GCR has reaffirmed AICO Africa Limited’s (“AICO”) Zimbabwe national scale rating of BBB- (triple B minus) and A3 (single A three) for the long and short term respectively. However, given the persistent challenges in the domestic operating environment, particularly the elevated cost of debt and capital renewal, Rating Watch was maintained.
AICO is a diversified agro-industrial group with core competencies in crop seed development and marketing, the ginning and distribution of cotton, as well as a market presence in the FMCG segment. The group’s primarily export-oriented businesses continue to sustain operations, reducing exposure to the challenging domestic environment. Furthermore, stable Seedco earnings have reduced the group’s susceptibility to the volatility of cotton prices, as well as the adverse effects of elevated competitive pressures that have threatened viability in recent years. With regulatory amendments set to reduce these challenges even further, the group’s turnover and profitability from the seed and cotton businesses is expected to improve notably in the medium term. Olivine operations, however, continue to be curtailed by liquidity and working capital constraints, resulting in persistently low production levels. In this regard, the earmarked capital injection and debt restructuring are critical.
Higher cotton prices, coupled with strong seed volumes, underpinned a 29% increase in turnover to US$211m in F11. Profitability was driven by the seed business, which accounted for a high 51% of F11 gross profit, compared to 32% from cotton and 8% from FMCG. While the operating margin virtually doubled to 16% in F11, nearly 50% operating income was consumed by the sizeable net finance charge. As such, while net income rose to US$17.5m (F10: US$2.4m), this was well behind target.
Seasonal changes in gearing levels are largely attributed to fluctuating working capital requirements typical of the industry. Nonetheless, gearing metrics have deteriorated since dollarisation, albeit AICO has consistently secured facilities to fund the seed and cotton seasons, mainly from international financial institutions. While comfort is drawn from the fact that debt is secured by finished goods inventories and receivables, constrained profitability remains a source of concern. AICO anticipates F12 revenue growth to be primarily driven by commodity price appreciation, as volumes are expected to increase marginally. Assuming that profitability targets are met, credit protection metrics are projected to register moderate improvement from F11 levels.
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