Announcements

GCR accords ASL Limited a first time rating of BBB+(KE), Outlook Stable.

Johannesburg, 19 May 2017 — Global Credit Ratings has today accorded ASL Limited a first time national scale long term debt rating of BBB+(KE) and a national scale short term debt rating of A2(KE). Concurrently a Commercial Paper rating of A2(KE) was also accorded. The ratings have been accorded a Stable outlook, and are valid until May 2018.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to ASL Limited (“ASL”) based on the following key criteria:

With a history stretching back more than 70 years, ASL is a leading supplier of building and hardware products in Kenya. Over the years, it has diversified the business into the manufacture of stainless steel products, heavy fabrication, and wire and cables, as well as recently establishing a chemicals trading business. ASL is part of the Ramco Group of companies which is a conglomerate of 40 companies based in East Africa. The group has a diverse portfolio in print, hardware, office supplies, manufacturing and services.

ASL’s sales are conducted through a wide network of dealers and distributors, as well as through showrooms and warehouses across major cities. In addition, it benefits from shared services and business relationships across the broader Ramco group of companies. The synergies that are derived from the different divisions are a core strength of ASL. Thus, its trading business is a major customer of its various manufacturing units, underpinning a stable base of demand off of which further growth and product expansion can be derived. Similarly, customers in the manufacturing units are also suppliers to its trading operations. As a result, entrenched relationships have been developed across the value chain that continue to support customer loyalty, negligible bad debts and facilitate further product expansions.

Although revenue is largely unchanged over the review period (due to the sale of the packaging and paper operations), the operating margin doubled from 5.7% in FY12 to 10.9% in FY16. This could be attributed to a firmer gross margin as a result of an increase in imported product sales, as well as tight cost controls across the operations. Nevertheless, although earnings have been substantially higher since FY14, they are exposed to volatility through currency fluctuations.

ASL’s approach is to fund expansion or new ventures through a 1/3 equity 2/3 debt split. Nevertheless, the net gearing ratio has edged up from 205% in F12 to a high 266% at FY15, before reducing somewhat to 239% at FY16 as profitability improved. GCR considers the high proportion of short term debt, in excess of 70% of the total to imply liquidity risk, but this is mitigated by the strong access to debt financing available to the group. In this regard, the large number of banks providing funding to ASL, the adequate amount of unutilised debt capacity, as well as with access to other sources of credit add to the high degree of financial flexibility.

Earnings based credit metrics do evidence some pressure with net debt to EBITDA registering at an elevated 477% and 461% at FY15 and FY16 respectively, whilst net interest coverage declined to just 1.8x in FY16, as interest payments spiked, from a review period high of 2.5x at FY15.

ASL is well positioned to benefit from the strong growth in the Kenyan economy, and particularly the increased investment in housing. Given the large divergence between supply and demand, such positive conditions should persist which should ensure rising demand for ASL’s core products.

Sustained growth in revenue and earnings that allow ASL to cover its interest obligations at a level of 3x or more, while also reducing earnings based gearing to below 400% would lead to upwards rating actions. Access to longer term financing could ease some liquidity pressure and would also be positively considered. Conversely, increased debt utilisation, even to fund the expansion of the business could impair debt service metrics. Were earnings to decrease, debt serviceability would also experience significant pressure.

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (May 2017)  
Long term: BBB+(KE); Short term: A2(KE)  
Outlook: Stable  
   

ANALYTICAL CONTACTS

Primary Analyst  
Eyal Shevel  
Sector Head: Corporate and Public Sector Ratings  
(011) 784-1771  
shevel@globalratings.net  
   
Committee Chairperson  
Sheri Few  
Senior Credit Analyst  
(011) 784-1771  
few@globalratings.net  

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2017

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S Corporates GLOSSARY

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
Economies Of Scale Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.
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.
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 Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
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. 
Long-Term Rating A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
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 Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Short-Term Rating A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
International Scale Rating LC International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.

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 ratings were 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.

ASL 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 ratings have been disclosed to ASL Limited with no contestation of the ratings.

The information received from ASL Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial statements for F16, and four years comparative numbers
  • Full details of funding facilities
  • Organisational charts
  • Ramco group information material

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 ASL Limited a first time rating of BBB+(KE), Outlook Stable.

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