improving and leading to substantial cash flow. Leverage, in terms of debt/EBITDA, remained stable at 2.0x in 2023 for the second consecutive year (down from 3.0x in 2021) thanks to the solid performance of Nikora Trade and FMCG activities, while Scope-adjusted debt remained moderate. Scope’s other leverage metric, funds from operations/debt, also improved, ending the year at 42%.

Scope foresees debt/EBITDA at around 2.5x and funds from operations/debt of about 30% in the medium term. This will be mainly supported by Nikora’s strategy to increase the organic growth of its FMCG and retail arms. While this strategy will benefit the group’s performance, debt-funded capital expenditures will be a constraint.

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 about 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.

While cash flow cover remains the weakest element of Nikora’s financial risk profile, Scope has not overweighted this metric in its analysis due to the company’s scale and financial flexibility in terms of capital spending. The construction of the new meat production facility is expected to be completed by the end of 2024, which will enhance the group's meat production capacity and expand its product range. However, the substantial expansion programme will continue to strain free operating cash flow and increase debt.

Liquidity: inadequate. Scope estimates that available cash levels only will be insufficient to fully cover (re)-financing needs after expected significantly negative free operating cash flow in 2024-2025. Even accounting for the group’s undrawn committed lines of GEL 33m, the ratio remains inadequate, exposing Nikora 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 in 2024 and 2025. 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’s continued 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. 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 agency’s 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. This 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 of managing the food supply chain is too high. Nikora 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 negatively via Scope’s assessment of operating profitability and its overall blending in the assessment of Nikora Trade’s competitive positioning.

All rating actions and rated entities

JSC Nikora

Issuer rating: BB-/Stable, affirmation

Senior unsecured debt rating: BB-, affirmation

*All credit metrics refer to Scope-adjusted figures.

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; Consumer Products Rating Methodology, 3 November 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 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 15 August 2019. 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
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.