GCR Accords Elephant Group Plc An Initial Rating of BBB+(NG); Outlook Stable.

03 Nov 2016 In Rating Notifications

GCR Accords Elephant Group Plc An Initial Rating of BBB+(NG); Outlook Stable.

Lagos Nigeria, 03 November 2016 — Global Credit Ratings has accorded national scale issuer ratings of BBB+(NG) and A2(NG) in the long term and short term respectively to Elephant Group Plc; with the outlook accorded as Stable. The ratings are valid until October 2017.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Elephant Group Plc (“Elephant” or “the Group”) based on the following key criteria:

Elephant is a leading player in the Nigerian rice and fertilizer market, with an estimated market share of 37% and 35% respectively. The Group’s competitive position is supported by its local market experience, extensive distribution network, and its business diversification. Elephant has commenced a backward integration programme for local rice and fertilizer production. Such initiatives have been supported by Federal Government of Nigeria (“FGN”) as part of its efforts to strengthening local content. This should help the Group consistently meet domestic demand for these commodities, increase market share, as well as mitigate foreign exchange (“forex”) volatility.

In line with the businesses expansion, the Group reported strong earnings growth between F11 and F13, with gross and EBITDA margins averaging 10.6% and 8.8% respectively.  As the Group had commenced its backward integration initiatives in 2014, Elephant benefitted from the FGN favourable levy on rice importation for owners of existing rice mills. As a result, its gross margin rose to a review period high of 21.1% (F13: 10.8%), while EBITDA registered at around 17%. However, pressures arising from foreign currency shortages, import restrictions, increased smuggling, security challenges, and the tough operating environment saw earnings fall sharply in F15. Revenue declined 19.6% to N25bn in F15 (from around N31bn in F14), whilst higher import prices and administrative expenses, as well as forex movements, saw operating profit decrease 77% to N1bn, at a much lower operating margin of 5% (F14: 17%).

Except for F15, working capital absorptions have been reported in all the review periods, largely due to rising trade receivables from government. Payments, mainly for fertilisers, were delayed in 2014 and exacerbated by the subsequent government transition post the 2015 election. While receivables remained high at end-June 2016 (“1H F16”), management highlighted that FGN has promised to paid down before FYE16, and the amount to be received will in turn be utilised to settle suppliers.

Gross debt rose from N22m at FYE11 to about N7bn at FYE15 (FYE14: N3bn) due to the businesses expansion. Given its high cash balance, the Group reported net ungeared position in all the years under review. At 1H F16, Elephant settled almost all outstanding overdraft balances, which saw gross gearing metrics fall to negligible levels. The Group plans to raise N5bn through a bond Issue before the year-end F16, with the proceeds to be utilised for financing its on-going capex projects. This would see debt increase, with net debt to equity forecast to rise to 45% at FYE16.

While management forecast modest revenue of N24bn in F16, due to the weak economic environment and persistent forex shortages, stronger revenue growth of 52.8% is anticipated in F17 as the rice mill is expected to commence operation and around 20% per annum over the medium term. Total debt is budgeted to remain around N10.8bn over the 5-year period, but the group is projecting a steady accumulation of cash, with a net ungeared position forecast by FYE19. Whilst historical accounts indicate that strong cash flows can be achieved, GCR considers the budget aggressive, particularly in light of the uncertain economic environment and the potential for further capex.

Bringing the capex projects to fruition on time and within budget will have a strong positive impact on earnings. If the robust forecasts are attained, this would lead to a substantial increase in scale and competitive positioning of the Group and improve financial strength. Conversely, any delays to capex and/or an underperformance of earnings against the robust projects, could burden Elephant with high debt service costs. Continued disruptions to the operating environment, could also negatively impact group performance.


NATIONAL SCALE RATINGS HISTORY

Initial/new rating (November 2016)
Issuer long-term: BBB+(NG)
Issuer short-term: A2(NG)
Rating outlook:  Stable


ANALYTICAL CONTACTS

Primary Analysts
Femi Atere/Adekemi Adebambo
Credit Analyst/Senior Credit Analyst
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Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2016
Glossary of Terms/Ratios, February 2016


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT WWW.GLOBALRATINGS.COM.NG


SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings are valid till November 2017.

 

Elephant Group Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Elephant Group Plc with no contestation of the ratings.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

The information received from Elephant Group Plc and other reliable third parties to accord the credit ratings included:
• 2015 audited annual financial statement, and four years audited annual financial statements;
• 6-month unaudited management accounts to 30 June 2016;
• Internal management reports;
• Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
• Information specific to the rated entity and/or industry was also received.

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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