DBRS Morningstar Confirms Ratings on METRO INC. at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of METRO INC. (METRO or the Company) at BBB as well as its Short-Term Issuer Rating at R-2 (middle). All trends are Stable. The confirmation is based on the Company’s stable operating performance in F2019. The ratings continue to reflect METRO’s well-established brand and market position in Ontario and Québec, diversified formats and banners and disciplined financial management. The ratings also consider the intensely competitive environment, the Company’s geographical concentration and the high level of union penetration.

METRO’s earnings profile should remain stable at a level considered appropriate for the current rating, despite intense competition in food retail, generic drug-pricing reforms and rising labour and transportation costs. DBRS Morningstar forecasts food same-store sales growth in the low-single-digit range over the near to medium term, primarily driven by price increases. Pharmacy same-store sales growth is expected to be in the low- to mid-single-digit range over the near to medium term, driven by front-store sales and increased prescription count, but partially offset by a decline in prescription value. DBRS Morningstar believes that EBITDA margins may come under pressure in the near term because of rising labour and transportation costs along with generic drug-pricing reforms, which METRO will seek to largely offset with price increases and continued efficiency improvements. The Company continues to expect $75 million in synergies (i.e., procurement, selling, general and administrative expenses and distribution) from the acquisition of The Jean Coutu Group Inc. by F2021 and has already realized $65 million to date (annualized). As such, DBRS Morningstar expects METRO’s EBITDA to be approximately $1.35 billion in F2020, rising above $1.40 billion over the medium term.

DBRS Morningstar believes that free cash flow (FCF) after dividends and before changes in working capital will be temporarily depressed in F2020 because of elevated capex. DBRS Morningstar forecasts that capex will be above $550 million in F2020 as METRO invests in a new Ontario warehouse and continues to invest in store openings, renovations and conversions. DBRS Morningstar expects the Company’s dividend policy to remain unchanged and dividend outflow to be in the $200 million range. As a result, FCF is expected to be modest at approximately $250 million in F2020. Over the medium term, DBRS Morningstar forecasts that FCF after dividends and before changes in working capital will be in the $400 million range, which METRO will apply toward share repurchases. As such, DBRS Morningstar expects key credit metrics to remain stable (i.e., lease-adjusted debt-to-EBITDAR near 2.7 times (x) and lease-adjusted net-debt-to-EBITDAR near 2.5x) at a level considered well placed for the current BBB rating (i.e., lease-adjusted debt-to-EBITDAR below 3.0x).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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