Earnings remain a positive rating factor, underpinned by the sound revenue progression over the review period, despite the pervasive macro-economic headwinds. This is driven by a combination of higher traded volumes and increased selling prices. Nonetheless, operating costs have risen significantly in recent periods due to the spike in energy prices and the continuous Naira devaluation. Emzor has not been able to fully pass on the additional cost to customers, resulting in the EBITDA margin narrowing to 16.2% in FY21 from 20.3% in FY20. As of June 2022 (“1H FY22”), the margin improved slightly to 17.2%, supported by cost-saving measures and the contributions from new higher-margin products.
PAR is an African focussed gold mining company producing just over 200,000oz per annum. Operations are centred on two well established mining complexes, with substantial installed mining infrastructure. The Barberton area complex comprises three underground mines, Sheba mine, Consort Mine and Fairview Mine, as well as the Barberton Tailings Retreatment Plant (“BTRP”). The Evander complex comprises of the Evander underground mine and the Elikhulu tailing operations. Adding to its production mix, PAR recently acquired Mintails SA (Pty) limited (“Mintails”), which comprises a large tailings resource, with an estimated production at 50,000oz over an 11-year period. The group also has a prospecting concession in North Eastern Sudan, where exploration activity has commenced.
PAR is domiciled in the UK, but all operations are conducted from its South African corporate offices. PAR is dual listed on the AIM of the LSE, JSE Securities Exchange, and the A2X market, as well as having an American Depository Receipt programme. Its shareholder base comprises largely institutional investors, with around 40% of shareholders based in the UK.
The earnings assessment reflects the steady revenue progression enjoyed from its long-term power supply contract with
Nigerian National Petroleum Company Limited (“NNPC”). This is further supported by the high proportion of foreign
currency earnings, with 70% of invoices denominated in USD. The EBITDA margin declined to 66.7% in FY21 (FY20: 72.6%)
due to scheduled maintenance but rebounded to 70.6% in 1H FY22. GCR thus expects the margin to be sustained
around 70% over the outlook period, well above peers, underpinned by the favourable pricing. This pricing mechanism
prevents under-recovery of income in periods of low power consumption by the customer.
Notwithstanding the rising competitive pressure within its domestic and Pan-African markets, DCP has sustained a sound earning base and cash flows, with the EBITDA margin registering at 47% over the last five years to FY21, well above the industry average. However, higher inflationary pressure, gas supply shortages, and extended plant maintenance during 1H FY22 saw sales volume and earnings margin decline slightly, albeit revenue increased 17% y/y supported by higher selling price in December 2021 to offset rising costs.
AFL has the largest integrated steel mill in Nigeria with rolling and melting capacity of 300,000 and 330,000 MT per annum respectively, which mainly serves the premium segment (where the Company enjoys considerable monopoly power) and the mid-segment of the construction sector. The Company’s ‘AFL Rebars’ are certified by ‘CARES UK’ and thus deemed to be of international standards (and direct substitutes for imports), making them suitable for large-scale constructions such as bridges, skyscrapers, dams etc. From a standalone perspective, AFL has maintained a strong earnings profile with average annual revenue growth of 35% and EBITDA margin of 19% since 2017, mostly in line with the Group’s earnings profile. This has largely supported comfortable leverage and liquidity metrics historically, albeit that working capital pressures caused some volatility in operating cashflows throughout the review period. GCR notes that working capital pressures have emanated from inventory accumulation due to sustained capacity expansion. Also supportive of the leverage profile are facilities from the Group (typically accounting for around 40% of total debt) which are interest free and are potentially flexible with regards to repayments. The liquidity profile is also boosted by support from the Group, as well as access to a relatively diverse pool of local and international financiers.
The State’s IGR strengthened to N18.1bn in FY21 (FY20: N13bn) following improved collection measures and the
implementation of new legislation to broaden revenue streams. Nevertheless, IGR still only accounts for a low 17% during
FY21 (primarily from income tax) and the State remains heavily dependent on federal transfers, thus exposing its treasury
to the highly volatile federal oil revenues. Notwithstanding, total income increased by 26% in FY21 to N107.3bn supported
by the increase in Value Added Tax (“VAT”) allocation as well as capital receipts in the form of loans and grants. GCR
anticipates further capital inflows in the near term to facilitate the execution of planned infrastructural projects.
Despite the slightly lower power generation in FY21 due to scheduled maintenance, the top line remained resilient on the back of currency translation gains as earnings are indexed against USD. Although 1H FY22 results indicated an annualised 11% decline, GCR expects only a slight revenue growth of 3% in FY22 supported by higher rain yield in 2H FY22. Furthermore, GCR anticipates future earnings stability underpinned by the essential nature of electricity and the long-term agreement with Nigerian Bulk Electricity Trading Plc. However, this is counterbalanced by earnings concentration to a single buyer. NSP intends to further diversify its income stream through the direct sale of power to eligible customers, but this segment remains a negligible portion of revenue. Thus, GCR does not expect the customer profile to change meaningfully over the rating horizon.
JSE-listed KAP comprises a diversified portfolio of businesses that operate in select sectors of wood-based decorative panels, sleep products, automotive components, polymers, supply chain and road safety.KAP acquired DriveRisk on 1 December 2021 as an entry point into the road safety sector.
Hyprop is a JSE-listed REIT whose portfolio consists of mixed-use precincts underpinned by dominant retail centers in South Africa and Eastern Europe. Pre FY22, the Eastern European portfolio (“EE”) was previously held via its investment vehicle Hystead Limited (“Hystead”). Due to certain joint control features of the shareholding agreement, Hystead was not consolidated, although Hyprop owned 60% of the company and directly provided surety for 90% of Hystead’s debt. The FY22 “Europe transaction” saw Hyprop fully acquire the four retail centres from Hystead as well the underlying liabilities, resulting in the EE portfolio being consolidated at March 2022. GCR’s credit assessment has historically assumed full consolidation of the EE portfolio, in view of the significant shareholding, joint shareholder arrangements and guaranteed debt exposures.
Centum is an investment holding company domiciled in Kenya and listed on both the Nairobi Securities Exchange (NSE) and the Uganda Securities Exchange (USE). Centum’s current five-year strategy is named Centum 4.0 and spans the period FY2019 - 2024. In a shift from its previous strategy aimed at developing projects from inception, the focus of this strategy is building resilient and sustainable businesses out of the current portfolio or acquisition of cash generative businesses that are already market leaders, and which present Centum with an opportunity for value creation. Nevertheless, the intention is still to exit mature investments after a number of years to realise value and recycle profits into new undertakings.