Lagos, 15 January 2021 – Global Credit Ratings has assigned initial long-term and short-term national scale Issuer ratings of BBB(NG) and A3(NG) respectively to Eunisell Limited, with the outlook accorded as Stable. The ratings are valid until November 2021.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Eunisell Limited (”Eunisell” or “the Company”) based on the following key criteria:
Eunisell is a leading independent chemical solutions company, having established relationships with high profile trade and technical partners, strong and reputable multinational oil and gas clientele, and a moderately diversified products/earnings profile.
Key business risks are closely correlated to the highly cyclical upstream oil and gas industry/counterparties it caters to. However, Eunisell has mitigated this risk by focus on the Oil Field Chemicals (“OFC”) sector, which is less volatile and underpinned by long-term service contracts.
The Company has sustained an upward trajectory in the top line over the years, reflected in the 22.3% five-year CAGR to FY19, primarily driven by steady increase in traded volumes. Beyond the revenue decline in 1H FY20 owing to COVID-19 induced disruptions, GCR anticipates a stronger performance in 2H FY20 (Eunisell having procured sufficient inventory). Nevertheless, FY20 earnings are projected to be slightly be below FY19, before picking up in FY21 (barring a further exogenous shock).
Although, earnings have shown much variability through the cycle, due to the high direct cost base (particularly for the additives products), Eunisell has now identified opportunities within the higher margin OFC segment, with EBITDA margin widening by over 170 basis points y/y during 1H FY20. Underpinned by procurement efficiency initiatives, GCR expects firmer and more stable future earnings margins.
Working capital (“WC”) management has been fairly efficient, with debtors largely performing and suppliers’ terms generally favourable. This notwithstanding, cash absorptions have been reported intermittently over the cycle, with moderate pressures expected to persist as the Company increases inventory holding to meet projected demand. However, presuming steady operational cash generation over the medium term, net operating cash flows (“OCF”) should remain positive but will likely still provide low coverage of debt.
EBITDA coverage of net interests have been low in recent years (below 5x) but has strengthened to 7.4x during 1H FY20 (on the back of firmer earnings), and GCR expects it to be sustained above 8x over the rating horizon, driven by the anticipated stability of earnings. Positively, despite the variability in earnings, Eunisell has maintained earnings based gearing metrics at very conservative levels since FY17 (around 100%), as funding requirements have been supported by internal resources. However, the downsides include the high concentration of lending sources and the lack of committed facilities, which elevates refinancing risks, somewhat.
Eunisell’s liquidity coverage is considered fairly low, with just 1x barely covering its uses over the next 12 months, but there is ample covenant headroom. To ensure sufficient net OCF covers debt redemptions, it is critical that WC stabilises, through tighter debtors and inventory controls.
Substantial geographical diversification of earnings, sustained firmer EBITDA margins and improvement in the liquidity assessment could bode positively for the ratings. Conversely, termination of key supply contracts, material revenue loss, deterioration in profit margins (which weakens the credit protection metrics) and/or rapid escalation of debt position could trigger a downgrade.
NATIONAL SCALE RATINGS HISTORY
|Issuer – Long term||BBB(NG)||Stable||December 2020|
|Issuer – Short term||A3(NG)||Stable||December 2020|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
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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 expire in November 2021.
Eunisell participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Eunisell Limited.
The information received from Eunisell and other reliable third parties in according the credit rating included;
- 2019 audited annual financial statements (plus four years of comparative numbers),
- unaudited management accounts as at June 2020,
- long term financial forecasts,
- industry comparative data and regulatory framework,
- a breakdown of facilities available and related counterparties.
- Information specific to the rated entity and/or industry was also received
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.