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Fitch Affirms Foster's At 'BBB'; Outlook Stable

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Fuseworks Media
Fuseworks Media
Fitch Affirms Foster's At 'BBB'; Outlook Stable

Fitch Ratings has today affirmed Foster's Group Limited's (Foster) Long-term Issuer Default Rating (IDR) at 'BBB' and Short-term IDR at F2.

The Outlook is Stable. Foster's ratings continue to reflect the strength of cash flows generated by its domestic beer franchise, which accounted for 82% of group earnings before interest and self-generating and regenerating assets (EBITS) in 1H10, compared to 65% in the same period last year. In the duopolistic domestic beer segment, Foster's benefits from high barriers to entry and market leader status, which supports its peer leading operating margins (group Operating EBITDAR margin of 26% FY09). Recent moves by Coca-Cola Amatil to focus on the Australian premium beer market present some threat to Foster's. Even though the premium beer market is growing quickly, it represents only about 9% of the wider Australian beer market. As such, Foster's is likely to continue in its leadership of the Australian beer market for the foreseeable future. The ratings also take into account Foster's conservative financial profile, given its still modest debt levels, and strong liquidity. These strengths are offset by exposure to the riskier wine industry, with Foster's being the world's fourth-largest global producer. The wine industry is highly cyclical, with related commodity input price and currency exposure. Competition in this market is intense due to the high degree of fragmentation. Whilst operational cash flow is strong at the funds from operations level (FFO), large shareholder payouts (averaging 64% of FFO between FY06 and FY09 including both dividends and share buy-backs) lead Fitch to project that Foster's will be mildly free cash flow (FCF) negative for at least the next 2 years. However, despite the challenging operating conditions in the wine sector, and the still weak (but improving) macroeconomic outlook in Foster's overseas markets, solid operational cash flow generation from the group's beer operations should suffice to ensure the group's financial profile remains commensurate with its current rating. Fitch projects that net adjusted debt (i.e. capitalised for operating lease expense) to operating EBITDAR will remain at around 3x for the next 2 to 3 years.

Funds from operations (FFO) interest cover is projected to be within the range of 4.5x to 5x over the same period.

Any upward revision to the rating or Outlook is reliant on a sustainable and significant improvement in Foster's financial profile, such that net adjusted debt falls below 2x EBITDAR, which is considered unlikely in the short-term given current operational challenges and significant dividend payouts.

A downside could arise from capital management initiatives, debt-funded acquisitions or aggressive capital investment, such that financial metrics migrate outside Fitch's expectations for a sustained period, particularly if adjusted net debt to operating EBITDAR were to exceed 3.5x and/or FFO interest cover were to move below 3.75x, both on a projected 2 year basis.

The group maintains good liquidity through committed senior unsecured bank facilities and cash. At end-1H10, Fosters had AUD1.8bn of committed undrawn bank facilities (compared with AUD1.5bn end-1H09) and cash of AUD352m. Against this, the group had AUD296m of debt maturing within 12 months. Average debt maturity in 1H10 was 6.8 years, with approximately 42% at floating rates.

Although only 15% of EBITS is generated in US Dollars, 88% of debt is US Dollar-denominated, meaning a considerable exposure to translation impacts. Foster's is an Australia-based global alcohol beverage company with a portfolio including beer, wine, spirits and non-alcoholic brands. The company owns and operates iconic Australian beer brands such as "VB" and "Carlton Draught". Following a number of acquisitions over the last eight years, the most notable being Beringer Wine Estates Holdings, Inc. in 2000 and Southcorp Limited in 2005, the company is the fourth-largest wine producer globally.

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