GCR affirms Lafarge Africa Plc’s Issuer and Bond ratings at A+(NG); Outlook Stable

11 Oct 2017 In Rating Notifications

GCR affirms Lafarge Africa Plc’s Issuer and Bond ratings at A+(NG); Outlook Stable

Lagos, 11 October 2017—Global Credit Ratings has affirmed the national scale Issuer ratings assigned to Lafarge Africa Plc of A+(NG) and A1(NG) in the long term and short term respectively; with the ratings placed on Stable Outlook. Concurrently, GCR affirmed the ratings of both the Series 1 Bonds and Series 2 Bonds at A+(NG) respectively, with Stable Outlooks.  The ratings expire in August 2018.


RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on Lafarge Africa Plc (“LAP” or “Issuer” or “the Group)” and the Series 1 and Series 2 Bonds based on the following key criteria:

Lafarge Africa Plc’s strong domestic market position is underpinned by an established international brand, effective distribution network, and operational support from its parent, LafargeHolcim. The recent completion of the new 2.5mtpa cement line at Mfamosing, Cross River State, has increased its production capacity to 14.1mtpa and further enhanced earnings potential.  Nigeria continues to dominate LAP’s operations, and accounted for 69% of revenue and a much higher 94% of operating profit in FY16 (FY15: 72% and 92% respectively).

LAP’s cement sales volumes reduced by 16% in FY16, due to disruptions in gas supply and scarcity of foreign currency, which impeded productivity. Coupled with pricing pressures (in the first eight months of 2016), this drove an 18% decline in revenue to N219.7bn in FY16. The significant escalation in energy costs and the effect of a weaker Naira saw EBITDA margin contract sharply to 11.7% in FY16 (FY15: 25.2%), albeit this had corrected to 23.6% by 1H FY17. Increased productivity, cheaper fuel mix and operating efficiencies are expected to support an EBITDA margin of 29% for the full year. Although depreciation costs increased by 40% y/y in 1H FY17, the higher EBITDA margin and overhead cost rigour supported a 12 percentage-point correction in the operating margin to 16.7%, leading to a considerable rise in operating profit to N25.9bn (1H FY16: N2.9bn).

Cash generation rebounded to N30.7bn in 1H FY17, from the weak performance reported in FY16, to match historical trends. This was, however, offset by the accumulation of higher value inventory and debtors absorption, which drove an N8.4bn operating cash outflow (FY16: N725m outflow; five year average: N33.9bn inflow). Net interest cover rose to 2.6x in 1H FY17 (1H FY16: 0.6x) despite the 68% increase in net interest expenses, albeit continuing to track below historical levels. While debt service and liquidity ratios are set to normalise by FY17, GCR will continue to monitor performance over the rating horizon, with an interest cover ratio of approximately 4x required to support stronger ratings (inter alia).

In September 2016, LAP restructured USD493m (N139bn) of shareholder loans into a hybrid instrument, repayable at its discretion. Following the introduction of the dynamic Nigerian Inter-Bank Foreign Exchange Fixing (“NIFEX”) market it hedged its USD shareholder loan exposure and thus reclassified the quasi-equity to debt in 1H FY17. Borrowings therefore nearly doubled to N244.7bn in 1H FY17 (FY16: N127.5bn), with shareholder loans accounting for 52% of the total (FY16: 22%). Net gearing increased from 58% at FY14 to peak at 117% at 1H FY17 (FY16: 44%) while net debt to EBITDA deteriorated materially from 145% at FY14 to 420% at FY16, before improving to 300% in 1H FY17.

LAP is planning a N131.7bn Rights Issue in 4Q FY17. Through the offer, LafargeHolcim, will subscribe to its rights by converting c.70% of dollar denominated shareholders loans into equity. According to management, the parent is also willing to extend the tenor of the remaining shareholder debt by three years. While, the high short-term debt exposure at 1H FY17 (78%) is concerning, this will be addressed by the Rights Issue, which should see net gearing and net debt to EBITDA managed to around 50% and 200% respectively.

As the Series 1 Bonds and Series 2 Bonds are direct, unconditional, senior and unsecured obligations of the Lafarge Africa Plc, the Bonds bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bonds ratings.

Upward rating migration in the medium term would depend on stabilisation/normalisation of the Group’s earnings and free cash flows, together with gearing and debt service metrics within guidance. Conversely, slower than anticipated economic growth, delays in rolling out public infrastructure projects, foreign currency scarcity, and competitive pressures may constrain demand and/or pricing flexibility. These factors could adversely affect earnings and result in liquidity strain, increased gearing metrics and impede debt service, 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
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2017
Lafarge Africa Plc Rating Reports, 2010-16
Lafarge Africa Plc Bond Rating Report, October 2016
Glossary of terms/ratios, February 2017

SALIENT FEATURES

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, security or financial instrument; and d.) the Issuer and Bonds ratings expire in August 2018.

Lafarge Africa 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 Lafarge Africa Plc with no contestation of the ratings.

The information received from Lafarge Africa Plc and other reliable third parties to accord the credit rating included:
- the 2016 audited annual financial statements and audited comparative results for the preceding four years,
- 2017 budget for Nigerian operations
- unaudited management accounts to June 2017,
- a completed rating questionnaire containing additional information on Lafarge Africa Plc,
- breakdown of facilities available and related counterparties

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.

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

 

 

 

 

 

 

 

 

 

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.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2013 Global Credit Rating Company Limited. THE INFORMATION CONTAINED HEREIN MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED , IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. The ratings were solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR has been compensated for the provision of the ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information. GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.

Click on logo below to view more information about Global Credit Ratings Africa

Recent Rating Reports

10 Oct 2017: Rand Merchant Bank Nigeria Limited

10 Oct 2017: Leadway Assurance Company Limited

10 Oct 2017: North South Power Company Limited

10 Oct 2017: First Bank of Nigeria Limited

10 Oct 2017: Nigeria Mortgage Refinance Company Plc

10 Oct 2017: Dangote Cement Plc

10 Oct 2017: Fortis Microfinance Bank Plc

10 Oct 2017: Flour Mills of Nigeria

10 Oct 2017: Sterling Investment Management SPV PLC

10 Oct 2017: FSDH Merchant Bank Limited

Purchase Rating Reports

Parties interested in purchasing individual or sectoral rating reports and/or bulletins from Global Credit Rating Company Limited are kindly requested to contact us on the following telephone numbers or email address.

Telephone: (+2341) 462 2648, 460 5001, 0805 615 8393, 0803 352 871

Email: bisi@warltd.com

Email: tunde@globalratings.net

Recent Bulletin Releases
Rating Sectors
Credit Ratings

For a full list of Credit Ratings performed by Global Credit Ratings Company Limited please click here