GCR upgrades Lafarge Africa Plc’s (formerly Lafarge WAPCO) rating to AA-(NG); Outlook Stable

28 Oct 2015 In Rating Notifications

GCR upgrades Lafarge Africa Plc’s (formerly Lafarge WAPCO) rating to AA-(NG); Outlook Stable

Lagos, 28 October 2015—Global Credit Ratings has upgraded the long term national scale rating assigned to Lafarge Africa Plc to AA-(NG) and affirmed the national scale short term rating of A1+(NG); with the outlook accorded as Stable. The ratings are valid until August 2016.

Lafarge Africa Plc’s (“LAP or the Group”) N11.88bn Senior secured bond was fully redeemed in October 2014.


RATING RATIONALE

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

Lafarge Africa Plc in its enlarged form was formed in September 2014 through the acquisition of the affiliate companies and equity interests held by its parent company, Lafarge S.A., in Nigeria and South Africa. LAP is the 2nd largest cement company in Nigeria and is now amongst the top 10 listed entities by market capitalisation on the Nigerian Stock Exchange. Companies and business interests acquired by LAP are:

• AshakaCem Plc (“AshakaCem”);
• Atlas Cement Company Limited (“Atlas”);
• United Cement Company of Nigeria Limited (“UniCem”), through Egyptian Cement Holdings B.V.
• Lafarge South Africa Holdings (Pty) Limited (“LSAH”)

LAP’s leading position in the Nigerian cement market is underpinned by its long history of operations, established international brand, substantial fixed infrastructure, effective distribution network and operational support from Lafarge S.A. With the combination of Nigeria and South Africa operations, LAP is better positioned to expand operations through organic growth and enter new markets. Nevertheless, Nigeria remains the primary area of operations, accounting for 64% of revenue and 86% of operating profit in 2014. Installed cement capacity is anticipated to reach 14.1Mtpa by 2016, in addition to strong market leading positions in aggregates, ready mix concrete and fly ash.

The merger resulted in an entity with N206.1bn in revenue in F13 (after restating F13 accounts for the consolidation), more than doubled the level of Lafarge WAPCO. However, turnover reduced marginally to N205.8bn in F14 (F13: N206.1bn), as the challenging environment in South African saw revenue from the country decline by 12%. This was offset by a strong performance in the Nigerian business. However, underpinned by robust volumes, LAP reported a 12% YoY revenue growth to N116.7bn for the six months to 30 June 2015 (“1H F15”). The operating margin improved from 22.2% in F14 to 24.3% at 1H F15, resulting in an annualised 24% increase in operating profit to N28.3bn. As earnings are usually firmer in the second half of the year, the robust 1H F15 performance suggests strong growth for the full year.

Working capital movements were relatively moderate over the past 30-month period as trade payables largely covered inventories and debtors. As a result, LAP reports robust operating cash flows, which peaked at N49.7bn in F14 (F13: N46.4bn), before rising further by an annualised 33% to N33.1bn in 1H F15.

Gross debt fell to N13.8bn at FYE14 (FYE13: N28.3bn), following repayment of the N11.88bn bond, resulting in a net ungeared position at FYE14. Equity registered around three times higher than FYE12 level of N68.4bn to reach N193.1bn in 1H F15. Therefore, gross gearing declined to just 7% at FYE14 (FYE13: 16.8%) and 10% at 1H F15. Similarly, earning based gearing remained low, with total debt to EBITDA of 28% at 1H F15 (FYE14: 25%). Liquidity also registered marked improvement, with operating cash flow covering total debt 3.5x in 1H F15 (F14: 3.6x). Gearing is not expected to increase materially in the foreseeable future.

Given the rating upgrade, any positive rating action will only be likely over the medium to long term and would be dependent on significant growth in earnings and leading positions across its various operations. Conversely, slower anticipated economic growth, delays in rolling out public infrastructure projects or other exogenous factors may constrain demand or elevate pricing pressures. This could adversely affect earnings and cause liquidity strain, thus resulting in rising gearing metrics. These factors could place downward pressure on the ratings.


NATIONAL SCALE RATINGS HISTORY
Initial rating (July 2010)
Long term: A(NG); Short term: A1(NG);
N11.88bn Senior secured Bond: AA-(NG) (July 2011)
Outlook: Stable
Last rating (September 2014)
Long term: A+(NG); Short term: A1+(NG);
N11.88bn Senior secured Bond: AA(NG)
Outlook: Stable


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
Criteria for Rating Corporate Entities, updated February 2015
Lafarge Cement WAPCO Nigeria Plc Rating Reports, 2010 to 2014
Glossary of terms/ratios, February 2015


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. The ratings are valid until August 2016.

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 rating/s has been disclosed to Lafarge Africa Plc with no contestation of the rating.

The information received from Lafarge Plc and other reliable third parties to accord the credit rating included:
- the 2014 audited annual financial statements (plus four years of comparative numbers),
- budgeted income statements for 2015 for WAPCO operations, AshakaCem and LSAH,
- unaudited management accounts to June 2015,
- a completed rating questionnaire containing information on Lafarge Africa Plc,
- Insurance policy document for WAPCO,
- breakdown of facilities available and related counterparties
- corporate governance and enterprise risk framework

The ratings above were solicited by, or on behalf of, Lafarge Africa Plc, and therefore, GCR has been compensated for the provision of the ratings.


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