GCR has downgraded Dana Group’s (“Dana”) national scale credit rating to BB+(NG) (double B plus) in the long term and B(NG) (single B) in the short term. The Series 1 Bond Issue under the Domestic Medium Term Note Issue has also been accorded an Issue rating of BB+(NG) (double B plus). The rating reflects the weaker operational performance of Dana in F11 and for the YTD F12, as well as excessive gearing levels. While some additional protection has been afforded to bondholders, the recovery rate is not sufficiently improved to warrant a rating uplift on the Series 1 Issue.
Despite Dana’s strong market presence in a wide range of businesses, reduced volumes in key segments saw revenue decline 13% in F11. Primarily, earnings were impacted by the substantial decrease in revenue from the Food division. While revenues in the Pharmaceutical business increased slightly in F11, operating profit decreased 16% on the back of higher development costs and weaker sales in some core products. Dana Plast was the only business to report an improved performance as the division benefitted from the procurement of a large quantum of raw materials at comparatively lower prices. Overall, operating profit was marginally higher at N1.3bn (F10: N1.2bn), but fell well short of budget.
Of greater concern than the underperformance of operations, is the group’s very high gearing levels. Net gearing registered at 231% at FYE11, with net debt to EBITDA of 625%, both more than double the forecast level. Liquidity issues were somewhat addressed with the issuance of a 7 year N8bn bond towards the end of F11. Nevertheless, such high gearing metrics and low interest coverage are not supportive of an investment grade rating.
Looking ahead, Dana is confident that its aggressive growth prospects are attainable, albeit the subdued performance in F11 has pushed out forecasts by a year. However, management accounts for 1H F12 indicate an underperformance relative to budget, calling into question Dana’s ability to meet forecasts, particularly in light of the challenging economic environment. Thus negative pressure remains on the rating.
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