We reaffirm our SR1 short-term rating, the second-highest grade in our rating scale, for the €1,500m NEU CP instrument of Sonepar SAS. Family-owned Sonepar is the world’s largest B2B distributor of electrical products, solutions and related services, a fragmented market in which the group holds an 8% share globally in 2020.
Our SR1 rating reflects Sonepar’s strong business profile and credit metrics, and its excellent liquidity profile.
The rating of Sonepar is supported by the group’s diversified product offering, its strong local footprint and distribution network, and limited customer concentration. Sonepar benefits from its large scale, operating in four continents, with the bulk of sales being generated in Europe and North America where the group has leading market positions. This is a key factor as intense competition results in low operating margins, making scale a key driver for profitability.
Sonepar has gone a long way to digitalizing its operations - and on this front the group is ahead of peers, which is expected to bring further efficiency gains and support margins.
The industry is anticipating positive long-term trends on the back of rising energy needs and demand for electrical appliances, paving the way for further growth in all regions where the group is present, including in emerging markets where B2B electrical product distribution has had a low penetration rate so far. We expect Sonepar to benefit from these trends, especially in fragmented markets where the group is already present and well positioned to drive market consolidation. Sonepar has indeed a long history of M&A - it completed over 140 small-to-medium-size deals over the past fourteen years (representing over €10bn of acquired sales) - and a good track record for integration. This is supported by the group’s policy to involve local management in the acquisition and integration processes.
Sales are subject to some degree of cyclicality due to the group’s exposure to the construction and renovation end-markets for residential and commercial buildings, and to various other industries. Mitigating this, Sonepar has displayed resilience both in terms of operating margins and cash generation during past economic downturns, and has outperformed peers over the past few years. It has consistently achieved a high level of free cash flow, a positive factor that we expect to continue over the medium term.
Over the past 10 years the group has consistently met its conservative guidance regarding debt ratios (including a maximum net reported leverage of 2.50x). Our rating factors in Sonepar’s relatively modest leverage (Ethifinance Rating’s net adjusted debt/EBITDA ratio within a 1.0-1.5x range at YE20, including IFRS 16 lease liabilities), plus its stable and prudent financial policy, including limited shareholder distribution as most earnings are reinvested to support growth. EthiFinance Ratings estimates Sonepar’s net adjusted debt/EBITDA (including IFRS 16 lease liabilities) remained within the 1.0x-1.5x range for 2021 (financial results are expected to be released in the coming weeks), despite some working capital normalization which was probably offset by some EBITDA improvement, mostly entailed by the recovery of revenues to their pre-pandemic level.
Sonepar has built in substantial financial flexibility, and while M&A is clearly a key component of its development strategy, which could periodically lead to some releveraging, we are reassured by Sonepar’s good track record for integrating companies and adhering to its disciplined financial policy.
Nearly all financing, mostly denominated in EUR and USD, has been raised at the level of the parent company Sonepar S.A.S.
The financings of the group mostly rely on private placement as well on on-balance sheet factoring, securitization programs (there is no off-balance sheet program), and commercial paper (which was drawn for c. €162m at end-2021). The remaining debt mostly consists of IFRS 16 lease liabilities. The group has access to c. €1.9bn of committed revolving credit facilities which are mostly undrawn.
Excellent liquidity profile
The liquidity profile is excellent. This is driven by the significant amount of cash on balance sheet, large undrawn committed credit lines, the long-term debt maturity profile, and our expectation that Sonepar will continue to generate strong free cash flow after dividends.
Credit Metrics Expected Evolution (CMEE)
Our CMEE is Stable, reflecting the expectation that our net adjusted debt-to-EBITDA ratio will remain at broadly similar level over the next twelve months.
An upgrade to SR0 could be considered if one or several key rating factors improved markedly on a sustainable basis, such as greater scale and business diversification, increased operating margins and cash generation, and/or lower leverage (eg improved FFO/debt and debt/EBITDAR ratios).
At this stage, a downgrade to SR2 is unlikely. It could result from a significant deterioration of the financial risk profile, such as rising leverage due to large debt-funded M&A and/or a contraction in margins/free cash flow.
Initiation report: No.
Rating initiation: SR1 on 4 June 2018.
Last rating action: Reaffirmed at SR1 on 16 April 2021
Rating nature: Solicited short-term instrument rating
With rated entity or related third party participation: Yes. This rating report was published with being reviewed by the issuer.
With access to internal documents: No
With access to management: Yes
Ancillary services provided to the entity: No
Name of the rating committee chair: Thomas Dilasser, Senior Credit Analyst.
Material sources used to support the rating decision:
- Financial statements 2020, 2019, 2018, 2017, 2016, 2015
- Discussions with Sonepar management, presentation of its strategic plan
Limitation of the Rating action:
EthiFinance Ratings believes the quality and quantity of information available on the rated entity is sufficient to provide a rating.
EthiFinance Ratings has no obligation to audit or verify the accuracy of data provided.
Our methodologies used for this rating are available at:
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