GCR has downgraded African Oxygen Limited’s (“Afrox”) domestic ZAR currency ratings to A- (single A minus) and A2 (single A two) for the long and short term respectively, from A+ (single A plus) and A1 (single A one) previously. The ratings are indicative of high credit quality and sound protection factors. However, risk factors are elevated in periods of economic stress. The economic downturn has adversely impacted domestic operations since F08, driving a decline in turnover, persistent margin compression and volatile cash flows. Consequently profitability has fallen to review lows, as equipment failure and impairment charges compounded the effects of the challenging economic climate in F10.
Net debt declined for the second consecutive year to R842bn at FYE10 (FYE09: R914bn), as R354m in maturing debt was redeemed utilising internally generated funds. While gross gearing improved to 46% (FYE09: 57%), net gearing remained virtually unchanged at 33%. Net debt to EBITDA rose to 121% (FYE09: 104%) on constricted earnings, remaining well above projections. Generally, liquidity and debt servicing factors deteriorated in FYE10, falling behind initial expectations. Operating cash flow to total debt reduced to 35% (FYE09: 62%), and net interest cover remained at a review low of 3.3x. In addition, cash covered short term debt 1.1x, compared to 1.5x previously. Afrox had total facilities of R2.7bn in F10, with R1.4bn being committed at year end.
Going forward, management anticipates moderate top-line growth for the years F11-F14, underpinned by recovering demand in key sectors, and pipeline contracts in the region (which should provide steady annuity revenue streams). Capacity planning and strategic stocking initiatives to maximise efficiency have become central to Afrox’s broad profitability objective. As such, emphasis is being placed on bedding down current structures (including the recently rolled out ERP platforms), effectively managing energy consumption, and overall cost rationalisation. The group is also strongly prioritising plant modernisation, and is likely to adopt a more comprehensive intermediate term capex policy in order to maintain market share in key markets. Consequently, although net gearing is expected to remain close to FYE10 levels at FYE11, higher borrowings are likely in the medium term. Nonetheless, despite the likely increase in borrowings, net earnings-based gearing should improve as earnings strengthen.
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