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ARCLK - Arcelik AS News Story

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Sector
Consumer Cyclicals
Size
Mid Cap
Market Cap £1.93bn
Enterprise Value £2.73bn
Revenue £4.01bn
Position in Universe 21st / 645

Fitch Affirms Arcelik's at 'BB+'; Outlook Negative

Thu 18th July, 2019 9:00am
(The following statement was released by the rating agency)


Fitch Ratings-Barcelona-July 18: 

Fitch Ratings has affirmed Turkish consumer goods manufacturer Arcelik A.S.'s 
Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+'. The 
Outlook is Negative. The affirmation follows the downgrade of Turkey's sovereign 
Long-Term IDR to 'BB-' from 'BB 'on 12 July 2019 and the Country Ceiling to 
'BB-' from 'BB+'. The ratings of Arcelik are above the 'BB-'Turkish Country 
Ceiling, reflecting Fitch's expectations that Arcelik has sufficient structural 
enhancements that would mitigate transfer and convertibility risks.Nevertheless, 
the Negative Outlook reflects Fitch's expectation of prolonged stress on cash 
generation compared with Arcelik management's expectations, driven by higher 
financing costs, plus increased inventory and receivable collection days in the 
domestic market. Significant volatility in the Turkish economy is compounding 
uncertainty over free cash flow (FCF) forecasts. However, we expect Arcelik will 
maintain funds from operations (FFO) adjusted (for receivables) net leverage 
below 2.5x in the medium term, which is more in line with the 'BBB' rating 
median.

Key Rating Drivers

FCF Generation Remains Weak: FCF generation continues to be under stress, driven 
by increased working capital needs, higher capex, and sharp increases in 
interest rates in Turkey. Fitch believes that current FCF generation is not 
commensurate with the current ratings, and prolonged stress on cash generation 
could further increase leverage. However, Fitch expects FCF generation to turn 
positive in 2020, as the expansion programme completes and inventory levels in 
factories normalise. Leverage Still Commensurate with Ratings: Despite 
significant volatility in working capital needs, sharp movements in currency and 
interest rates, Fitch forecasts FFO adjusted (for receivables) net leverage to 
average 2x until 2020, remaining below our negative rating sensitivity, which is 
comfortably in line with the 'BBB' rating median of 2.5x FCF Generation Remains 
Weak: Fitch forecasts profitability to remain at current stressed levels until 
2020, along with a negative FCF margin averaging 3% for the next 24 months. 
However, we expect Arcelik to maintain some headroom under our current leverage 
sensitivity. Although leverage is currently in line with the ratings, 
uncertainty on the domestic Turkish economy has increased materially, and sharp 
FX and interest rate movements could lead to swift and sharp increases in 
leverage and, consequently, a downgrade.Immaterial Currency Impact on 
Profitability: Compared with Turkish peers, sharp FX movements in 2018 have had 
a lower negative impact on Arcelik's profitability. With 32% of revenue coming 
from the domestic market, Arcelik remains a significant Turkish exporter, with 
healthy hedging policies in place for hard currency movements. However, along 
with current business expansion, Arcelik is still highly exposed to emerging 
markets, such as Pakistan and Egypt where hedging policies are very limited, 
which is stressing profitability. Its current business expansion will increase 
this exposure.Fitch believes that sharp movements in other emerging market 
currencies could marginally lower profitability in the next 12-18 months. 
However, Fitch still expects the EBIT margin to remain around 7%, which is in 
line with current ratings and slightly below our 'BBB' rating median of 
8%.Revenue Growth Remains Strong: We expect Arcelik to maintain double-digit 
revenue growth throughout our four-year forecast horizon, supported by an 
expanding international presence. We expect a slowdown in domestic volumes as a 
result of challenging macroeconomic conditions in Turkey and a high revenue base 
in 2018.On the international front, we expect the expanding business footprint, 
increased overseas market shares and the recent Turkish lira devaluation to 
drive revenue growth.Growing Market Shares: Arcelik has generated strong 
international revenue growth in the past few years, by attracting more 
price-conscious consumers in western Europe and by capitalising on its strong 
marketing and distribution network, which has allowed it to become one of the 
top three white goods manufacturers in Europe. We believe Arcelik will be able 
to further increase its market shares, through its low-cost manufacturing 
abilities, the Turkish lira depreciation, strong RD and a solid product line. We 
expect international markets to be the main growth driver in the medium term, as 
Arcelik has targeted markets where appliance penetration rates are lower than 
the rest of the world.Emerging Market Exposure: We believe recent 
investment/expansion plans in the ASEAN region is a positive step towards 
reducing Arcelik's exposure to the Turkish economy, which has constrained the 
ratings. Arcelik has become a more geographically diverse white goods 
manufacturer in the past 10 years, by gaining solid market shares in Europe and 
expanding into new emerging markets. Domestic revenue share declined to 32% in 
1Q19 from 41% in 1H17, and 50% in 2008. Nevertheless, Arcelik's emerging market 
presence is high compared with that of peers such as, Whirlpool and Electrolux, 
and remains a credit risk.Financial Services Adjustments: Arcelik's reported 
leverage is affected by higher-than-average working capital needs, as a 
significant portion of durable goods are sold on credit in Turkey. While this is 
partly financed by Arcelik, the dealer credit risk is covered by banks' letters 
of credit and mortgages. Fitch assumes approximately 120 days of domestic 
receivables come from this business practice in Turkey and adjusts debt 
accordingly to reflect a more accurate peer comparison. Based on its financial 
services criteria, Fitch applies a 3x debt/equity ratio for these receivables.

