CREDIT RATING ANNOUNCEMENT
Lagos, 31 March 2020 – GCR Ratings (“GCR”) has accorded a first-time national scale long term and short-term Issuer ratings of BBB(NG) and A3(NG) respectively to MeCure Industries Limited (“MeCure” or “the Company”). The outlook is Stable. The ratings will expire on 31 March 2021.
MeCure is a well-entrenched Nigerian pharmaceutical manufacturer, whose modest but defensive market position is underpinned by growing capacity, as well as established supply chain and independent distribution networks.
Product innovation and higher traded volumes supported strong revenue progression in most of the years under review, barring FY19, when factory remodelling curtailed growth. Management expects an average growth of 30% p.a. in the next two years supported by planned capacity expansion. However, FY20 performance could be constrained by the heightened economic uncertainty.
Company margins continue to trend above the industry, with EBITDA between 20%-25% of revenue in the past three years despite some variability in volume. Although the domestic industry mostly imports active pharmaceutical ingredients (“APIs”), MeCure has some interim protection against potential supply chain disruptions from four months of inventories on hand. It, however, remains susceptible to foreign currency risks, imported inflation and the downstream contagion of the COVID-19 crisis on the economy, which could constrain its volumes and margins over the rating horizon.
Retained cash flows have been volatile historically, mostly due to working capital pressures and more recently, investment in additional capacity. Although favourable creditor terms help MeCure to better manage liquidity, maintaining optimal stock levels still places significant pressure on the Company’s operating cash flows.
Consequently, MeCure evidences high net debt levels, which equated to 3.3x the Company’s equity at FY19 (FY18: 4.2x). Although net debt to EBITDA has been moderately high, trending within the 1.4x-2.2x range, interest coverage has remained below 2.0x since FY17 due to high finance costs. These metrics currently constrain the credit risk profile.
Management expects to achieve double digit interest coverage and plans to manage debt to EBITDA within the 0.5x-1.5x range over the rating horizon, on the back of improved cash generation, a capital injection, as well as more competitively priced debt facilities and notes issued under a planned N5.5bn bond programme. In this regard, a demonstrated commitment to a more conservative funding profile would be positively considered.
The Company’s funding flexibility is also currently constrained by limited unutilised credit lines, with 90% of debt maturing within 12 months. Liquidity pressure could emanate from higher dollar-denominated obligations (c.60% of debt) on translation due to a weakening of the Naira.
Looking ahead, sustained profitability, enhancement of the credit protection metrics, and a successful debt restructuring could bode positively for the ratings. Conversely, significant underperformance relative to earnings which further constrains debt service and earnings-based leverage would be negatively viewed.
NATIONAL SCALE RATINGS HISTORY
|Long term||BBB(NG)||Stable||March 2020|
|Short term||A3(NG)||Stable||March 2020|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until 31 March 2021.
MeCure participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to MeCure.
The information received from MeCure and other reliable third parties to accord the credit rating included:
- Audited accounts for the year ended 31 December 2019 (plus historical three years of comparative numbers);
- Financial projections for 2020-24;
- A breakdown of facilities available and related counterparties;
- Information specific to MeCure was also received.