Update Credit Research 13 January 2016

Transcription

1 Update Credit Research January Kesko Industry (GICS): Food & Staples Retailing Sector (Nordea): Consumer Goods BBB- Stable Key info Country Bloomberg debt Bloomberg equity Moody's S&P Market cap. (bn) Nordea Markets - Analysts Sami Kallela Senior Analyst sami.kallela@nordea.com Rickard Hellman Chief Analyst, Credit rickard.hellman@nordea.com Kesko's outstanding bonds Finland KESBV Corp KESBV FH NR/n.a. NR/n.a. EUR.8/EUR Issuer Coupon Maturity Currency Amount Kesko.75 Feb 8 EUR 5 Source: Bloomberg and Nordea Markets KESBV 8 ASW spread development, bp 75 5 Acquisitions emptying the wallet Kesko has executed its new strategy, as laid out in May, quite swiftly, selling its real estate assets for roughly EUR 4m and using the proceeds to acquire Suomen Lähikauppa and Onninen, bringing in roughly EUR.4bn in sales but dependent on competition authority approval. In our view, the Onninen deal supports Kesko's business risk profile by broadening its product offering and customer base more into the growing BB segment. Kesko expects EUR m in synergies on the level from, but we include none in our updated estimates, resulting in a weakening financial risk profile for. In our view, this puts pressure on Kesko's shadow rating and should widen the KESBV 8 bond spreads. Kesko becomes a major European building trade company The acquisition of Onninen creates a EUR 4.bn building trade company and puts Kesko just behind Bauhaus in the European competitive landscape. Moreover, the acquisition changes its technical and building trade business more to the BB side, which we consider credit-positive since the professional sector has outperformed the consumer sector for several years. The biggest challenge is profitability, as Onninen's margin of.7% LTM in Q is clearly below competitors' and we expect it will be a struggle to get this on par with peers. Onninen says its weaker profitability is mainly the result of the product mix rather than operating efficiency, which makes it more difficult to improve, in our view Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Source: Bloomberg and Nordea Markets Oct-5 Jan- Our new estimates expect leverage to increase in We include Onninen in our estimates from H but exclude the Suomen Lähikauppa acquisition for now, as it is under competition authority review. In our base case, we see credit metrics weakening, with adjusted debt/ of.x, but recovering in 7, whereas our credit case suggests weaker profitability versus the base case (debt/ of.5x) and no bounce-back in 7, putting pressure on the shadow rating. Key credit metrics and ratios (adjusted numbers) % EBIT 5 8 Shareholders' equity,9,5 Debt,,599 Debt/(Debt+Equity).5.4 FFO/Debt 5.9% 7.9% FOCF/Debt -.9%.7% DCF/Debt -.% -4. interest coverage 4..7 Debt/.5.4 ROC % 94,5, % 8,75, % -5.%.5 9.7% 75 9 %,5,.5 7.% -.9% -9.9% % 77 9,79,778.4.%. 5.% %,84, % -9.% -5.9%.9.7% 5E 9 55,77,.4 8.%.9% -5.% 4..5 E 79 99,,.5 4.%.9% % 7E 79 44,7,.5 5.9% 5.7% % IMPORTANT INFORMATION AND DISCLOSURES AT THE END OF THIS REPORT Markets

2 Kesko January Acquisition of Onninen In our view, Kesko's acquisition of Onninen supports its business risk profile, as the acquired businesses spread the offering to the BB side and new product areas. BB is a growing segment in the technical and building trade segment and the combined entity has potential to improve profitability in the coming years. Currently, Onninen reports an margin of less than %, clearly lower peers and also somewhat weaker than Kesko's own margin. The acquisition excludes the Russian operations as well as the steel business which, in our view, is credit-positive. The transaction is expected to close in H. At a purchase price of EUR 9m (9.5x LTM ) paid in cash, we see increasing leverage for our estimates. Onninen operates in the Baltic Sea and Nordic regions, like Kesko... Kesko's and Onninen's sales network A EUR.4bn business with of EUR 9m (LTM Q) Onninen is a leading provider of HEPAC and electrical products and services in the Baltic Sea region and the Nordic countries. Onninen has a strong presence in Finland, Sweden and Norway, strengthening Kesko's existing sales network and bringing in Poland, a fast-growing region with high construction activity. Kesko has points-of-sale, which Onninen's network of 5 expands by 5%. There is only limited overlap, however, since the customer groups served differ. Combined entity will be a significant player in Europe Kesko's own building trade sales were EUR.bn in 4 and sales for the whole K-Group were EUR.9bn. The acquisition of Onninen will increase K-Group sales to EUR 4.bn, making it the fifth-largest technical and building trade operator in Europe. Source: Kesko...but its product and service offering and the customers complementing those of Kesko European technical and building trade companies' net sales, Groupe Adeo Kingfisher OBI Bauhaus K-Group and Onninen Hornbach Wolseley Nordic Onninen sells HEPAC and electrical products for contractors The transaction broadens Kesko's offering into HEPAC and electrical products, which it currently lacks. These products offer a good complement to the building products that Kesko currently sells. Onninen will also increase its share sold to professional customers to % of total sales ( at present), which is positive since one of the key drivers in the home improvement and renovation is regulation to tighten standards, resulting in a growing need for professional services. BB has been growing faster than the consumer business, a trend that looks set to continue. Onninen's sales by country in 4 4 % % 4 % Finland % 5 % Norway Poland Sweden Baltic countries Onninen's sales by product in 4 4 % HEPAC 47 % 49 % Electrical BB and consumer sales, BB Consumers K-Group K-Group and Onninen Nordea Markets

