GCR Affirms Mixta Real Estate Plc’s rating of BBB(NG); Outlook Stable.

29 Jun 2018 In Rating Notifications

GCR Affirms Mixta Real Estate Plc’s rating of BBB(NG); Outlook Stable.

Lagos Nigeria, 29 June 2018 — Global Credit Ratings has affirmed the national scale ratings assigned to Mixta Real Estate Plc of BBB(NG) and A3(NG) in the long term and short term respectively, with the outlook accorded as Stable. The ratings are valid until June 2019.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Mixta Real Estate Plc (“Mixta Nigeria” or “the Group”) based on the following key criteria:

Mixta Nigeria has evolved into a leading domestic real estate development company, with a solid track record and diverse portfolio of operations spanning the residential, commercial and retail property segments. The Group typically reflects a protracted revenue recognition period and cash conversion cycle (averaging two years), albeit in line with industry norm. Most of the revenue from large and lumpy projects is typically only realised at the tail end of the developments, which are usually executed in multiple phases.

The challenging operating climate in Nigeria, characterised by constrained consumer spending, higher lending rates and inadequate funding, continued to curtail industry performance. Positively, the group achieved revenue growth of 23% to N6.1bn in FY17 on the back of completed developments, although underperforming an aggressive budget by 52%. As of 31 March 2018 (“1Q FY18”), revenue stood at N2.5bn, representing as annualised growth of 62%. The depreciation of the Naira has driven a significant escalation in construction costs, eroding the gross margin to a four-year low of 9% in FY17. The lower gross profit, combined with higher overheads following a rise in personnel and administrative costs, resulted in operating loss in FY17. Although the position rebounded as of 1Q FY18, with gross and operating margin of 32% and 16% respectively, the contractual nature of operations drives earnings variability. Overall, the Group reported a pre-tax profit of N7.9bn in FY17 (FY16: N1.3bn, 1Q FY18: N4.8m), largely supported by fair value gains of N12.4bn, related to the revaluation of its land bank. In this regard, Mixta Nigeria’s significant land bank and strong technical alliances with major industry players are key competitive advantages which support timely delivery of projects, amidst the industry challenges and earnings variability.

Gross debt, comprising related party loans and term debt, rose from N25.2bn at FY16 to N35.2bn at 1Q FY18. This followed an Issue of N4.5bn in Series 1 Bonds and N6.9bn in Commercial Paper. Based on the reported debt maturity profile, about 65% of the total debt is expected to fall due within one year, indicating potential liquidity pressure. Despite the growth in debt, the conversion of its deposits for shares to equity saw net gearing improve to 49% at 1Q FY18, from a peak of 85% at FY16. The Group’s net loan to value remained low at 29% at 1Q FY18 (FY16: 23%). On the other hand, net debt to EBITDA remained elevated, reflecting the significant earnings drag with respect to properties to be completed and sold. The substantial growth in the debt profile has increased the finance charge, with net interest cover remaining below 1x since FY16 (FY17: negative). Based on the revised forecast, the metric is expected to rise to 1.3x by FY18, and then average 9.4x in the next four years to FY22.

The substantial proportion of short term debt creates a serious funding mismatch with highly rated property companies, whose project cycles extend over the medium term. Combined with the very low interest coverage, this suggests that any earnings underperformance could result in substantial liquidity and debt service challenges for Mixta. This would likely require Mixta to divest of some of projects or investment properties. Mitigating this concern somewhat is the strategic support provided by its ultimate parent company.

Mixta Nigeria plans to raise an additional N6bn through the capital market in two tranches, under its N30bn bond programme. The debt is to refinance existing facility and partly finance on-going projects, and could see gross debt rise to about N45bn by FY18. Accordingly, smoother earnings and a more robust free cash flows are critical to ensure that debt serviceability remains at manageable levels over the forecast period.

The ability to develop and successfully deliver large scale projects on a consistent basis will support improved margins and earnings growth. This should also lead to strong internal cash generation, which should reduce the reliance on debt, with earnings based gearing declining to more comfortable levels. Conversely, further delays in project delivery, whether due to internal disruptions and/or adverse exogenous factors, will impact the Group’s earnings generative capacity, leading to liquidity strain. This could significantly impair Mixta Nigeria’s ability to service obligations, and would place downward pressure on the ratings.


NATIONAL SCALE RATINGS HISTORY

Initial rating (June 2016)
Long-term: BBB(NG)
Short-term: A3(NG)
Rating outlook:  Stable

Last rating (November 2017)
Long-term: BBB(NG)
Short-term: A3(NG)
Rating outlook:  Stable

ANALYTICAL CONTACTS

Primary Analyst
Femi Atere
Credit Analyst
.(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 2018
Global Criteria for Rating Property Funds and Commercial Real Estate companies, updated February 2018
Mixta Real Estate Plc Issuer rating reports (2016-17)
Glossary of Terms/Ratios, February 2018


RATING LIMITATIONS AND DISCLAIMERS

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/RATINGS-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 AT WWW.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 rating was 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 ratings expire in June 2019.

Mixta Real Estate 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 Mixta Real Estate Plc with no contestation of the ratings.

The information received from Mixta Real Estate Plc and other reliable third parties to accord the credit rating included:
- the 2017 audited annual financial statements and audited comparative results for the preceding four years,
- revised budgeted financial statements for the years 2018 to 2022,
- 3-month unaudited management accounts to March 2018,
- a breakdown of facilities available and related counterparties,
- completed rating questionnaire containing additional information of Mixta Real Estate Plc.

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/RATINGS-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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