GCR affirms Lafarge Cement WAPCO Nigeria Plc’s long term rating of A+; Outlook Stable

18 Sep 2014 In Rating Notifications

GCR affirms Lafarge Cement WAPCO Nigeria Plc’s long term rating of A+; Outlook Stable

Lagos, 17 September 2014—Global Credit Ratings has affirmed the long term national scale and short term national scale issuer ratings of A+(NG) and A1+(NG) respectively assigned to Lafarge Cement WAPCO Nigeria Plc (“Lafarge WAPCO”); with the outlook accorded as Stable. Concurrently, the rating of the Lafarge WAPCO Senior Secured Bond has been affirmed at AA(NG) with a Stable outlook. The ratings expire in July 2015.


RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) on Lafarge WAPCO based on the following key criteria:

Lafarge WAPCO’s leading position in the Nigerian cement market is underpinned by over five decades of operations, a substantial fixed infrastructure and an extensive distribution network, as well as technical support from its parent, Lafarge S.A. The proposed business combination with its South African affiliate is expected to provide a strong platform for growth and value creation.

Robust latent demand has supported the continued expansion of production over the review period. Accordingly, progressively stronger volumes saw revenue peak at N98.8bn in F13 (F12: N88bn), thereafter rising by an annualised 12% in 1H F14. Double digit revenue growth is expected for the full year, to be underpinned by the continued ramp up at the new 2.5mtpa plant. The rollout of new clinker capacity has driven marked margin enhancement in recent years. Specifically, the operating margin rose by 9 percentage points to 30% in F12, reaching a five-year high of 32% in F13. Consequently, operating profit increased to N31.2bn in F13 (F12: N26.4bn), almost double the forecast level. Coupled with the concomitant improvement in working capital management, this supported a 64% increase in F13 operating cash flows to N34.3bn.

Robust earnings have supported significant deleveraging and repayment of debt ahead of schedule. Thus total debt had declined to N20.8bn at 1H F14 (FYE13: N21.5bn), compared to a high of N52.3bn as at FYE11. Accordingly, gross gearing reduced to just 19% at 1H F14 (FYE13: 23%), while total debt to EBITDA fell to a new low of 49% (FYE13: 58%). With expansionary capex having tapered off, a substantial cash build up has been evidenced, with the company net ungeared at 1H F14. Credit protection metrics remain strong, with the net interest cover increasing from 9.4x in F13 (F12:5.2x) to 30.5x in 1H F14.

In light of the enhanced recovery prospects for bondholders offered by the security package, GCR considers a two-notch upgrade to be appropriate for the secured Bond. The Bond will be fully redeemed by October 2014.

Enhanced capacity and clinker sufficiency amidst strong demand could result in positive rating action if it enables the Company to sustain robust cash flows and sound credit protection metrics. The proposed business combination would also notably enhance Lafarge WAPCO’s competitive positioning, resulting in a rating uplift. Conversely, adverse regulatory changes, slower than anticipated economic growth, delays in rolling out public infrastructure projects, increased competitive threats or other exogenous factors may constrain demand or elevate pricing pressures. This could adversely affect earnings and result in liquidity strain, placing downward pressure on the ratings.


NATIONAL SCALE RATINGS HISTORY

Initial rating (Jul/2010)
Long term: A(NG); Short term: A1(NG);
Outlook: Stable

N11.88bn Senior secured Bond: AA-(NG) (Jul/2011)
Outlook: Stable


Last rating (Jul/2013)
Long term: A+(NG); Short term: A1+(NG);
N11.88bn Senior secured Bond: AA(NG)
Outlook: Stable


ANALYTICAL CONTACTS

Primary Analyst
Adekemi Adebambo
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

GCR’s Global Master Criteria for Rating Corporate Entities, August 2014
Lafarge Cement WAPCO Nigeria Plc Rating Reports, 2010 to 2014
Glossary of terms (February 2014)


SALIENT FEATURES

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.

Lafarge WAPCO 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 information received from Lafarge WAPCO and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), budgeted financial statements for the years 2011 to 2015, unaudited management accounts to June 2014, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, 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.


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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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