GCR has reaffirmed Athi River Mining’s (“ARM”) national scale rating at A(KE) (single A) and A1(KE) (single A one) in the long term and short term respectively. However, in view of concerns regarding the adverse impact of possible delays in construction as well as other performance risks related to the Maweni expansion project, the rating outlook remains “Negative”. Persistently elevated debt levels and gearing metrics may trigger a rating review.
ARM is expected to strengthen its position as a leading cement producer in East Africa, given the considerably higher cement capacity that will accrue from ongoing capex. Specifically, following the completion of the US$130m plant in Tanzania in F13, the group will have total integrated capacity of 2.56 million tonnes per annum, making it the largest cement producer in the region. Although significant capex plans registered by key competitors and new entrants in the region will place pressure on margins, robust latent demand should support industry profitability in the medium to longer term.
Underpinned by rapid expansion, ARM’s revenues have registered a five year CAGR of 21%, increasing by 37% to KShs8.1bn in F11. As overheads remained relatively well controlled, the operating margin remained close to review period highs, at 21.5% in F11. This translated to a 32% rise in operating profit to KShs1.8bn (budget: KShs1.6bn). In view of sizeable capex, the group benefited from capital allowance benefits, translating to an effective tax rate of 16% in F11 (F10: 3%), against the statutory 30% applicable to corporate entities. Overall, NPAT nearly trebled to KShs1.2bn over the period under review, underpinned by a 15% net profit margin (F10: 18%).
Gearing metrics have, however, risen considerably over the review period to fund capex, with net gearing and net debt to EBITDA exceeding budget for two consecutive years, to register at highs of 174% and 472% respectively at FYE11. Gearing is projected to decline markedly from F14, once the Maweni project comes online in F13. Nevertheless, earnings from current operations are sufficient to service debt in the interim. The recently approved AFC convertible loan enhances financial flexibility, and its anticipated conversion to equity is supportive of lower gearing, although this is subject to the pace at which new capacity can be successfully bedded down.
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