GCR Affirms Chellarams Plc’s Issuer and Bond ratings at BB(NG); Outlook Stable.

30 Nov 2017 In Rating Notifications

GCR Affirms Chellarams Plc’s Issuer and Bond ratings at BB(NG); Outlook Stable.

 

Lagos Nigeria, 30 November 2017 — Global Credit Ratings has affirmed the long term national scale Issuer rating assigned to Chellarams Plc at BB(NG) and maintained the national scale short term rating at B(NG), with the ratings placed on Stable Outlook. Concurrently, GCR affirmed the Senior Unsecured Series 2 Bond rating at BB(NG), with a Stable Outlook.  The ratings expire in November 2018.

RATING RATIONALE

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

Chellarams Plc is a Nigerian conglomerate with competitive market shares across a diverse range of industries, primarily chemical products and fast moving consumer goods (“FMCG”). Its competitive position is underpinned by its long operational history (over 90 years) and broad distribution network. However, the difficulty in sourcing foreign currency for imports has constrained operations and supplies, leading to low levels of capacity utilisation across business divisions.

Accordingly, revenue contracted for the third consecutive year, registering at 38% y/y decline to N12.4bn in FY17. Positively higher selling prices amidst limited stocks and some procurement efficiencies have supported relative margin resilience, with double digit EBITDA margins sustained since FY16 considerably outperforming the volatile historical trajectory. Volume pressure nonetheless remains evident in the annualised moderation in EBITDA by 8% and 14% respectively in FY17 and 1H FY18, with the trend only expected to normalise with substantive recovery in the domestic economy. Chellarams is budgeting moderate growth in revenue in FY18, in view of the subdued operating environment. While the Group expects operating efficiencies to improve profitability, this is also dependent on exogenous risks abating.

Chellarams has hived off the FMCG business to a newly established subsidiary, Chellarams DMK Limited, and has since sold a 26% stake in the new company to DMK Group of Germany for a EUR6.5m consideration, with the resultant gain notably bolstering 1H FY18 net profit to N2.6bn (FY17: N334m).

Following the redemption of the series 1 bond and settlement of other maturing obligations, debt has more than halved to N7.1bn at 1H FY18, from a high of N13.5bn at FY15. Accordingly, net gearing registered at a new low of 158% (FY17: 519%; FY16: 743%), from review period high of 1,117% in FY15. Also, net debt to EBITDA improved to a low of 488% and 430% in FY17 and 1H FY18 respectively (FY16: 524%). In view of the lower debt profile, net finance charge has materially been reduced, strengthening net interest cover ratio to 1.7x in FY17 (FY16: 1.2x). Notwithstanding the modest softening seen in 1H FY18, the measure remains adequate, and is expected to remain within range over the rating horizon.

Subdued capacity utilisation has seen sizeable working capital releases in recent reporting periods. Liquidity requirements are expected to rise as productivity rebounds amidst a stabilisation in foreign currency supply, which will be funded by internal reserves, N10.6m in untapped general banking facilities, as well as improved credit terms secured from suppliers.

As the Series 2 Bond is a senior unsecured obligation of the Issuer, the Bonds bear the same long term, national scale rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bond rating.

The ability to achieve sustainable profitability, despite the weak economic environment, would bode positively. Upward migration would also be sensitive to a further moderation in gearing metrics in line with guidance. However, business operations are susceptible to vagaries of the operating environment. In this respect, adverse regulatory changes, foreign exchange policy or other exogenous factors may constrain product volumes and revenue. This could adversely affect earnings and result in liquidity strain or increased gearing metrics, placing downward pressure on the ratings.


NATIONAL SCALE RATINGS HISTORY

Initial rating - Issuer (August 2010)
Long term: BBB-(NG)
Short term: A3-(NG)
Rating outlook: Stable

Initial rating - Bond (November 2012)
Senior Unsecured Series 1 Bond: BB+(NG)
Senior Unsecured Series 2 Bond: BB+(NG)
Rating outlook: Stable

Last rating -  Issuer (December 2016)
Long term: BB(NG)
Short term: B(NG)
Last rating - Bond (December 2016)
Senior Unsecured Series 2 Bond: BB(NG)
Rating outlook: Stable


ANALYTICAL CONTACTS

Primary Analyst
Femi Atere
Credit Analyst
.(JavaScript must be enabled to view this email address)


Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2017
Chellarams Plc rating reports 2010-16
Glossary of Terms/Ratios, February 2017


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 expire in November 2018.

 

Chellarams 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 Chellarams Plc with no contestation of the ratings.

The information received from Chellarams Plc and other reliable third parties to accord the credit rating included:
- 2017 audited annual financial statements (plus four years of comparative numbers),
- budgeted financial statements for the years 2017 to 2022,
- 6-month unaudited management accounts to September 2017,
- corporate governance and enterprise risk framework,
- industry comparative data
- a breakdown of facilities available and related counterparties.
- a completed rating questionnaire
- Trustees’ report dated 6th November 2017 on Series 2 Senior Unsecured Bonds

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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