Lagos, 10 August 2021 – GCR Ratings (“GCR”) has assigned national scale long-term and short-term Issuer ratings of BBB(NG) and A3(NG) respectively to Sundry Markets Limited, with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Sundry Markets Limited||Long Term Issuer||National||BBB(NG)||Stable|
|Short Term Issuer||National||A3(NG)|
The ratings of Sundry Markets Limited (“Sundry Markets”, “SML” or the “Company”) are underpinned by steady earnings growth, satisfactory credit protection metrics and favourable industry dynamics. Nevertheless, its credit profile is constrained by modest competitive position and limited track record.
Sundry Markets competes favorably with other players within the Nigerian grocery retail industry in terms of revenue and number of outlets. However, its competitive position is constrained by the infancy of the industry compared to global peers, with modern commercial retailers having only a small fraction of the general industry. In this regard, Sundry Markets currently operates 15 stores, whilst its major competitors only have between 20 – 30 stores currently. The company does intend to strengthen its competitive position by increasing its store count to 50 by 2025. Positively, the Nigerian retail sector offers substantial opportunities for expansion, with steady cash flows underpinned by the non-discretionary nature of the products being sold and the high demand. With little impact on operations due to the COVID-19 pandemic, GCR expects the sectoral earnings to remain resilient in 2021.
Sundry Markets has reported strong revenue progression over the review period with a CAGR of 97% between FY16 and FY20, underpinned by rapid store expansion and volume growth across its stores. This has been complemented by the efficient management of operating costs, which has seen EBITDA margin maintained at around 11% over the review period. Nevertheless, revenue stability is yet to be fully tested on a larger scale, with more diverse distribution chains. GCR also expects competition for market share in modern retail to increase, driven by a number of well-funded supermarket groups. In that regard, our expectation for revenue growth is capped at 30% and 35% for FY21 and FY22 respectively on the back of improved economies of scale from store expansion. Similarly, GCR expects the earnings margin to remain resilient at 11% over the outlook period as improved economies of scale should help offset the persistent inflationary pressure and foreign exchange volatility that weigh adversely on inventory costs and operating expenses.
Supported by firm earnings Sundry Markets has reported strong cash flows over the review period. Despite the rapid store expansion, the Company has maintained a conservative debt level over the review period, with net debt to EBITDA reported at 0.54x at 5M FY21 (FY20: 0.97x) and OCF coverage of debt currently at 1.31x (FY20: 0.56x) on the back of the improved earnings. While the cash flows have been sufficient to cover operations and have reduced the need for debt, the planned expansion drive is expected to create some funding pressures, likely necessitating future debt support. Nevertheless, refinancing risk is low as the debt maturity profile is largely long tenured, and further supported by the subordinated shareholder loan. Furthermore, the ability to scale up earnings should see cash flow and leverage metrics remain within moderate level over the medium-term rating horizon, even if debt is eventually raised.
The liquidity assessment is considered neutral to the ratings. Liquidity coverage is premised on anticipated improved operating cash flow and moderate cash holdings, which are expected to cover debt redemption and some smaller capex spend. However, the major capex required to expand the store footprint will be financed by the Bank of Industry loan, from which N2.6bn was recently received. As such, GCR expects liquidity coverage to remain within the intermediate range of 1.25x to 2x over the 12-month period to FY22.
The Stable Outlook reflects GCR’s expectation that earnings and cash flow will remain strong and continue to support ongoing expansion, whilst maintaining a moderate capital structure and liquidity profile.
Positive rating action could arise if Sundry Markets demonstrates a sustainable growth in outlets that translates into improved market share and brand awareness, as well as robust earnings growth. Conversely, a rating downgrade could emanate from an increase in debt to fund expansion, and resulting deterioration in gearing metrics, particularly if earnings targets are not achieved.
|Primary analyst||Busola Akinrolabu||Analyst|
|Lagos, Nigeria||Busola@GCRratings.com||+234 1 904 9462|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, July 2021|
|GCR Nigeria Corporate Sector Risk Scores, August 2021|
Sundry Markets Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial/Last||National||BBB(NG)||Stable||August 2021|
|Short Term issuer||Initial/Last||National||A3(NG)|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.00|
|Management and governance||0.00|
|Leverage and capital structure||1.00|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Coverage||Coverage The scope of the protection provided under a contract of insurance.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Gearing||Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Sundry Markets Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Sundry Markets Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Sundry Markets Limited and other reliable third parties to accord the credit ratings included:
- 2020 audited annual financial statement, and prior four years annual financial statements;
- Five-month management accounts to 31 May 2021;
- Internal and/or external management reports;
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
- Information specific to the rated entity and/or industry was also received;