Qivalio has reaffirmed its short-term corporate rating of SR3 for Sodiaal Union, the ultimate holding company of Sodiaal Group.
Sodiaal is a French cooperative specialised in the collection of milk and then its transformation and conditioning into various dairy products. The group reported revenues of c.€4.8bn for 2020, down 5.2%, as well as lower EBITDA (Qivalio’s adjusted EBITDA margin decreased to 2.7% from 3.1%). Sodiaal is the eighth-largest European group in the dairy products market in terms of revenues. Sodiaal owns well-known brands such as Entremont, Candia and Régilait. The group is also working on a deal with General Mills regarding its historical brand Yoplait (FY20 revenue of €1.1bn). The transaction, expected to close before end-2021, will involve no cash exchange but a split of ownership between North American operations, expected to remain the property of General Mills, and European operations expected to become the property of Sodiaal. From a consolidated standpoint, European operations will be fully integrated in Sodiaal.
Despite the Covid-19 pandemic, the market has been quite resilient for milk, cream, butter and packaged cheese as food has been one of the main purchases possible – not to say vital - during the lockdowns. However, the pandemic has hampered parts of Sodiaal’s business, such as catering services which have been hard hit by the lockdowns and the stringent regulations imposed by public authorities, or Appellation d’Origine Protégée (AOP) cheese which is served over the counter in supermarkets. The nutrition business was also hampered by the difficulties to export to China as well as ordering and payment difficulties with Chinese client Synutra following the takeover of the Carhaix factory by the group. We expect 2021 profitability to be broadly similar to that for 2020 as some of the negative effects of Covid-19 fade away but the benefit is offset by the increase in the price of milk collected.
Our rating is still underpinned by i) growing global demand for dairy products, especially in emerging markets, alongside high consumption in developed countries, and ii) Sodiaal’s wide range of products. Indeed, the group sells all types of milk and milk-based products through several brands, and is expected to re-integrate Yoplait, its most iconic brand. Also, we continue to factor in iii) Sodiaal’s good business position in its core market, France, with a top 5 position for market share in drinking milk and cheese, and well-known brands not only in France but also in foreign markets, e.g. Yoplait.
Our rating is, however, constrained by i) the presence of significantly larger peers in a very competitive market, ii) Sodiaal’s limited geographic diversification compared to market-leading companies with c.75% of its revenues generated in France, and iii) the volatility of the dairy products market, both in terms of prices and habits, which favours the strongest and most adaptable firms. We also factor in iv) Sodiaal’s historically low EBITDA margins and relatively high adjusted net leverage. Both indicators are expected to deteriorate by end-2021 but to improve significantly in 2022 following the acquisition of Yoplait and the further easing of the impact of the Covid-19 pandemic: Qivalio’s adjusted net leverage ratio is projected at c.5.9x at end-2021 (vs 5.3x at end-2020) and 4.0x as of end-2022. Meanwhile, free cashflow after dividends is expected to remain negative in 2021, and to return to positive territory as of 2022. Both the Qivalio-adjusted net leverage ratio and the level of free cashflow will depend on the level of capex the group will adopt going forward, especially following the acquisition of Yoplait, meaning the group will also have the flexibility to adapt its investments to its cash and liquidity positions.
Unlike some of the larger peers in the market, Sodiaal is a cooperative and, as such, has a responsibility for collecting and selling the milk produced by its French farmers, who are the shareholders of the group. Such a status may explain some of Sodiaal’s average credit metrics, such as its limited geographic diversification and low EBITDA margins.
Most medium- and long-term financial debt is issued by Sodiaal International, the financing holding of the group.
Sodiaal International’s financial debt is mainly composed of private placements (Euro PP, US PP, Shuldschein) and a revolving credit facility, which was undrawn at end-2020.
Sodiaal Union’s net adjusted leverage was 5.3x at end-2020. The difference with the ratio reported by the company (3.0x) derives from our adjustments, mainly factoring debt, as well as operating leases and employee benefits.
Sodiaal’s liquidity profile is still driven by a sizeable committed RCF with a 5 + 1 + 1 years maturity - undrawn at end-2020 - but is somewhat constrained by significant factoring debt and rather high short-term debt. Nevertheless, given the credit quality of Sodiaal’s customers, we have no reason to believe factoring contracts may be terminated in the short term, which eases potential concerns on the liquidity front. Sodiaal may also adapt its level of capex if it needs to in order to preserve good liquidity.
The Positive outlook reflects our view that credit metrics will improve over the next twelve months on the back of a recovery post-Covid-19 combined with the acquisition of Yoplait, the credit metrics of which are expected to impact positively on the group.
Sodiaal’s position in the SR3 category has improved based on our most recent forecasts including Yoplait. We may therefore upgrade our rating if Sodiaal’s profitability (and thereby credit metrics) were to improve on a sustainable basis. An upgrade could also result from a significant improvement in geographic diversification, which is one of the weakest links in Sodiaal’s business profile.
Meanwhile, we may downgrade our rating if the acquisition of Yoplait brings significant unforeseen expenses, and if EBITDA declines, leading to further deterioration of credit metrics, and/or if liquidity were to deteriorate significantly.
Review report on solicited short-term rating
Initiation report: No
Rating initiation: SR3 on November 8, 2018
Latest rating action: Reaffirmed at SR3 on November 4, 2020
Rating nature: Solicited, short-term, public rating
With rated entity or third-participation: No, the rating was issued without having been reviewed by the issuer
With access to internal documents: Yes
With access to management: Yes
Ancillary services provided to the rated entity: No
Name of the rating committee chair: Marc Pierron, Senior Credit Analyst
Material sources used to support the rating decision:
- Consolidated financial statements 2017, 2018, 2019, 2020
- Company presentation and 2020 annual report
- Call with Sodiaal Head of Financing
Limitation of the Rating action:
- Qivalio believes that the quality and quantity of information available on the rated entity is sufficient to provide a rating
- Qivalio has no obligation to audit the data provided
Our methodologies used in this rating:
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