Fitch Ratings has affirmed
The Rating Outlook is Stable.
KOF's ratings reflect its strong business position as the largest franchise bottler in the world of Coca-Cola products by sales volume with operations across
The ratings also incorporate Fitch's Parent and Subsidiary Rating Linkage Criteria that result in equalizing KOF's ratings with those of its stronger parent company
Key Rating Drivers
Strong Revenue Growth: KOF's sales volumes and revenues growth reflect the resilience of the business and the results of its commercial strategies amid an inflationary environment. For the first nine months as of
Pricing initiatives, favorable currency translation effects, and better price-mix also supported revenues growth. Fitch projects KOF's revenues to increase around 17% in 2022 and 6% in 2023. Our projections incorporate a weaker economic environment and a lower level of inflation in Latin American countries for 2023 that will result on more normalized growth rates of sales volume and revenue.
Profitability Pressures Continue: Fitch expects that KOF's EBITDA margin (pre IFRS 16) will continue facing an environment of higher commodities costs and expenses in 2023. For the first nine months as of
The benefits of higher revenues, favorable hedging initiatives and cost reduction initiatives implemented during the year were not sufficient to offset the pressures in profitability. Fitch anticipates that KOF's EBITDA margin will remain around 17% in 2022-2023 and will recover to 18% until 2024.
Low Leverage: Fitch incorporates in the ratings that KOF's will maintain low leverage metrics in the mid to long term. We project that the company's total debt to EBITDA and total net debt to EBITDA to be around 2.0x and 1.0x, respectively, by 2022, and then could gradually decline to 1.7x and 0.9x, by 2023. The projection incorporates mid to high single digits growth of EBITDA, positive FCF, and a total debt of around MXN80 billion by 2022 and MXN72 billion by 2023.
For the last 12 months as of
Positive FCF: KOF's FCF generation capacity will remain positive but at lower levels than last two years due to higher capital investments (capex). Fitch estimates that the company's cash flow from operations in 2022 and 2023, after covering net working capital, will be around MXN29.8 billion, which will be enough to cover annual average capex of around MXN16.4 billion and dividends of MXN11.9 million. FCF is projected around MXN1.5 billion for the next two years. KOF's consistent positive FCF provides financial flexibility across the ups and downs of economic cycles to maintain an adequate capital structure.
Solid Business Position: KOF's strong business position is supported by an extensive and well-developed distribution network, solid brand equity of Coca-Cola products, diversified product portfolio and solid execution at the point of sale. In addition, the company has deployed a renewed business strategy with a focus on maintaining a winning portfolio, strengthening the omnichannel platform and digital capabilities, leveraging on its talent, incorporating value added acquisitions and meeting its sustainability targets. Fitch believes that KOF's continuo s focus on improving its service to customers and achieving operating efficiencies combined with this renewed strategy will contribute to sustain its competitive advantage and maintain its leading market position in the long term.
Parent and Subsidiary Linkage: KOF's ratings are equalized to those of its parent company, FEMSA. Despite low legal incentive to support KOF, FEMSA has a high strategic and medium operational incentives to support KOF, which would normally result in a top down minus one notch rating approach to KOF following the stronger parent path. However, when the standalone credit profile of the subsidiary is one notch lower than that of the stronger parent, as in the case of KOF and FEMSA, the rating of the subsidiary is equalized to the rating of the parent.
Rating Above Mexico's Country Ceiling: KOF's ratings on stand-alone basis are rated one notch higher than its applicable Country Ceiling of
Derivation Summary
KOF's ratings reflect its strong business position as the world's largest franchise bottler of Coca-Cola products by sales volume and solid financial profile characterized with low leverage metrics, positive FCF and ample liquidity. The company's rating also reflects the parent-subsidiary relationship with its stronger parent, that result in equalizing KOF's ratings with those of FEMSA.
Its ratings are higher than peer
Also, when compared to
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue is projected to increase around 17% in 2022 and 6% in 2023;
EBITDA margin around 17% in 2022 and 2023;
Capex around MXN15.9 billion in 2022 and MXN16.9 billion in 2023;
Dividends at MXN11.4 billion in 2022 and MXN12.4 billion in 2023;
FCF margin close to 1% of revenues over 2022-2023;
Total debt/EBITDA and total net debt/EBITDA around 1.7x and 0.9x, respectively, by YE 2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch does not foresee any positive rating action over the medium term.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A significant decline in revenues or profitability;
Negative FCF through the rating horizon;
Maintain over the rating horizon a net leverage above 2.5x;
A downgrade in FEMSA's IDRs;
A downgrade of
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Ample Liquidity: As of
The company's long-term debt amortization profile is manageable with proforma maturities considering the recent local issuances of MXN40 million in 2024, MXN1.8 billion in 2025, MXN2.9 billion in 2026, MXN8.5 billion in 2027, and MXN57.7 billion afterwards.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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