3 Kesko January Financial forecasts We include Onninen in our estimates from Q but exclude Suomen Lähikauppa as we believe it likely that the competition authority will require divestment of some stores. As a result of the Onninen acquisition and the hefty dividend, Kesko's financial risk profile will be weakening for the full year but will gradually start to improve from 7 in our base case. We do not include any synergies in our estimates, although Kesko expects a total of EUR 5m on the level for -9. Revenues and margin, %, % 8,, % 4,, % % 4 5E E Revenues Revenues, credit case, credit case Adjusted debt/ 4. x. x. x. x. x 4 5E E 7E Debt/ Debt/, credit case Adjusted FFO/debt % % % % 4 5E E 7E FFO/debt FFO/debt, credit case Base case assumptions We include Onninen from Q but exclude Suomen Lähikauppa since we do not believe the competition authority will allow the transaction to go through as proposed. We expect sales growth of % for and for 7, with the margin remaining roughly stable at throughout the forecast period. We expect NWC to remain stable in relation to sales and forecast capex of EUR 55m for -7 and dividend payments of EUR 48m for and EUR 59m for 7. Credit case assumptions We include Onninen from Q and exclude Suomen Lähikauppa for now, as in the base case. We expect sales growth of % for and for 7, with the margin decreasing slightly from to 7% owing to the lower profitability of the acquired business. We forecast similar NWC, capex and dividends to the base case. Outcome for the credit metrics Our base case results in a weakening financial risk profile, with adjusted debt/ reaching.x in. Cash flow metrics also weaken, on account of the increasing capex and distribution, but the situation improves in 7 and credit metrics return to the 4 level (pre-real estate deal). Our credit case offers a weaker outcome, with leverage reaching.5x in. Owing to the weakening profitability, we do not expect a recovery in 7, which will put pressure on the shadow rating. Summary of adjusted figures base and credit cases Credit adjusted figures Base case Credit case EUR(m) E E 7E 4 5E E 7E Revenues 9,579 8,445 8,777 9,4 9,8 9,5 9,7 8, 9,5,48 9,7 8,57 9,79, % 8 % 9 % 8 % 8 % 8 % 8 % 8 % 8 % 8 % 8 % 8 % 7 % 7 % Debt,,599,5,85,,778,7,,,,7,98,4,48 Equity,9,5,5,75,5,79,84,77,,7,84,4,8, FFO Change in NWC OCF Capex FOCF Net acquisitions Dividends FFO/debt % % 7% % % % % 9% % % FOCF/debt -% % 5% -9% - % -9% % % % -9% % -% % DCF/debt -% - % -% -% % -% -% -% -% -% - -% -5% Debt/.5x.4x.x.5x.7x.x.9x.5x.x.8x.9x.x.5x.5x /interest 4.x.7x x x 5.x 5.x x 4.x x 5.x x 4.x 4.x 4.x Nordea Markets

