GCR assigns Dufil Prima Foods Plc a first time long term Issuer rating of A-(NG); Outlook Stable

27 Jun 2016 In Rating Notifications

GCR assigns Dufil Prima Foods Plc a first time long term Issuer rating of A-(NG); Outlook Stable

Lagos, 27 June 2016—Global Credit Ratings has assigned long term and short term national scale Issuer ratings to Dufil Prima Foods Plc of A-(NG) and A2(NG) respectively. The ratings have been placed on a ‘Stable’ outlook and are valid until May 2017.

RATING RATIONALE

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 is a major player in the Fast Moving Consumer Goods sector, with six subsidiaries manufacturing a diversified range of products. Aided by its well-structured marketing base and an effective distribution network, its products enjoy widespread acceptance in the market, through its estimated 63% market share in the noodles segment and rising presence in the cooking oil segment. This position is further enhanced by the support of major shareholders (98% of shareholding), the Tolaram and Salim Groups (headquartered in Singapore and Indonesia respectively), which operate businesses in many countries in Africa and South-East Asia. The Company also benefits from backward integration, which has strengthened the group’s supply chain, reducing exposure to market variability.

Despite the challenging operating environment, Dufil has reported a robust five-year compound annual growth rate of 26% in revenue, largely driven by rising production and higher traded volumes, with several new factories becoming operational over this period. Nevertheless, revenue advanced by a slower 16% to N103.9bn in F15 (F14: 32%), before dipping by an annualised 10% as at end May F16 (“YTD”), reflecting the weaker trading environment. Notwithstanding this, scale economies from higher volumes has seen a consistent rise in profitability over the years, with the gross and operating margins peaking at 27.6% and 15.6% respectively in F14. However, F15 profitability was severely affected by the devaluation of the Naira, which made imports more expensive, whilst marketing and administrative spend was increased to combat the weaker consumer environment. Combined with high industry competition which forced Dufil to absorb the additional costs in order to maintain market share, the operating margin fell to a period low 5.4%, with operating income registering at N5.6bn (F14: N14bn).

The combined effects of the expansion and high working capital requirements has seen gross debt rise from N14.2bn at FYE11 to N40.7bn at FYE15 and N47.5bn at YTD. Consequently, gearing metrics are high, with net gearing peaking at 466% at FYE14, before reducing to 399% at FYE15, whilst net debt to EBITDA deteriorated to 493% (FYE14: 254%). With the down-scaling of the palm oil business relaxing funding requirements, the Company intends to settle around N12bn in debt, which would see gross debt fall to around N30.3bn at FYE16. This would see gearing metrics moderate, with net gearing reducing to around 190%. However, the high debt level at YTD suggests Dufil is unlikely to reduce debt to the level forecast. Nevertheless, liquidity remains a concern, exacerbated by the devaluation of the Naira and the resulting increase in short term debt (which comprises a high portion of USD import facilities). This saw a spike in interest in F15, and a decline in interest coverage to just 1.3x, compared to firm coverage previously. Managing the interest charge may be more challenging in F16.

Notwithstanding the challenging macroeconomic environment and weaker currency, prospects for the Nigerian economy remain high given government’s efforts to stimulate broader growth and the favourable long term demographic trends, with Dufil well positioned to benefit.

Positive rating action is unlikely in the medium term, any further rating action would be dependent on significant growth in earnings, accompanied by a material improvement in current gearing metrics. Conversely, earnings underperformance combined with further deterioration in gearing and other credit protection metrics could likely lead to a rating downgrade.

NATIONAL SCALE RATINGS HISTORY
Initial/last rating (n.a)

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 2016)
Glossary of Terms/Ratios (February 2015)


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 ratings expire in May 2017.

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 have been disclosed to and contested by Dufil Prima Foods Plc and were amended following the provision of further material information by the entity.

The information received from Dufil and other reliable third parties to accord the credit rating included the following;
-2015 audited annual financial statements (plus four years of comparative numbers),
-projections (operating and capital) for the years 2016 to 2020,
-annual operating plan for 2016
-unaudited management accounts to May 2016,
-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.

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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