(The following statement was released by the rating agency)
Oct 10 - This announcement corrects the version published earlier today which incorrectly stated Arcelik's National Long-term rating. A corrected version follows.
Fitch Ratings has affirmed Arcelik A.S.'s
(Arcelik) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+' and National Long-term rating at 'AA(tur)' The Outlook is Stable.
The rating affirmation reflects Fitch's expectations that profitability and free cash flow (FCF) will rebound in 2013, following an erosion of the EBITDA margin to 10% in H112 from 10.6% in 2011 and 11.7% in 2010, and further negative FCF. Fitch's current base case projects a rebound in EBITDA margin to just less than 11% and positive FCF in 2013. A lower or slower improvement in profitability and cash generation in 2013 could put renewed pressure on the ratings.
The ratings are supported by Arcelik's leading position in its domestic market, its proven capability to grow export volumes and a broadly stable financial profile. Market share gains in Europe, mainly due to European customers trading down in the current difficult economic conditions, has supported Arcelik's revenue growth in H112. The majority of Arcelik's production is based in low-cost locations such as Turkey, Romania, Russia and South Africa, which allows the company to benefit from lower costs compared to its EU based competitors (mainly from labour) and its Asian competitors in terms of transportation costs due to its proximity to the EU.
Arcelik's revenue grew 39% in H112, supported by all segments, as well as the contribution from the full consolidation of Defy acquired in Q411. Excluding the effects of the Defy acquisition and currency effect, sales jumped 27% organically. This strong growth prompted a significant working capital outflow and the company is lagging behind its working capital target of 35% at end-2012 (38.7% at end-June 2012). As a result, FCF was negative in H112, although Fitch expects FCF to improve and be positive in H212 and beyond.
Despite higher than expected revenue growth, H112 EBITDA margin were lower than historical levels at 9.9%. Fitch believes this deterioration is mainly because of persistently high raw material costs, and margin losses coming from international markets and the increased share of the electronics business where margins are typically lower compared to the white goods sector. Fitch believes that profitability will rise slightly in the medium term as the volatility surrounding raw material prices lessens. However, increasing sales from international markets is likely to continue putting pressure on earnings margins.
Debt increased slightly to TRY3.6bn at end-H112 from 2011 YE levels of TRY3.1bn, mainly due to continuous working capital needs. This pushed the net debt/EBITDA ratio up to 2.5x but Fitch expects some de-leveraging in 2013 as the company improves its working capital management and its FCF generation ability.
Arcelik's reported leverage is negatively impacted by its higher than average working capital needs, as a significant portion of durable goods are sold on credit in Turkey, and this is partly financed by Arcelik. Given that Arcelik has historically seen few losses on its trade receivables, Fitch adjusts Arcelik's debt by netting off the debt portion of trade receivables above 60 days of revenues (approximately TRY1.7bn at end-H112) to enable a more accurate peer comparison. On this basis, Arcelik's adjusted gross debt/EBITDA ratio was 2.0x at end-H112 (from 1.6x at end-2011) and the adjusted FFO gross leverage was 2.2x.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Significant improvement in business profile along with reduced structural FX risks could be positive for Arcelik's ratings.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A receivable-adjusted FFO gross leverage ratio above 2.0x, EBITDA margins below 10.5%, or consistently negative FCF would put negative pressure on Arcelik's ratings.
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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria 'Corporate Rating Methodology', dated 12 August 2011, are available at
. Applicable Criteria and Related Research: Corporate Rating Methodology (New York Ratings Team)