OREANDA-NEWS. Fitch Ratings Indonesia has assigned a National Long-Term Rating of 'AA-(idn)' to PT Sumber Alfaria Trijaya Tbk's (Alfamart; AA-(idn)/Stable) proposed IDR1trn bond issue. The new bonds will be issued in two tranches: IDR600bn of 9.7% notes maturing in three years and IDR400bn of 10% notes maturing in five years. The new bonds are the last issue from Alfamart's outstanding IDR2trn bond programme, from which it issued IDR1trn of notes in 2014.

Fitch does not expect the new issue to impair Alfamart's overall credit profile because the proceeds will be used to repay existing bank loans.

The bonds and bond programme are rated at the same level as Alfamart's National Long-Term Rating of 'AA-(idn)' as they constitute direct, unconditional, and senior unsecured obligations of the company. The rating assigned to the bond programme is no assurance that bonds issued under the programme will be assigned a rating, or that the rating assigned to a specific issue will be the same as that of the programme.

'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations.

KEY RATING DRIVERS

Weak Consumer Sentiment Impacted 2014: Activities related to the national elections typically contribute to higher sales per day; however, this did not eventuate in 2014. Weaker consumer sentiment and more intense competition contributed to slower same-store sales growth (SSSG) of around 6% in 2014 compared with a historical average of around 9%. Weak consumer sentiment was to a large extent driven by higher inflation and a fuel subsidy cut towards the end of 2014. Despite this, Alfamart's 2014 financial metrics were within our rating guidelines, although its leverage was slightly above our initial expectations. Consumer sentiment has since recovered, with inflation easing and interest rates falling slightly.

Market Leader: With over 10,000 stores in the portfolio, Alfamart controls about 50% of Indonesia's mini-market store sector through multiple brands: Alfamart, Alfamidi, and Lawson. Alfamart is therefore able to achieve economies of scale across its distribution centres while its market leadership provides it with buying power. Although both Alfamart and its major competitor Indomaret have expanded rapidly in recent years and mini-market store density has increased, we believe there is still ample room for growth of modern grocery stores in the Greater Jakarta region and areas outside Java. Indonesia's large population and rising middle class, and the low penetration of modern grocery stores will support growth in the sector.

High Fixed-Cost Structure: Alfamart's strategy of renting property for all its stores and the upward trends in minimum wage and utilities tariffs limits the company's financial flexibility. However, grocery retailing is a scalable business and therefore Alfamart's large scale and market leadership, its efficient working capital management and the stability of the grocery retail business are key mitigants. Fitch expects Alfamart's financial metrics to remain comfortable in the next 12-18 months even as it continues to increase the number of stores, with funds from operations (FFO) net leverage of below 3x and fixed charge cover of above 2.5x.

Strong Store Growth: The company's quick expansion is set to continue through 2015-2016. At the same time, it is looking to diversify its business geographically by entering new markets. Alfamart will face challenges in these new markets, in the form of poor distribution infrastructure that may lead to lower service levels from suppliers, strong competition and differing formats and product offerings. In addition, the company's Lawson unit continues to be cash negative. However Fitch believes the company's experience under comparable conditions and its strategy of shutting non-performing stores in a timely manner mitigates the risks. Alfamart has managed to keep its financial metrics at comfortable levels despite its rapid expansion over the past few years.

Cash Flows Stability: Alfamart's top-selling products are fast-moving consumer goods, demand for which is resilient, especially in Indonesia where the middle class is growing. We expect Alfamart to be able to maintain growth in overall same-store sales despite what is likely to be a period of slower economic growth compared with the average of the past 10 years. Consumers switching from traditional stores to modern convenience stores that have a wider range of products and services will also help to drive Alfamart's growth and its plans to expand into islands outside of Java.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Addition of 750 new Alfamart stores owned by the company in 2015 (2014: 888)
- Same-store sales growth of about 5% in 2015 and 6% in 2016 (2014: 6%)
- No significant expansion for Lawson or investment in the Philippines

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO net leverage at more than 3.5x on a sustained basis
- FFO fixed charge cover at less than 2.5x on a sustained basis

Positive rating action is not expected over the medium term, due to Alfamart's debt funded capex commitments.