The credit rating of X5 Retail Group N. V. (hereinafter, X5, or the Company) is based on the Company’s very strong operational risk profile and liquidity, leading position in the Russian food retail market, low leverage, and high profitability. The Agency notes the positive dynamics of X5’s operational and financial performance in H1 2023.
X5 is one of Russia’s leading food retailers. The Company successfully develops various trading formats, both offline and online. As of June 30, 2023, the Company’s chain included 22,680 stores, including 20,200 Pyaterochka stores, 956 Perekrestok supermarkets, and 809 Chizhik hard discounters.
KEY ASSESSMENT FACTORS
X5’s very strong operational risk profile stems from the high assessment of market position, as well as very high assessments of the business profile, geographic diversification and corporate governance. The Company’s core activity is selling food and staple goods, which have low cyclicality of demand. X5’s business is well diversified by formats — currently, the core segment for the Company is Pyaterochka proximity stores, while a significant share is represented by Perekrestok supermarkets. The Company is expanding its own chain of Chizhik hard discounters and developing a presence in the e-grocery segment. The Agency assesses the brand strength and Company’s promotional policy as very high.
X5 is successfully implementing its strategy of development and retail chain transformation. The Company’s management structure complies with the best global practices. Risk management procedures are documented and minimize all main risks. The Company’s structure is assessed at a high level, the core operations generating cash flow are focused on several legal entities. The financial transparency is very high, and investor relations are managed in line with the best global practices.
Low leverage and medium coverage. As of the end of 2022, the ratio of total debt to FFO before net interest payments was 1.4x (2.0x in 2021), and the ratio of adjusted total debt1 to FFO before fixed payments was 3.7X (4.1x in 2021). The Agency expects further improvement in the relative indicators of X5’s debt load in 2023 due to simultaneous growth in FFO and shrinking total debt. The ratio of FFO before net interest payments to interest payments was 7.3x as of the end of 2022 (9.2x as of the end of 2021), and the ratio of FFO before fixed payments to fixed payments was 2.0x (2.1x in 2021). ACRA expects debt service metrics to improve in 2023 compared to 2022 and 2021.
Very strong liquidity and strong cash flow. In 2022, the Company reduced its investment activity and stopped paying dividends, which allowed it to considerably increase the cash on its balance sheet and improve cash flow indicators. The Agency expects the Company’s investment activity to recover starting from 2023, but notes that there is continuing uncertainty with regard to the possible timeline for resuming dividend payments. The absence of dividend payments gives additional support to X5’s liquidity and cash flow indicators.
1The operating lease multiplier for retailers is 7.
KEY ASSUMPTIONS
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Successful implementation of the Company’s development plan;
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Annual average growth of revenues at 16–17% in 2023–2025;
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Gross profitability ranging from 22–24% in 2023–2025.
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 negative rating action may be prompted by:
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Ratio of FFO before fixed payments to fixed payments declining below 1.5x;
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FFO before fixed payments and taxes margin declining below 10% and weighted ratio of adjusted debt to FFO before fixed payments exceeding 4.0x.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): aaa.
Support: none.
issue ratings
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned 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.
The credit rating of X5 Retail Group N. V. was published by ACRA for the first time on October 5, 2022. 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 X5 Retail Group N. V., information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of Retail Group N. V. The credit rating is solicited and X5 Retail Group N. V. 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 X5 Retail Group N. V. No conflicts of interest were discovered in the course of credit rating assignment.