Derivation Summary

Arcelik has strong market shares in Turkey and Europe, which drive stable EBITDA 
(around 10%) and FFO margins (around 8%). These financial metrics are 
commensurate with the 'BBB' rating median in our capital goods navigator, and 
are in line with that of higher-rated peers like Whirlpool Corp. (BBB/Stable) 
and Panasonic Corporation (BBB/Negative). However, these strengths are offset by 
weak FCF generation, driven by intense capex in new markets, and structurally 
high working capital needs. Despite the current investment phase, Arcelik's 
leverage metric adjusted for financial services remains below our negative 
rating sensitivity and conforms to an 'A' rating median in our capital goods 
navigator.The technological content and RD capabilities of Arcelik are broadly 
in line with that of Whirlpool, Electrolux and the broad white goods industry. 
However, Arcelik's revenue from emerging markets is much higher than 
higher-rated white goods manufacturers'. Although Arcelik is broadening its 
geographical diversification -away from Turkey - it remains vulnerable to 
macro-economic, political and FX risks in emerging markets.

Key Assumptions

Fitch's Key Assumptions within our Rating Case for the Issuer-Double-digit 
revenue growth in European markets and mid-to-low singe-digit revenue declines 
in Turkey for 2019-Stress on profitability to continue for the next 12-18 
months- Sizeable capex outlay in the medium term in line with expansion 
plans-Effective interest rates for 2019 higher than four-year historical 
averages Dividend pay-out to remain at historical averages despite stressed cash 
flow generation -Financial services adjustment assumes 120 days of domestic 
receivables

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action -We do not expect the ratings to be upgraded while they are constrained 
by Turkey's Country Ceiling.Developments That May, Individually or Collectively, 
Lead to Negative Rating Action- Receivable-adjusted FFO net leverage ratio above 
2.5x- FFO margin below 8% - Consistently negative FCF

Liquidity and Debt Structure

Low Liquidity Score: Historically Arcelik's liquidity score has been below 1x, 
driven by the use of short-term debt to finance its high working capital needs. 
Available cash on balance sheet was TRY2,955million at end-2Q18, which was not 
sufficient to cover short-term debt of TRY4,413 million and our expected 
negative FCF of TRY1,196 million.Fitch believes that liquidity risk is mitigated 
by Arcelik's comfortable (uncommitted) lines in Turkish banks, which were 
available even during the global financial crisis of 2008-2009, and continues to 
be in place despite current stress. While the liquidity score below 1x is not 
adequate for the current rating, the risk is also partly mitigated by customer 
receivables financing that are deemed self-liquidating. 

Arcelik; Long Term Issuer Default Rating; Affirmed; BB+; RO:Neg

; Local Currency Long Term Issuer Default Rating; Affirmed; BB+; RO:Neg

----senior unsecured; Long Term Rating; Affirmed; BB+

Contacts: 

Primary Rating Analyst

Cigdem Cerit, 

Director

+34 93 467 8840

Fitch Ratings Espana. S.A.U.

Av. Diagonal 601 

Barcelona 08028

Secondary Rating Analyst

Shrouk Diab, 

Associate Director

+971 4 424 1250

Committee Chairperson

Paul Lund, 

Senior Director

+44 20 3530 1244

 

Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: 
adrian.simpson@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Non-Financial Corporates Exceeding the Country Ceiling Criteria (pub. 17 Jan 
2019)

https://www.fitchratings.com/site/re/10059284

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10082848

Solicitation Status 

https://www.fitchratings.com/site/pr/10082848#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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