New York, March 29, 2022 -- Moody's Investors Service ("Moody's") affirmed Cencosud S.A.'s Baa3 issuer rating and senior unsecured rating and changed the ratings outlook to positive from stable.
Affirmations:
..Issuer: Cencosud S.A.
.... Issuer Rating, Affirmed Baa3
.... Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3
Outlook Actions:
..Issuer: Cencosud S.A.
....Outlook, Changed To Positive From Stable
"The change in the outlook reflects the improvement in Cencosud's credit metrics since 2020, that we expect to continue through 2023," said Moody's VP Senior Analyst Sandra Beltrán. Although Cencosud's core supermarket business proved resilient amid the coronavirus pandemic, non-core businesses, specially shopping centers and department stores, were affected the most, but have recovered since mid-2021 and we expect to continue to fuel growth through 2023", Beltrán further stated.
RATINGS RATIONALE
Cencosud S.A.'s Baa3 ratings incorporate the company's position as one of the largest South American retailers, with solid market shares across divisions and operations in five countries. The rating also considers the company's improved credit metrics resulting from measures taken in 2019 to gain operating efficiencies and to reduce debt. As of the end of 2021, Moody's-adjusted debt to EBITDA reached 2.7 times and EBIT to interest coverage 5.1 times. Current metrics are not only strong for Cencosud's Baa3 rating but are significantly stronger than the average credit metrics reported in the 2012-2019, when its international expansion led to a long-lasting weak credit profile.
Shopping malls and Department stores were hard hit during the pandemic, but recovery is underway and will fuel Cencosud's growth through 2023. Both segments accounted more than 25% of Cencosud's consolidated EBITDA prior to the pandemic, but the mandatory lockdowns, forced Cencosud to offer discounts to fixed rent for tenants, of non-essential products. As a result, shopping centers EBITDA declined 70% during the year and department stores reported negative cash generation. As of December 2021, malls accounting the totality of Cencosud's gross leasable area (GLA) were opened and discounts have been gradually eliminated. As a result, the company reported EBITDA for Shopping malls at CLP 135 billion during 2021; well above the CLP 49 billion in 2020 but still far from the CLP 378 billion reported in 2019, prior to the pandemic. In the department stores segment, Cencosud was not only able to turn around the operation in 2021, but to improve its operating performance through efficiencies. Reported EBITDA in 2021 reached CLP 145 billion compared to the CLP 48 billion reported in 2019.
Cencosud's guidance for 2022 includes revenues of $15 billion, with an adjusted EBITDA of $1.8 billion and capital expenditures close to $640 million. In local currency Cencosud expects to achieve double-digit growth in its revenues and to continue to expand EBITDA margin towards 12%. The plan is underpinned on an investment plan to continue to grow organically, with at least 37 new stores expected to open in 2022. The plan also considers stores transformations and the refurbishment of the totality of Cencosud's stores. As of 2021 about a third of the stores were already remodeled and the company expects to achieve at least 67% by 2022. Part of the plan also considers continued investments in its digital ecosystem and innovation. Some $134 million will be used to improve and expand Shopping malls and the omnichannel capabilities for the segment. These investments will be covered through cash generated internally, posing limited risk to its credit profile. However, the company has stated its interest in continuing to grow through acquisitions in Brazil. Moody's expects that any in case of arising, acquisitions will not be debt funded, allowing the company to maintain leverage below 3 times.
Cencosud's liquidity is strong. Cash in the amount of about CLP 1,310 billion ($1.5 billion) in December 2021 plus around CLP 956 billion in cash from operations support Moody's view that the company will be able to fund the $640 million capex planned for 2022. In 2021, Cencosud declared an extraordinary cash dividend amounting CLP 702 billion (close to $1 billion) funded with internal cash generation. Going forward, Moody's expects Cencosud to pay dividends in the $250 to $350 million range, in line with historical levels and to maintain cash at least at the current $1.5 billion level. Also supporting a strong liquidity assessment is a comfortable maturity profile with the next large maturity scheduled until 2025, when $525 million in global notes mature.
The positive rating outlook considers that Cencosud's credit metrics and operating performance will continue to improve over the next 12-18 months as consumer spending normalizes and that Cencosud will continue to maintain balanced financial policies as it executes its investment plan.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure will arise as Cencosud continues to implement its strategy, gaining market share in its core food retail business and recovering non-core businesses, while maintaining adequate profitability. Quantitatively, a rating upgrade will require Cencosud maintaining debt to EBITDA as adjusted by Moody's below 3.0 times and adjusted EBIT to interest sustained above 4.0 times. Positive pressure will only be dependent on the maintenance of its strong liquidity and credit profile.
Conversely, the outlook could stabilize due to a more challenging operating environment or due to either missteps in the implementation of the strategic plan, a decline in same store sales, or if operating margin trends turn negative trailing its peers. Likewise, a rating downgrade could arise if liquidity deteriorates significantly as a result of a more aggressive than expected expansion plan either in its Brazilian retail operation or in the Shopping malls division or if distributions remain high. Quantitatively, debt to EBITDA sustained above 4.0 times would lead to a rating downgrade.
The principal methodology used in these ratings was Retail published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296095. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Sandra Beltran
Vice President - Senior Analyst
Corporate Finance Group
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Marcos Schmidt
Associate Managing Director
Corporate Finance Group
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