GCR has downgraded AICO Africa Limited’s (“AICO”) national scale ratings to BBB- (triple B minus) and A3 (single A three) for the long and short term respectively. The investment grade ratings depict adequate protection factors. However, cognisance was also taken of persistent challenges in the domestic operating environment, particularly the escalating cost of debt and capital renewal.
AICO is a vertically integrated agro-industrial group that dominates the growing, processing and distribution of Zimbabwean cotton. The group has maintained its market share by leveraging off linkages with suppliers to guarantee a significant proportion of the local crop through prefinancing. Furthermore, it is set to benefit from recent regulatory changes to the administration of the domestic cotton value chain that has seen a reduction in contractors and side-marketing. However, high US$ denominated procurement costs and overheads have constrained earnings in recent years. 1H F11 proved to be particularly arduous, with annualised turnover declining by 35% to US$53m, and the sizeable finance charge driving a US$12m pre-tax loss.
Seasonal changes in gearing levels are largely attributed to fluctuating working capital requirements typical of the industry and erratic cash flows. Nonetheless, the group has evidenced deterioration in gearing metrics over the past two years, with rising carryover debt.
AICO anticipates stronger sales volumes going forward, while broader earnings are expected to derive from the successful mitigation of cost overruns and improved operating efficiencies. Management is considering various alternatives to funds imperative expansionary
capex and working capital constraints, in a bid to reduce carryover debt, prohibitively high finance charges and drive medium term growth.
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