GCR Affirms Fidson Healthcare Plc’s Long Term Issuer Rating at BBB+(NG); Outlook Stable

05 Dec 2019 In Rating Notifications

GCR Affirms Fidson Healthcare Plc’s Long Term Issuer Rating at BBB+(NG); Outlook Stable

Lagos, 05 December 2019—Global Credit Ratings has affirmed the national scale ratings assigned to Fidson Healthcare Plc (“Fidson” or “the Company”) at BBB+(NG) and A2(NG) in the long term and short term respectively; outlook Stable. Concurrently, the rating of the N2bn Bond Issue was maintained at A+(NG); with the outlook accorded as Stable. The ratings are valid until June 2020.

RATING RATIONALE

Global Credit Rating Company Limited (“GCR”) has accorded the above credit ratings to Fidson based on the following key criteria:

Fidson’s maintains the status of a leading manufacturer in the Nigerian pharmaceutical sector, with a well-diversified product base, extensive distribution network, and strong technical and business relationships. These strengths should continue to support the Company’s growth over the review period.

Revenue grew by 15.5% in FY18 (in line with budget) on the back of higher traded volumes, particularly from the ethical drugs segment. Due to the high demand and price elasticity in the segment, Fidson’s focus in FY18 was on driving higher volumes and increasing market share through price-cutting. Management plans to grow the revenue base by a 19% CAGR over the next three years, underpinned by increased market penetration and additional revenue from various toll manufacturing contracts.

Earnings margins were severely constrained in FY18, due to the rising price of imported active pharmaceutical ingredients ((“APIs”) c.80% of inputs cost) and higher logistics cost (by c.10x), inter alia. Given some adjustments to the logistics mechanism, some respite was seen in the margins in 1H FY19. Medium term plans to control costs include bypassing third-party import logistics providers and renegotiating prices with key suppliers. This is estimated to result in cost savings by c.20% and strengthen the margins.

Fidson’s liquidity position was significantly impaired in FY18, with operating cash flow registering below N0.5bn in FY18 (FY17: N3.6bn), which was insufficient for debt coverage. Maintaining the current ratings is dependent on a demonstrated ramp-up of profitability and ultimately operating cash flows, otherwise, credit protection metrics will deteriorate further and impact the ratings.

The interest expense doubled to N1.9bn in FY18, triggered by higher debt and unfavourable short term interest rates. Accordingly, interest coverage fell to just 1.1x; (1H FY19: 1.5x), the lowest over the review period. As the interest charge is currently unsustainable, GCR positively notes efforts to reduce the interest charge by tapping concessionary funding sources, albeit the financial benefits need to be demonstrated.

Gross debt nearly doubled to a period high of N7.9bn in FY18 and remained largely unchanged at 1H FY19. This saw, gross and net debt to EBITDA spiked to 331% and 308% respectively. To ease the funding burden, Fidson raised N2.3bn through a rights issue in June 2019, and the proceeds from the rights issuance has been utilised to settle some expensive loans and reduce the finance costs. Going forward, management projects that net gearing will moderate to 72% in FY19 on the back of stronger earnings and lower debt.

The high proportion of short term debt and low interest coverage represent significant liquidity risks. Nevertheless, GCR positively notes recent transactions to improve the funding profile, with the two long term concessional loans raised, extending the maturity profile and reducing interest. The sale of old factories should make further cash available to reduce debt.

A rating uplift is only likely in the long term, upon the realisation of the projections for sound earnings and debt service metrics, coupled with moderate gearing. Conversely, persistent decline in earnings, profit margins and cash generation, coupled with rising gearings even to fund expansion, with likely place pressure on the ratings.


NATIONAL SCALE RATINGS HISTORY


Initial rating
Long term: BBB(NG)  (January 2014)
Short term: A3(NG)  (January 2014)
N2bn Bond: BBB(NG)  (June 2016)
Rating outlook: Stable


Last rating (December 2018)
Long term: BBB+(NG)
Short term: A2(NG)
N2bn Bond: A+(NG) 
Rating outlook: Stable


ANALYTICAL CONTACTS


Primary Analyst
Samuel Popoola
Analyst
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Committee Chairperson
Dave King

APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018;
Global Structurally Enhanced Corporate Bonds Rating Criteria, updated November 2018;
Fidson Healthcare Plc Rating Reports (2014-18);
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 were an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until June 2020.

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

The credit ratings have been disclosed to Fidson.

The information received from Fidson Healthcare Plc and other reliable third parties to accord the credit rating included;
- 2018 audited annual financial statements, and four years of comparative audited annual financial statements;
- Unaudited management accounts to June 2018;
- Revised forecasts for 2018-22;
- Industry comparative data and a breakdown of facilities available and related counterparties;
- Trustees Bond performance report as at 13 August 2019;
- Information specific to the rated entity and/or industry.

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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