The credit rating of PJSC «Pharmacy Chain 36,6» (hereinafter, the Company) is based on strong assessment of the Company's operational risk profile (which, in turn, reflects a low cyclical demand for pharmaceuticals), strong portfolio of brands, and high diversification of selling formats. ACRA assesses the Company's market positions as high.
The overall assessment of the financial risk profile is medium. The Company's leverage is high and interest coverage is low, however, the Agency notes that these factors have improved since 2020–2021. ACRA assesses the Company's profitability as very high. In addition, the Company is characterized by medium business size and high scores for liquidity and cash flow.
The Company is a large Russian pharmacy chain operating under such brands as "36,6", "Gorzdrav", "Kalina Pharm". The chain's pharmacies are largely concentrated in Moscow (ACRA rating AAA(RU), outlook Stable) and the Moscow Region (ACRA rating AA+(RU), outlook Positive). At the end of 2022, the chain included 1,814 pharmacies.
key ASSESSMENT factors
Strong operational risk profile assessment. The focus regions for the Company are Moscow and the Moscow Region, where the Company holds leading positions. The Agency positively assesses the Company's business profile, which is due to a low cyclical demand for pharmaceuticals and a strong portfolio of brands (the Company's main brands, including 36,6 and Gorzdrav, benefit from a very high awareness). The share of online sales was 16% at the end of 2022, which is positive for the format diversification.
As part of the corporate governance assessment, ACRA notes a fairly high level of elaboration of corporate and risk management procedures. The Company has a board of directors; all the key procedures are regulated. The group structure is rather complicated because the group was shaped through mergers and acquisitions. Financial transparency is assessed as medium: the Company prepares its IFRS statements audited by BST JSC, but its financial and operational indicators are not publicly available.
Medium business size assessment and very high profitability. By the end of 2022, the Company's revenue reached RUB 59 bln, which is 34% higher than in 2021. ACRA expects that in 2023–2025 the annual revenue growth rate will be lower and ranging within 5–15%. The scenario considered by the Agency as the base one does not involve significant mergers and acquisitions. If the Company implements a more aggressive strategy, the revenue growth rate may be higher, however, in such case ACRA would have to adjust its forecast financial model. The growth rate of FFO before fixed charges and taxes in 2022 was 49%, so that this indicator grew to RUB 10.2 bln. The Agency expects that in 2023–2025, this indicator will grow on par with revenues. The current values of revenue and FFO before fixed charges and taxes correspond to the medium score for business size as per ACRA's methodology.
In the Agency's view, the Company's profitability is very high. The FFO before fixed charges and taxes margin at the end of 2022 was 17%, while EBITDAR amounted to RUB 108,000 per 1 sq. m. ACRA expects that the current profitability will be maintained in 2023–2025.
High leverage and low interest coverage. As of December 31, 2022, the Company's total debt amounted to RUB 18.9 bln. The main share of the debt portfolio (69%) included outstanding corporate bonds. The Company's debt is raised at fixed rates and denominated in rubles. ACRA assesses the Company's leverage as high. By the end of 2022, the ratio of total debt to FFO before net interest was 4.1x, the ratio of lease-adjusted total debt to FFO before fixed charges was 5.6x. Although the leverage is high, ACRA notes that it has decreased since 2020–2021. According to ACRA's forecast, in 2023–2025, the Company's leverage may continue to decline further.
Coverage metrics also improved in 2022 and exceeded 1.0x: the ratio of FFO to net interest to interest reached 1.8x, and FFO before fixed charges to fixed charges amounted to 1.3x. Regardless the positive dynamics, the indicators are still low.
High liquidity and strong free cash flow (FCF). The Company’s FCF was positive in 2022, while FCF margin stood at 3%. ACRA expects that the Сompany’s FCF margin will stay within the 1–4% range in 2023–2025. The positive FCF supports the Company’s liquidity, which is assessed by the Agency as high thanks to a fairly comfortable repayment schedule and the availability of undrawn credit lines.
KEY ASSUMPTIONS
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Revenue growth by 5–15% in 2023–2025;
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FFO before fixed charges and taxes margin at 16–18%;
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No annual dividend payments;
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Absence of major M&A transactions;
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Access to external sources of liquidity.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted average ratio of total debt to FFO before net interest falling below 3.5x;
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Weighted average ratio of FFO before fixed charges to fixed charges exceeding 1.5x.
A negative rating action may be prompted by:
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Weighted average ratio of total debt to FFO before net interest exceeding 5.0x or adjusted total debt to FFO before fixed charges exceeding 6.0x;
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Weighted average ratio of FFO before fixed charges to fixed charges falling below 1.0x or weighted average ratio of FFO before net interest to interest falling below 1.0x;
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FFO before fixed charges and taxes margin declining below 15%;
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Deterioration of access to external sources of liquidity.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb+.
Support: none.
issue ratings
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to PJSC «Pharmacy Chain 36,6» under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to PJSC «Pharmacy Chain 36,6» for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by PJSC «Pharmacy Chain 36,6», information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and PJSC «Pharmacy Chain 36,6» participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to PJSC «Pharmacy Chain 36,6». No conflicts of interest were discovered in the course of credit rating assignment.