Fitch cuts Pick n Pay’s credit rating

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Independent Newspapers

Customers at Pick n Pay in Carlton centre in Johannesburg. Photo: Leon Nicholas.

Fitch Ratings on Tuesday downgraded SA-based retailer Pick n Pay's (PIK) national long-term rating to 'A(zaf)' from 'A+(zaf)'.

At the same time, the agency has affirmed its short-term rating at 'F1(zaf)'. The outlook on the national long-term rating is stable.

“The downgrade primarily reflects our expectation that Pick n Pay's weakened credit profile will recover at a slower pace in FY12/13 than the agency previously anticipated.”

“We believe Pick n Pay's net lease-adjusted leverage metrics will remain above 2.3x over the medium term - a guideline previously set by Fitch as a maximum level consistent with a 'A+(zaf)' rating considering the tough competitive environment and the execution risk in the turnaround strategy,” the ratings agency said.

The cash flow effect from significant working capital outflows in 2011 and costs associated with the group's transformation strategy is reflected in the group's net debt position of R1.2 billion in FY2011 compared with a net cash position in FY2010, Fitch said.

Adding that it expected investment levels to rise over the next two years as the group embarked on improving its supply chain through central distribution centres and by rolling out new stores.

“Pick n Pay's ratings continue to reflect the group's business profile, including its leading market position in the domestic food retail industry and the diverse range of its product mix, including both branded and private products. However, we believes the company's ability to deleverage organically will be constrained by weak free cash flow generation, after dividends due to high capex - as this is deemed necessary to secure its business position in the long term,” it said.

Furthermore, Fitch said the stable outlook reflected its expectation that sustainable steps taken by management in 2010/2011, such as the focus on reducing costs, better working capital management and supply chain focus should provide operating cash flow relief and EBITDA margin protection over the long term.

The ratings agency said it recognised that the key challenge in the near term remained the successful execution of the company's domestic transformation strategy in a competitive food retail environment and more subdued economic growth prospects in 2011.

“Although there is some uncertainty about the timing of the completion of the sale of its Australian business, we notes that asset sale proceeds should help strengthen the liquidity position and finance expected capex levels,” Fitch said.

It warned that it could take future negative rating action if the turnaround strategy failed to deliver real benefits in terms of market share gains and better profits, resulting in sustained negative free cash flow generation and lease-adjusted net leverage weakening around 3.0-3.5x.

“In contrast, sustained profitability improvement along with a prudent financial policy balanced with a more conservative shareholder return policy and net leverage below 2.0x would be positive for the ratings,” Fitch concluded. - I-Net Bridge

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Jannie Margate, wrote

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10:49am on 21 September 2011
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Spare a thought for P & P management, one of the best run businesses who are now suffering because of the unrealistic salary and wage bills forced on them by the Unions. P & P cannot effectively discipline a staff that is not willing to learn and help them as their promotions and salaries are bargained for at a trough run by the Unioins. Sadly, as with everything else, we, the public now suffer the consiquences and soon the loyal staff will share this discontent!

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Pauline, wrote

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06:15am on 21 September 2011
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"Pick n Pay's ratings continue to reflect the group's business profile, including its leading market position in the domestic food retail industry and the diverse range of its product mix, including both branded and private products." Really? But you want to retrench 3000+ people - not that I am surprised - you visit PnP Cedar Square and you get a minimum MINIMUM product range, gaps in the shelves with no stock and highly paid staff meandering around...

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John, wrote

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12:56pm on 20 September 2011
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What is all this crap - what normal Joe wants to know is if he can efford to buy his pap and spinach as prices are going thru the roof

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Anonymous, wrote

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12:34pm on 20 September 2011
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Oops! P n'P needs to get it's ducks in a row and stop the slide. It needs to squeeze more productivity out of it's well paid labour force.

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