Johannesburg, 01 Dec 2015 — Global Credit Ratings has today assigned national scale ratings to Sappi Southern Africa Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Sappi Southern Africa Limited (“SSA”) based on the following key criteria:
Sappi Limited is one of the leading global players in the paper and pulp industry. Although the structural decline in the demand for paper has negatively impacted earnings in recent years, the group has focussed its operations on coated and specialty papers. These are areas where it has significant expertise and intellectual property and can thereby maintain a significant market share. In addition, Sappi Limited’s position as the largest supplier of dissolving wood pulp (“DWP”) provides important diversification from paper and packaging and now accounts for approximately half of group EBITDA.
SSA has strong market positions in all its domestic paper and pulp businesses. Nevertheless, in response to market trends, the company has sold or closed much of it production capacity in certain generic product lines where there is high competition. Rather, it has focused on more specialised products and on products where its integrated business model provides a quality and cost advantage. In this regard, SSA’s extensive forests (covering 496,000ha) provide an important competitive advantage in terms of access to raw materials and quality control.
Having converted mill capacity to produce cellulose, SSA derives more than 50% of its sales from DWP, which is exported mainly to the textile industry and priced in USD. Thus, rising demand for DWP and the wider margin earned than traditional pulp products, combined with the ZAR depreciation have underpinned robust growth in SSA’s revenue from R12.1bn in F12 to an expected R15.5bn in F15. In conjunction, SSA’s earnings have risen strongly over the same period, with operating profit of R2.3bn reported in F14 and an around R2.9bn in F15. Combined with lower net interest and fewer impairment and restructuring costs, as well as moderate working capital requirements, this has translated into robust cash generation. As rising earnings and strong cash flows are expected to be sustained, this should allow SSA to meet all capex and debt redemption requirements over the medium term.
SSA has demonstrated a conservative funding approach by withholding dividends to ensure sufficient cash has been available to weather market turbulence and meet restructuring and capex costs. Accordingly, gross debt decreased from R3.8bn at FYE10 to R2.4bn at FYE15, whilst retained earnings saw cash holdings rise from R487m at FYE13 to R3.4bn at FYE15. Accordingly, SSA’s gearing metrics have remained modest over the review period and evidenced a declining trend, with net ungeared position reported at FYE15. SSA expects to maintain its net cash position over the medium term, while it has access to almost R1.3bn in unutilised debt facilities with some of the major South African banks, underpinning strong liquidity.
The weak ZAR should support further revenue growth in F16, while cementing SSA’s position as a low cost producer of DWP.
A ratings upgrade is dependent on sustained growth in earnings and cash flows over the medium term, demonstrating the long term benefits of the more specialised business lines. Conversely, a further contraction in key market segments, leading to lower volumes and necessitating further impairments and restructuring could lead to a ratings downgrade.
|NATIONAL SCALE RATINGS HISTORY|
|First time rating|
|Sector Head: Corporate & Public Sector Debt Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2014
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Sappi Southern Africa Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
Credit rating/s has been disclosed to Sappi Southern Africa Limited with no contestation of the rating.
The information received from Sappi Southern Africa Limited and other reliable third parties to accord the credit rating(s) included;
- audited financial results for Sappi Limited for 30/09/2014, as well as five years comparative financial statements.
- reviewed results for Sappi Limited for 30/09/2015
- audited financial results for Sappi South Africa Limited for 30/09/2014, as well as five years comparative financial statements.
- reviewed results for Sappi South Africa Limited for 30/09/2015
- quarterly results presentations (2012-2015)
- debt update per June 2015
- details of funding facilities
- financial projections for Sappi South Africa for 2015-2020
- corporate governance and enterprise risk framework; and
- industry comparative data
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.
GCR accords an initial rating of A(ZA) to Sappi Southern Africa Limited; Outlook Stable.