Johannesburg, 05 February 2016 — Global Credit Ratings has assigned initial national scale ratings to FTG Holdings Limited of BB+(KE) and B(KE) in the long term and short term respectively; with the outlook accorded as Stable. Concurrently, a Commercial Paper rating of B(KE) has also been accorded. The rating(s) are valid until September 2016.
The rating exercise was performed in September 2015 with the public results only released today.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to FTG Holdings Limited (“FTG”) based on the following key criteria:
FTG is a medium size manufacturer with diverse interest in plastics and FMCG products. What combines the entities within the group is an ability to initiate and manage light manufacturing enterprises, targeting a common customer base. Nevertheless, the business is underpinned by being the largest manufacturer of plastic bulk water storage, processing and transportation tanks, as well as related products in East Africa.
Revenue has grown steadily over the review period to KES1.8bn in F14 and by an annualised 26% to KES1.1bn at 1H F15. However, profitability has been more erratic, impacted by the start-up nature of several of the businesses, cash flow constraints and external factors. Weak operating profit of KES139m was reported in F14 due to liquidity constraints and rising expenses; but following the listing, operating profit climbed by an annualised 38% to KES96m in 1H F15, with the operating margin widening to 8.6% (F14: 7.9%). Moreover, a much reduced interest charge saw net profit more than double to KES76m at 1H F15 (excluding the impact of the asset sale in F14). Budgets indicate that the operating performance 1H F15 should be sustained for the full year.
While FTG has, historically, reported relatively high gearing, the proceeds from the share issue, combined with retained earnings, have seen the proportion of funding shift in favour of equity. Thus, gross debt decreased to KES191m at 1H F15 (FYE14: KES213m). Combined with the high cash balance and stronger earnings, net debt to equity fell to just 25% at 1H F15 (FYE14: 36%) and net debt to annualised EBITDA to 62% (FYE14: 88%). FTG expects net debt to decrease further by FYE15. Given its growth, cash utilisation has been high and largely expended on working capital, interest and rising tax paid. Nevertheless, aside for F14, FTG has reported positive operating cash flows over the review period.
FTG’s fortunes remain closely linked to the performance of the plastics business. To this end, the ongoing infrastructure development in the country, and the broader region, bodes positively for demand for Roto Moulder’s products. With the working capital constraints having eased, the company should be able to fully meet this demand, with the higher volumes also likely to generate economy of scale benefits. However, the investments being made into FMCG products to increase capacity and market share, while necessary for growth, do entail higher financial risks and add to the risk profile of the group as a whole.
Positive rating movement is dependent sustained profit growth over the medium term, driven by rising revenue and firmer margins, combined with the maintenance of moderate gearing metrics. The demonstrated ability to successfully conclude and integrate new acquisitions that will bolster the scale of the FMCG operations, will aid in this regard. Conversely, weaker profitability due to external pricing pressures or the inability to adequately expand in competitive markets, as well as renewed working capital pressures, could all result in a deterioration of earnings metrics. Higher than expected debt and gearing metrics due to weaker earnings or debt funded acquisitions would also be negatively considered.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (September 2015)|
|Long term: BB+(KE)|
|Short term: B(KE)|
|Commercial Paper: B(KE)|
|Sector Head: Corporate & Public Sector Debt Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Commercial Paper||Commercial paper is a negotiable instrument with a maturity of less than one year.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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.|
|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.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Prospectus||A document produced by a company issuing new equity or debt, which provides detailed information about the offering and the company.|
|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.
FTG Holdings 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.
The credit rating/s has been disclosed to FTG Holdings Limited with no contestation of the rating.
The information received from FTG Holdings Limited and other reliable third parties to accord the credit rating(s) included;
- Audited financial results of Company per 31 December 2014
- Two prior years of pro-form consolidated annual financial results
- Pre-listing prospectus
- Unaudited interim results of Company per 30 June 2015
- Budgeted income statement for 2015
- A breakdown of facilities available and related counterparties
- Presentation covering the group and its subsidiaries
- Corporate governance and enterprise risk framework
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 BB+(KE) to FTG Holdings Limited; Outlook Stable.