OREANDA-NEWS. Fitch Ratings Indonesia has affirmed PT Sumber Alfaria Trijaya Tbk's (Alfamart) National Long-Term Rating at 'AA-(idn)'. The Outlook is Stable. At the same time, the agency has affirmed Alfamart's outstanding Indonesian rupiah-denominated senior unsecured bonds at 'AA-(idn)'. A full list of rating actions is at the end of this commentary.

The affirmation is based on Alfamart's successful expansion via additional stores, while maintaining a consistent credit profile with low leverage and adequate fixed-charge coverage. Store numbers have more than doubled since 2010 and the company generated almost USD200m of EBITDA in 2015 (2014: USD178m). However, the company is focussing store growth in areas outside Java, where traditional stores continue to dominate the retail market.

'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
Expansion Continues: Fitch expects mini markets, such as those operated by Alfamart, to be the best-performing modern retail format in Indonesia in terms of store growth. We forecast the company will add more than 1,100 stores a year over 2016-2018 (2015: more than 1,200 stores added). Alfamart has shifted the focus of its expansion to cities outside the highly populated Java island because of difficulties in acquiring suitable new store locations at reasonable rates in prime areas and to tap the potential growth in other islands.

This expansion requires the setting up of more warehouses outside the main island, which has resulted in rising distribution costs while the warehouses remain underutilised. The contraction in its margin does not yet have significant impact on the company's creditworthiness, but it could be negative for the rating if the trend is not addressed. In addition, the rapid increase in the number of stores amid a deceleration in economic growth has slowed same-store sales growth since 2014. However, the trend has stabilised and Fitch expects same-store sales growth to pick up as the economy rebounds.

Shift to Modern Grocery: Traditional grocery stores continue to dominate Indonesia's grocery market, with around a 60% share by sales, although new retail formats have been making inroads. Mini market operators such as Alfamart are well placed to modernise Indonesian' retail market as the stores require less capital to start and the format is more flexible in terms of space and location requirements, which allow it to serve non-prime areas with less traffic than the larger formats such as supermarkets.

Leading Market Position: Alfamart's rating also benefits from its solid position as Indonesia's largest mini market operator (including Alfa Midi and Lawson stores) by number of stores. It accounts for about 30% of modern retail revenue in the country. Alfamart had more than 11,600 stores (including its subsidiaries) at end-3Q15 compared with its closest rival, PT Indomarco Prismatama (Indomaret) with just over 11,400 stores. Alfamart's size gives it a better negotiation position against suppliers, discounts from bulk purchases and strong store presences that enhance its brand name.

Stable Cash Flows: Non-discretionary items, such as food and beverage and fast-moving consumer goods, make up more than 50% of the company's sales. Fitch believes that these sectors have strong defensive characteristics and therefore provide Alfamart with stable cash flow generation.

Adequate Liquidity: Fitch forecasts Alfamart to continue generating adequate CFO of around IDR1.5trn-2trn to cover a large part of its capex and dividend payments in 2016-2018. We believe that the company's leverage will be manageable and financial flexibility remain adequate with FFO-adjusted net leverage below 2.5x and FFO-fixed charge coverage above 2.5x. This will help the company in securing funding required to finance its rapid store expansion.

Strong Funding Access: Alfamart demonstrated it has solid access to funding by securing loans from various banks and tapping the local bond market by issuing IDR2trn of bonds. The company also raised IDR1.5trn of equity through rights issues in 2015 to reduce its leverage.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Alfamart include:
- Addition of 1,000-1,200 Alfamart stores a year in 2016-2018.
- 5% annual growth in sales per day.
- Dividend payout ratio of 25%-30% in 2016-2018.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO-fixed charge coverage rises above 3.0x on a sustained basis
- FFO-adjusted net leverage (adjusted for pre-paid rents) falls below 2.0x on a sustained basis

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO-fixed charge coverage falls below 2.5x on a sustained basis
- FFO-adjusted net leverage (adjusted for pre-paid rents) rises above 3.0x on a sustained basis

FULL LIST OF RATING ACTIONS
National Long-Term Rating affirmed at 'AA-(idn)'; Outlook Stable
IDR2trn bond programme affirmed at 'AA-(idn)'
IDR1trn senior unsecured bonds due 2017 under the IDR2trn bond programme affirmed at 'AA-(idn)'
IDR600bn senior unsecured bonds due 2018 under the IDR2trn bond programme affirmed at 'AA-(idn)'
IDR400bn senior unsecured bonds due 2020 under the IDR2trn bond programme affirmed at 'AA-(idn)'.