GCR affirms Dufil Prima Foods PLC’s National Scale Rating at A-(NG); Outlook Positive

06 Jul 2018 In Rating Notifications

GCR affirms Dufil Prima Foods PLC’s National Scale Rating at A-(NG); Outlook Positive

Lagos, 06 July, 2018—Global Credit Ratings has affirmed the long term and short term national scale issuer ratings of A-(NG) and A2(NG) respectively, assigned to Dufil Prima Foods PLC, with the outlook accorded as Positive. Concurrently, the rating of A-(NG) accorded to the N10bn Series 1 bond was also affirmed, with outlook accorded as Positive.

The long and short term issuer and bond ratings are valid until June 2019.

RATING RATIONALE

Global Credit Ratings has accorded the above credit ratings to Dufil Prima Foods Plc (“Dufil or the Company”) based on the following key criteria:

Dufil’s dominant presence in the packaged food segment of the economy is supported by a long operational track record, strong shareholder support, ongoing expansion of production capacity (including acquisition of smaller competitors) and backwards integration. This underlies its superior competitive strength and strong brand equity, which has seen most of its products enjoy widespread acceptance across the country, with strong sales demonstrating demand inelasticity to upward prices movement.

Revenue growth has been driven by a combination of expansion in production capacity, higher traded volumes, upward price adjustments, and more recently, business acquisitions. This equated to a five-year Compound Annual Growth Rate (“CAGR”) of 24%, translating to a period high revenue of N171.8bn in FY17 (FY16: N120.7bn). Profit margins have remained robust through the review period, as revenue growth has consistently outpaced costs. This has been enabled by the benefits of economies of scale, as well as backwards integration. As such, the robust growth in revenue allowed Dufil to fully absorb much higher production and administrative costs necessary for the enlarged operations. Thus, on the back of the firmer earnings, profitability metrics strengthened, translating to a higher EBITDA margin of 20.2% in FY17 (FY16: 17.8%), with the operating margins widening to 18.7% (FY16: 15.7%).

Despite the strong cash generation capacity, liquidity pressure has been experienced in recent years, largely resulting from increased working capital requirements, as inventory and related party debtors have more than doubled over the last three years. The cash position was further depleted by a large dividend payment of N15.9bn in FY17 (including a N4.7bn portion from FY16), necessitating additional borrowings to finance the huge capex. Nonetheless, Dufil operates a favourable cash conversion cycle which should mitigate any substantial future cash outflow.

Dufil displays an elevated debt profile, underpinned by ongoing capex and working capital requirements. In this regard, total debt grew by 32% to N65.3bn at FY17, well above budget of N39.2bn. Although, the issuance of the Series 1 bonds served to reduce the concentration to short term debt, it still comprised around two-thirds of total debt. Access to funding is supported by the strong relationships with several banking counterparties. Nevertheless, gearing metrics strengthened on the back of the firmer growth in earnings, with net gearing moderating for a third consecutive year to a period low 243% at FY17 (FY16: 246%), while net debt to EBITDA declined to 172% (FY16: 206%) Similarly, firmer operating income resulted in a stronger net interest cover of 3.3x (FY16: 2.6x). The improved credit protection metrics demonstrate a strong capacity to absorb higher debt, although Dufil could find itself in an over geared position if earnings drop suddenly.

Given that the Bonds are senior unsecured obligations of the Issuer, and the Bond programme features a negative pledge, the Series 1 Bonds bear the same rating as the Issuer. Thus, any change in the rating assigned to the Issuer will directly impact the Bonds ratings

Positive rating action is only likely once completion of all ongoing capacity expansion projects is achieved, on time and within budget. This should contribute to margin enhancement and earnings growth over the medium term. A material decrease in gearing metrics, and the greater retention of cash, will also be positively considered.  Conversely, continuous increases in debt, even to fund profitable expansions/acquisitions, would see gross debt rise above levels congruent with the current ratings. This risk of high debt may be exacerbated by earnings underperformance, construction delays and cost overrun, which would constrain profitability and lead to a rapid deterioration in credit protection metrics.


NATIONAL SCALE RATINGS HISTORY


ANALYTICAL CONTACTS

Credit Analyst
Kunle Ogundijo
.(JavaScript must be enabled to view this email address)
Lagos
+23 41 9049462

Committee Chairperson
Dave King
Chairman
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2018
Dufil Prima Foods PLC Issuer and bond rating reports, 2016-2017
Glossary of Terms/Ratios (February 2018)


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 process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings are an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until June 2019.

Dufil Prima Foods 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 ratings have been disclosed to Dufil with no contestation of the ratings.

The information received from Dufil to accord the credit ratings included;
• 2017 audited annual financial statements (plus four years of comparative numbers),
• industry comparative data and regulatory framework
• five year projections
• a breakdown of facilities available and related counterparties.
• information specific to the rated entity and/or industry was also received.

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/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.


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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