GCR affirms Dufil Prima Foods PLC’s National Scale Rating at A-(NG); Outlook Positive
Lagos, 28 April 2017—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 indicative rating of A-(NG) accorded to the proposed N20bn bond was also affirmed, with outlook accorded as Positive.
While the indicative bond rating is valid until July 2017, the long and short term issuer ratings are valid until April 2018.
RATING RATIONALE OF THE ISSUER
Global Credit Ratings has accorded the above credit rating(s) to Dufil Prima Foods Plc (“Dufil or the Company”) based on the following key criteria:
Dufil’s long operational track record and the continuous expansion of production capacity (across the segments) makes it one of the most prominent players in the rapidly growing consumer food sector, epitomised by Its dominance of the noodles segment and growing presence in the pasta, cooking oil and snack segments. Its operations are supported by its substantial marketing spend to develop brand awareness and an effective distribution network.
Despite the challenging operating environment that persisted in 2016, Dufil maintained its upward growth trajectory, reporting a 16% increase in revenue to a new high of N120.7bn in FY16. While growth in previous years was mainly attributed to the expansion in production capacity and higher traded volumes, growth in FY16 was underpinned by an upward adjustment in the prices of the various products. Notwithstanding the economic crunch, demand remains high, reflecting the strong brand equity of the Company. Resulting from efficient cost management and scale benefits from rising production volumes, Dufil reported stronger profitability in FY16, overcoming the slump in FY15. Dufil was able to mitigate the associated high cost of importation triggered by the devaluation of the Naira value in 2016 through greater local sourcing of raw materials, coupled with a slight dip in the global commodity prices for wheat and oil. To this end, the gross margin rose to 26.9% (FY15: 17.3%), while the effect of the firmer earnings translated to a much wider operating margin of 15.7% (FY15: 5.4%)
Due to the additional working capital requirements, total debt rose by N8.7bn to N49.4bn at FY16, above budget of N29.2bn. Of this, short term debt amounted to a higher N41.8bn at FY16 (FY15: N35.3bn), which incurred high interest charges and contributed to the 63% increase in the interest charge to N7.4bn in FY16. Nevertheless, firmer operating income resulted in a stronger net interest cover of 2.6x (FY15: 1.3x). Earnings also had a positive impact on gearing metrics, with gross gearing moderating to 273% (FY15: 399%) and net gearing to 246% from (FY15: 386%). Similarly, gross and net debt to EBITDA declined to 229% and 206%, from 508% and 493% respectively.
RATING RATIONALE OF THE ISSUE
Dufil is in the process of issuing bonds into the Nigerian capital market, under a N40bn programme. The Bonds will be issued in Series, with Series 1 being a senior unsecured N20bn Issue. Proceeds are to be utilised to repay expensive short term debt and fund expansion. A preliminary filing has been carried out at the Securities and Exchange Commission (“SEC”), with the expected method of distribution being through Book Building. The Series 1 Bonds will carry a five-year maturity, with semi-annual interest payment, while the principal will be settled through a bullet repayment upon maturity.
The Programme Trust Deed does not offer bondholders any security over assets or income streams but does feature a negative pledge and other covenants to protect the interest of bondholders. Global Credit Rating Co. Ltd. (“GCR”) takes cognisance of the payment mechanism which requires the Issuer to fund the Payment Account four days to the Payment Date, although, this leaves the bondholders with little protection or buffer against any adverse financial strain/shortfall in the Issuer’s cash flow position.
As the Series 1 Bonds will be 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 Bonds rating. Dufil was assigned an Issuer long term rating of A-(NG) in April 2017.
Positive rating action, for both the issuer and the bonds, hinges on the successful completion of the proposed capacity expansion programme on schedule and within budget, leading to sustained growth in profitability. A material improvement in gearing metrics would also be positively considered. Conversely, earnings underperformance combined with higher debt could lead to a deterioration in gearing and other credit protection metrics, and could likely lead to a rating downgrade.
NATIONAL SCALE RATINGS HISTORY
*Indicative rating for the proposed bond issuance.
ANALYTICAL CONTACTS
Credit Analyst
Kunle Ogundijo
.(JavaScript must be enabled to view this email address)
Lagos
+23 41 462 2545
Committee Chairperson
Dave King
Chairman
.(JavaScript must be enabled to view this email address)
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2017
Dufil Prima Foods PLC Issuer and bond rating reports, 2016-2017
Glossary of Terms/Ratios (February 2017)
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; d) the indicative bond rating would expire in July 2017, while the long and short term ratings would expire in March 2018.
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 were contested by Dufil Prima Foods PLC, but the rating appeal was not successful.
The information received from Dufil to accord the credit rating included;
• 2016 audited annual financial statements (plus four years of comparative numbers),
• Strategy document on expansion
• industry comparative data and regulatory framework
• a breakdown of facilities available and related counterparties.
• information specific to the rated entity and/or industry was also received.
• information relating to the proposed Bond Issue;
draft trust deed
draft prospectus
draft series 1 trust deed
draft series 1 pricing supplement
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.