GCR downgrades Aarti Steel Nig.Ltd’s national scale Issuer rating to BBB-(NG)

22 Dec 2015 In Rating Notifications

GCR downgrades Aarti Steel Nig.Ltd’s national scale Issuer rating to BBB-(NG)

Lagos, 22 December 2015—Global Credit Ratings has downgraded the long term national scale rating of Aarti Steel Nigeria Limited to BBB-(NG) and affirmed the short term national scale rating of A3(NG). The ratings have been placed on ‘Rating Watch’ and expire in June 2016.


RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Aarti Steel Nigeria Limited (“Aarti” or “the Company”) based on the following key criteria:

Established in 2003, Aarti has begun to carve out a niche position in the Nigerian steel market, with a total production capacity of 125,000tpa and a diverse range of steel products. While Aarti’s market position has been largely supported by the extensive steel industry experience of its key shareholders and management, operations have been adversely impacted by a particularly challenging operating environment in recent years. The Company is investing in additional capacity, which should see it enhance its market penetration and performance in the medium term. Aarti estimates its market share for galvanised (zinc coated steel) and colour coated roofing sheets at about 25% and 17% of industry volumes respectively.

In line with capacity and scope expansion, strong turnover and earnings growth was evidenced between F09 and F13. However, constrained business activity owing to the weaker economic climate, security concerns and electoral tensions, as well as the loss of market share to smuggled product led to a 21% decline in turnover to just N13bn in F14, well below initial expectations of N28.9bn. Although, long term industry prospects are sound, current demand is subdued, with revenue declining by an annualised 22% to N5.1bn in the six month period to June 2015 (“1H F15”).

To promote the development of domestic industry, the Federal Government (“FG”) approved a new import tariff structure across various sectors in January 2014. This saw the import duty on cold roll steel, Aarti’s principal raw material, increased significantly from 5% to 35%. In addition, pricing pressures continued to mount amidst an escalation in the Naira-cost of raw materials. Coupled with the loss of essential economies of scale, this saw the operating margin contract sharply to a review period low of 4.6% in F14 (F13: 10.5%). Accordingly, operating profit contracted by 65% to a low of N602m. While some margin was reportedly clawed back in 1H F15, on the back of weak steel prices, the marked loss of volume translated to a modest operating profit of N369m.

Debt levels have not changed materially since FYE13, registering N3.9bn at FYE14: and N4.1bn at 1H F15. However, constricted earnings covered interest by a much lower 1.4x in F14 (F13: 4.3x), and an estimated 1x in 1H F15.  Although net gearing increased to 60% and 70% at FYE14 and 1H F15 respectively, it was well below a review period high of 125% (FYE11). Of concern, however, was the marked deterioration in net debt to EBITDA to 425.5% at FYE14. Net debt to EBITDA improved to 291% at 1H F15, but there is a strong likelihood that earnings based gearing metrics will fall behind budget for the full F15.

While the FG reduced the import duty on cold roll steel (CRS) from 35% to 15% in April 2015, operations have been hampered by the Central Bank of Nigeria’s (“CBN”) restrictive foreign exchange policy. The policy disqualified importers of forty-one items (including cold rolled steel sheets) from accessing sufficient foreign currency. Despite reduced productivity, working capital pressures are expected to be amplified by a weak Naira and cold rolled steel’s exclusion from CBN’s forex window. Per management, the locally sourced CRS is relatively more expensive and also puts pressure on Aarti’s working capital as advance payments are required by suppliers.  Thus, Aarti is highly vulnerable to market and operational risk, pending the commissioning of its cold rolling mill. Although lingering challenges remain within the industry, the huge housing and infrastructure deficits in Nigeria present strong long term demand for Aarti’s steel products.

Given the current economic conditions and non-conducive regulatory environment, upward rating migration is dependent on a timely completion of the ongoing capex projects. Amongst the several benefits, the projects would have an immediate impact on raw material costs and gross margins, which would result in stronger overall profitability and debt serviceability. Conversely, a rating downgrade is likely in the event of further delays in the rollout of the cold rolling mill beyond the anticipated period. If accompanied by reduced sale volumes, this could further curtail cash flows, driving a material deterioration in the company’s credit risk profile. Stiffer regulations also expose Aarti to greater operational risk.

 
NATIONAL SCALE RATINGS HISTORY
Initial ratings (November 2012)
Long term: BBB(NG)
Short term: A3(NG)
Outlook: Stable

Last ratings (February 2015)
Long term: BBB(NG)
Short term: A3(NG)
Outlook: Stable


ANALYTICAL CONTACTS
Credit Analysts
Adekemi Adebambo/Femi Atere
.(JavaScript must be enabled to view this email address)
.(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 (February, 2015)
Aarti Steel Nigeria Limited Rating Reports 2012 - 2015
Glossary of terms (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

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; d.) the ratings expire in June 2016

Aarti Steel Nigeria Limited 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 rating/s has been disclosed to Aarti Steel Nigeria Limited with no contestation of the rating.

The information received from Aarti Steel Nigeria Limited and other reliable third parties to accord the credit rating included:
• The 2014 audited annual financial statements (plus four years of comparative numbers)
• Unaudited management accounts to June 2015
• Industry comparative data and regulatory framework
• Breakdown of facilities available and related counterparties
• A completed rating questionnaire

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 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.

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