4 Kesko January Reported numbers and forecasts Income statement Total revenue -growth Gross profit EBITA EBIT Net finance Pre-tax profit Taxes Net profit, continuing operations Discontinued operations Net profit to equity 8 9,579.%,.9% 4 4.% 8.% 8.% ,445 -.,8 5.% 48 4.% ,777.9%,48.% % 7.5% 7.5% - 9,4 7.,.% 47 4.% 8.% 8.% ,8., % 9.% ,5 -.,9 4.% 4 4.% 48.7% 48.7% ,7 -.%,8 4.% % 5.7% E 8, -4.5%,9 4.% 4.9%.5%.5% E 9,5.%,7.9% 9 4.% 57.7% 57.7% E,48 7.5%,84.% % 99.9% 99.9% (credit adj) EBIT (credit adj) Interest expense (credit adj) Balance Sheet Goodwill intangibles Tangible assets Shares associates Interest bearing assets Deferred tax assets non-interest bearing non-current assets non-current assets Non-current assets , 7 7,79 9, 7 8,78, 7 8,79,49 9 8,8 9, ,, , 4 5,4 5 47, 5E 5, 7 47,79 E 78 5,9 7 47,5 7E 78 5, ,4 Inventory Accounts receivable current assets Cash and cash equivalents Current assets , 75, , , , 7 7 8, , , , ,4 Assets held for sale Total assets,89,84 4,77 4,9 4,8 4, 4,98 4,5 4,8 4,8 Shareholders equity Minority interest,9,5 5,5 59,75 58,5 7,79 7,84 8,77,,7 8 Deferred tax Convertible debt Long term interest bearing debt Non-current liabilities Pension provisions long-term provisions long-term liabilities Non-current liabilities Short-term provisions Accounts payable current liabilities Short term interest bearing debt Current liabilities Liabilities for assets held for sale Total liabilities and equity ,5, ,, , 4, , 4, ,54 4, ,558 4, ,5 4, ,9 4, ,5 4, ,58 4,8 Cash and cash eq (credit adj) Total assets (credit adj) Shareholders equity (credit adj) Debt (credit adj) 5,,9, 79 4,985,5,599 5,,5,5 9 5,5,75,85 5,7,5, 7 5,58,79, ,775,84,7 7 5,47,77, 7 5,99,, 4,7,7, Nordea Markets 4

5 Kesko January Cash flow statement Adj due to change in group structure Change in Provisions non-cash adjustments Net financials Dividends received Paid taxes Operating cash flow before NWC Change in NWC Operating cash flow CAPEX Free Operating cash flow Dividends paid Share issues / buybacks Discretionary cash flow investments / divestments Proceeds from sale of assets Net change to group borrowing/repayments Change in cash E E E Adjusted metrics Funds from operations (FFO) (adj) Operating cash flow (OCF) (adj) Free operating cash flow (FOCF) (adj) Discretionary cash flow (DCF) (adj) Key ratios Profitability ROC ROIC after tax ROE after tax Debt & Interest coverage FFO/Debt FOCF/Debt DCF/Debt interest coverage FFO cash interest coverage Leverage Debt/ Equity ratio Debt/(Debt+Equity) Capital expenditure CAPEX/Depreciation and amortisation CAPEX/Sales Working capital ratios Inventory turnover (days) Receivables turnover (days) Days sales outstanding (days) Per share data EPS EPS (adj.) DPS BVPS Equity valuation and yield Market cap. Enterprise value P/E P/BV EV/Sales EV/ Dividend yield Payout ratio % 9.% 8 5.9% -.9% -.% % ,, % 8.% 9..% 9 7.9%.7% % ,4, % 77..5%. 9.9% % ,55, % % 9.7%.% % -5.% % ,5, % 9.% 7.9% 8.% 5.5% 7.% -.9% -9.9% % ,445, % 8. 8.%.%.%. 5.% % ,, % 8.% 4.7% 9.% % -9.% -5.9% % ,9, % 47.% 5E.7% 5.% 5E 8.%.9% -5.% E.5 5.7%.4 5E.9. 5E 4 5E E,, %.5% E 9.5%.% E 4.%.9% E. 5.5%.5 E.. E 8 5 E E,, %.% 7E.%..% 7E 5.9% 5.7% E.8 5.%.5 7E.7. 7E 4 7 7E E,, % 7.9% Nordea Markets 5

