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Rating Action:

Moody's affirms Kingfisher plc (P)Baa2 rating; stable outlook

20 Dec 2018

Paris, December 20, 2018 -- Moody's Investors Service today affirmed Kingfisher plc's ("Kingfisher") (P) Baa2 long term senior unsecured EMTN Programme rating. Concurrently, Moody's affirmed Kingfisher's short-term Prime-2 rating. The outlook on the ratings remains stable.

"Today's rating affirmation reflects the company's strong credit metrics and financial flexibility, notwithstanding the business disruption related to the ongoing business transformation and weak trading performance in France and UK" says Francesco Bozzano, a Moody's Analyst and lead analyst for Kingfisher. "For now, the company remains adequately positioned in the rating category", he added.

RATINGS RATIONALE

The rating affirmation reflects that, despite increasing pressure on margins, the company maintains a very low level of funded debt of GBP44 million and company's reported a net cash position of GBP99 million as of July 2018. Moody's-adjusted debt was GBP3.1 billion, mainly including GBP2.8 billion adjustments for operating leases, implying an adjusted leverage of 2.4x, as Measured by Moody's Adjusted Debt/EBITDA which remains in line with Moody's guidance for the rating category.

Moody's Adjusted EBIT margin reduced from 6.8% to 5.9%in the first half of fiscal year 2018 (H1 2018). The fall in margins reflected the transformation costs associated with the implementation of the ONE Kingfisher five-year plan (Moody's treats the exceptional items related to transformation as recurring items), continued competitive pressure in France and in the UK,higher losses in the non-core Russian market and lower retail profit in the non-core Iberian market. In particular, French operations have suffered significantly during 2018 due to weaker footfall and transformation related. Negative performance in France has been partially offset by the growth in retail profit in H1 2018 in the UK, driven by continued expansion of Screwfix, and in Poland, the group's third largest market.

Moody's expects Kingfisher's Moody's-adjusted leverage, will only marginally increase to 2.6x at the end of FY 2018/19, from 2.4x and to remain broadly flat at around 2.6x in the next 12-18 months. Moody's expects headwinds in France to continue in the next 12 months as price investments and new product ranges will take time to gain traction with customers. However, this will be offset by a reduction in transformation costs related to Kingfisher ONE and the planned disposal of the loss making Russian business. This will lead to a limited growth in EBITDA in the next 12 months and a projected leverage remaining around 2.6x, a level which Moody's views as appropriate for the (P) Baa2 rating, provided that (1) the company's financial policies remain unchanged, with self-imposed leverage target of maximum of 2.5x net debt/EBITDAR as calculated by the company, and (2) reversal in large working capital outflow reported which occurred in the year ending January 2018 (fiscal 2017) such that free cash flow returns to positive territory in fiscal 2018.

Kingfisher's liquidity profile is good and underpinned by (1) cash of GBP181 million at end July 2018 and; (2) GBP550 million of committed and available revolving credit facility expiring in August 2021 and GBP225 million of committed and available revolving credit facility expiring in March 2022. The company's next maturity is the GBP44 million MTN issue due July 2020.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that Kingfisher is adequately positioned in the (P) Baa2 rating category supported by its low leverage and balanced financial policies which, for now, mitigate the pressure on sales growth and margins evidenced in 2018/19. The stable outlook also recognises ongoing high competitive pressures in the French and UK markets and the execution risks associated with Kingfisher ONE, which could weaken the company's operating performance if the programme does not bear fruits. In addition, while there has not been evidence of an impact on DIY demand yet, Brexit has created uncertainty for the economic outlook and housing activity in the UK.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure would reflect the company's ability to continue to mitigate competitive pressure within the industry and successfully enhance its profitability through its self-help initiatives. Quantitatively, Moody's could consider an upgrade to (P) Baa1 if:

Moody's-adjusted EBIT margin increases towards 8%, Moody's-adjusted debt/EBITDA remains below 2.5x and Moody's-adjusted retained cash flow/net debt trends towards 30% on a sustained basis.

Negative pressure on the rating would arise if Kingfisher's fails to improve margins, for example, as a result of (1) a significant worsening in economic conditions in Europe and the UK, or (2) if the group embarks in a more aggressive expansion strategy through M&A or implements more shareholder-friendly policies than those pursued to date. Downward rating pressure would also reflect weakened operating performance should the company be unable to successfully execute the ONE Kingfisher plan or if competitive pressure increases. Quantitatively, downward pressure would reflect: Moody's-adjusted debt/EBITDA above 3.25x on a sustained basis and Moody's-adjusted retained cash flow/net debt below 20%.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

Kingfisher plc is one of the world's largest DIY retailers, mainly operating in the UK and Ireland, with 894 stores as of the end of July 2018; France, with 224 stores; and other European countries, including Poland (76), Spain (28), Russia (20), Romania (38), Germany (19) and Portugal (3). In November 2018, the company announced its intention to exit the Russian, Spanish and Portuguese markets. Apart from its network of retail stores, the company offers its products through a catalogue and an online platform. Kingfisher offers both "hard" products (building materials, tools, plumbing and heating items) and "soft" products (kitchen, bathroom, lighting, decoration and gardening goods).

The UK and Ireland accounted for 42% of total group revenue in fiscal 2017. The company serves both private individuals (with brands such as B&Q, Castorama and Brico Dépôt) and professionals (mainly with its brand Screwfix).

Kingfisher's shares are listed on the London Stock Exchange, with a total market capitalisation of around GBP4.9 billion (December 2018).

Affirmations:

..Issuer: Kingfisher plc

.... Long Term Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2

.... Commercial Paper, Affirmed P-2

.... Other Short Term, Affirmed (P)P-2

Outlook Actions:

..Issuer: Kingfisher plc

.... Outlook, Remains Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Francesco Bozzano
Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yasmina Serghini, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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