Fitch rates Petrol Ofisi as ‘B+’
The statement by Fitch Ratings is as follows:
"POAS is the largest wholesale and retail fuel distributor in Turkey, commanding 36% and 27% market shares in key segments of diesel and gasoline sales respectively. The company runs a 3,600 strong nationwide dealer network.
Key factors supporting the ratings are POAS’ leading domestic market position, sizeable network and storage capacity with economies of scale and competitive advantage for direct fuel imports. The ratings also consider POAS’ good and improving financial and operational performance post-privatisation in 2000, capacity to generate future free cash flow, flexible capex, and currently fixed distribution margins (USD0.09/litre of diesel and USD0.11/litre of gasoline).
Against that, POAS has become highly leveraged as a result of privatisation in 2000, although the company is successfully reducing debt and is expected to continue to do so. It also remains inefficient on average throughput per station basis, when compared to domestically present international brands or leaders on foreign retail markets. Given its domestic focus, POAS remains fully exposed to the relatively unstable Turkish economy.
Unlike major industry peers operating outside Turkey, POAS does not fully capture fuel margin and non-fuel sales as the majority of its network are dealer-owned and dealer-operated stations. POAS keeps 45% of the fuel distribution margin and commission on some non-fuel sales, but is to a large extent insulated from the operating risk of the petrol stations.
While 32% of white fuel and 100% of black fuel sales are already made on a free-market pricing basis, revenues are mostly generated by sales with the fixed margin mentioned above. Full market liberalisation is scheduled for 2005 and may result in retail price wars in urban and industrial areas, but POAS is likely to retain its profitability given its nationwide network. Fitch believes that based on margin comparisons with the most competitive EU markets and the domestic retail market structure, margins are unlikely to decrease for a sustained period in Turkey. However, greater margin volatility may weaken POAS’ credit profile.
Positively, the market liberalisation and potential privatisation of Tupras (rated Senior Unsecured local currency ‘BB+’, Rating Watch Negative) will result in decreased FX risk through gained pricing/margins flexibility and full exploitation of POAS’ scale in its commercial relations. At the moment, Tupras, which delivers 71% of fuel sold by POAS, is not able to reflect POAS’ size in better pricing and payment terms vis-a-vis small distributors.
POAS is one of the largest companies in the country by sales, generating EBITDA of TRL357.7 trillion (USD256 million) on revenues of TRL8,372trn (USD6 billion) in FY03, representing 15% and 1% year-on-year growth respectively. The company was founded as a state enterprise in 1941 and privatised in 2000 (sold to Dogan Holding and Is Bankasi Consortium, the latter rated Long-term foreign and local currency ‘B+’). As a result of the privatisation and subsequent merger with Is Dogan, the acquisition vehicle, on 27 December 2002 POAS turned from a cash positive to highly leveraged entity (gross debt stood at TRL2,833trn at YE02). However, the management has embarked on a fast de-leveraging of POAS. Gross debt was reduced to TRL1,611trn at YE03 thanks to use of inherited cash balances, strong free cash flows, increase of trade payables, no cash dividends (since 2000), tax shield and USD depreciation (c.98% of debt is USD-denominated). As a result, gross debt to EBITDA decreased to 4.6x at YE03 from 9.3x at YE02 while interest cover improved to 1.7x from 1.1x. However, the debt level and its short-term maturity remain a constraining factor for POAS.
While debt reduction, increases in margins or higher efficiency would be viewed positively for the credit profile of POAS, significant market share erosion with subsequent decrease of margins and profitability, and its greater volatility post-liberalisation or economic turmoil would be detrimental."