6 Kesko January Disclaimer and legal disclosures Disclaimer Origin of the publication or report This publication or report originates from: Nordea Bank AB (publ), Nordea Bank Danmark A/S, Nordea Bank Finland Plc and Nordea Bank Norge ASA (together the "Group Companies" or "Nordea Group") acting through their unit Nordea Markets. The Group Companies are supervised by the Financial Supervisory Authority of their respective home countries. Content of the publication or report This publication or report has been prepared solely by Nordea Markets. Opinions or suggestions from Nordea Markets credit and equity research may deviate from one another or from recommendations or opinions presented by other departments or companies in the Nordea Group. This may typically be the result of differing time horizons, methodologies, contexts or other factors. Investment opinions, ratings, recommendations and target prices are based on one or more methods of valuation, for instance cash flow analysis, use of multiples, behavioural technical analyses of underlying market movements in combination with considerations of the market situation and the time horizon. Key assumptions of forecasts, ratings, recommendations, target prices and projections in research cited or reproduced appear in the research material from the named sources. The date of publication appears from the research material cited or reproduced. Opinions and estimates may be updated in subsequent versions of the publication or report, provided that the relevant company/issuer is treated anew in such later versions of the publication or report. Validity of the publication or report All opinions and estimates in this publication or report are, regardless of source, given in good faith, and may only be valid as of the stated date of this publication or report and are subject to change without notice. No individual investment or tax advice The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This publication or report has been prepared by Nordea Markets as general information for private use of investors to whom the publication or report has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor's particular financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment. Before acting on any information in this publication or report, it is recommendable to consult one's financial advisor. The information contained in this publication or report does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment. Sources This publication or report may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from Nordea Markets analysts or representatives, publicly available information, information from other units of the Group Companies or other companies in the Nordea Group or other named sources. To the extent this publication or report is based on or contain information emanating from other sources (" Sources") than Nordea Markets ("External Information"), Nordea Markets has deemed the Sources to be reliable but neither the companies in the Nordea Group, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information. The perception of opinions or recommendations such as Buy or Sell or similar expressions may vary and the definition is therefore shown in the research material or on the website of each named source. Limitation of liability Nordea Group or other associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this publication or report. In no event will entities of the Nordea Group or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report. Risk information The risk of investing in certain financial instruments, including those mentioned in this document, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments. Conflicts of interest Companies in the Nordea Group, affiliates or staff of companies in the Nordea Group, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report. To limit possible conflicts of interest and counter the abuse of inside knowledge, the analysts of Nordea Markets are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of the Group Companies and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. It is the policy of Nordea Markets that no link exists between revenues from capital markets activities and individual analyst remuneration. The Group Companies are members of national stockbrokers' associations in each of the countries in which the Group Companies have their head offices. Internal rules have been developed in accordance with recommendations issued by the stockbrokers associations. This material has been prepared following the Nordea Conflict of Interest Policy, which may be viewed at Important disclosures of interests regarding this research material are available at: Distribution restriction The securities referred to in this publication or report may not be eligible for sale in some jurisdictions. This research report is not intended for, and must not be distributed to private customers in the UK or the US. This research report is intended only for, and may be distributed only to, accredited investors, expert investors or institutional investors in Singapore who may contact Nordea Bank, Singapore Branch of Anson Road, #-, Springleaf Tower, Singapore This publication or report may be distributed by Nordea Bank Luxembourg S.A., 5 rue de Neudorf, L-5 Luxembourg which is subject to the supervision of the Commission de Surveillance du Secteur Financier. This publication or report may be distributed by Nordea Bank, Singapore Branch, which is subject to the supervision of the Monetary Authority of Singapore. This publication or report may be distributed in the UK to institutional investors by Nordea Bank, London Branch of th Floor, 5 Aldermanbury Square, London, ECV 7AZ, which is authorised by Finanssivalvonta (Financial Supervisory Authority) in Finland and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. This publication or report may not be mechanically duplicated, photocopied or otherwise reproduced, in full or in part, under applicable copyright laws. Nordea Markets

7 Kesko January Analyst Shareholding Nordea Markets analysts do not hold shares in the companies that they cover. No holdings or other affiliations by analysts or associates. Market-making obligations and other significant financial interest Nordea Markets has no market-making obligations in Kesko. Recommendation definitions Outperform Over the next three months, the fixed income instrument's total return is expected to exceed the total return of the relevant benchmark. Market perform Over the next three months, the fixed income instrument's total return is expected to be below the total return of the relevant benchmark. Investment banking transactions Nordea Markets has no ongoing or completed public investment banking transactions with Kesko. In view of Nordea s position in its markets readers should however assume that the bank may currently or may in the coming three months and beyond be providing or seeking to provide confidential investment banking services to the company/companies Underperform Over the next three months, the fixed income instrument's total return is expected to be below the total return of the relevant benchmark. All research is produced on an ad hoc basis and will be updated when the circumstances require it. Distribution of recommendations Recommendation Outperform Market perform Under perform Total As of October 5 Count % Distribution 9% 5% 9% % Distribution of recommendations (transactions)* Recommendation Outperform Market perform Under perform Count 8 4 % Distribution Total 8 As of October 5 * Companies under coverage with which Nordea has ongoing or completed public investment banking transactions. % % Issuer Review This report has not been reviewed by the Issuer prior to publication. Nordea Bank AB (publ) Nordea Bank Danmark A/S Nordea Bank Finland Plc Nordea Bank Norge ASA Nordea Markets Division, Equities Nordea Markets Division, Equities Nordea Markets Division, Equities Nordea Markets Division, Equities Hamngatan Strandgade (PO Box 85) Aleksis Kiven katu 9, Helsinki Essendropsgate 7 SE-5 7 Stockholm DK-9 Copenhagen C FI- Nordea N-8 Oslo Sweden Denmark Finland Norway Tel: Tel: +45 Tel: Tel: Fax: Fax: Fax: Fax: Reg.no. 54- Reg.no Reg.no. 99. Reg.no Stockholm Copenhagen Helsinki Oslo