GCR affirms Chellarams Plc’s Issuer and Bond Ratings at BB(NG); Outlook Stable

20 Dec 2016 In Rating Notifications

GCR affirms Chellarams Plc’s Issuer and Bond Ratings at BB(NG); Outlook Stable

Lagos, 20 December 2016—Global Credit Ratings (“GCR”) 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 2017.

The N1.5bn Senior Unsecured Series 1 Bond was fully redeemed at maturity, on 6 January 2016.

RATING RATIONALE

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

Chellarams Plc is a large 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 over the past 18 months constrained operations, leading to low levels of capacity utilisation across business divisions.

Revenue fell, for the second consecutive year, by 20% to N20.1bn in F16, and a further 41% YoY in the six month period to September 2016 (“1H F17”). Positively, sharp declines in international crude oil prices, commodities and milk powder prices served to moderate production costs, whilst scarcity supported higher selling prices. Together, these factors significantly enhanced the gross margin to 19.2% (budget: 11.2%), resulting in an 86% rise in gross profit to N3.9bn in F16.  The sharp increase in interest rates, due to the devaluation in the Naira value, raised the net finance charge by 59% to N1.5bn in F16. Consequently, net interest cover remained low at 1.2x, despite the N1.7bn operating profit (F15: N410m loss). Overall, Chellarams’ NPBT registered at N235m, from a N2.6bn loss position in F15.

Chellarams is budgeting for a 10% decline in revenue to N18.1bn in F17, as the paucity of forex and the weak economic environment will constrain volumes and reduce purchasing power. Nevertheless, the Group expects the profitability attained at 1H F17 to be sustained, in view of the continued weak input prices and greater efficiencies.

Chellarams reported a N2bn working capital release in F16 (F15: N4.9bn absorption), driven by a reduction in inventory and receivables as business volumes decreased. However, GCR notes that, in the face of foreign exchange scarcity (which restricted imports), inventories were reduced well below traditional holding levels and will likely have to replenished in the short term, which would likely lead to renewed working capital pressure.

Overall, gross debt reduced from N13.4bn at FYE15 to N10.3bn at 1H F17 (1H F16: N13.6bn), as Chellarams fully redeemed the N1.5bn Series 1 Bond at maturity (January 2016) and also settled other maturing obligations. As such, net gearing reduced to 624% at 1H F17 (FYE16:743%), from 1,117% at FYE15. Furthermore, the recovery in earnings at F16 drove an improvement in net debt to EBITDA to 524% at FYE16, a review period low, from 1,685% at FYE14. Nevertheless gearing metrics remain elevated and will be monitored.

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

Chellarams’ ability to improve revenue and achieve sustainable profitability, despite the weak economic environment, would be favourably considered and could lead to a rating upgrade. Upward rating migration would also be sensitive to a substantial reduction in gearing to levels more in line with investment grade companies. Conversely, adverse regulatory changes, foreign exchange policy or other exogenous factors may constrain product volumes and earnings and could result in liquidity strain or increased gearing metrics, placing downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Adekemi Adebambo
Senior Credit Analyst
Lagos
+234 1 462 2545
.(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, February 2016
Chellarams rating reports 2010-2015
Glossary of terms (February 2016)


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://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 2017.

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 rating.

The information received from Chellarams Plc and other reliable third parties to accord the credit rating included:
- 2016 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 2016,
- corporate governance and enterprise risk framework,
- industry comparative data
-a breakdown of facilities available and related counterparties.
-a completed rating questionnaire
-Trustees’ report dated 28th November 2016 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 WWW.GLOBALRATINGS.COM.NG/RATINGS-INFO. 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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