GCR has accorded Mumias Sugar Company Limited (“Mumias”) a domestic KShs currency long term rating of A+ (single A plus) and a short term rating of A1 (single A one). The rating is an indication of Mumias’ high credit quality and good protection factors. It also signals the company’s excellent liquidity factors, resulting in high certainty of timely payments to creditors.
Mumias is the leading sugar producer in Kenya, accounting for around 50% of local production and providing direct or indirect employment to thousands of people. However, the company has largely reached the mature phase of its life cycle, characterised by limited growth prospects, but robust earnings and cash flows. Nevertheless, F10 proved to be a record year, as Mumias benefited from higher production levels and an increase in the selling price of sugar. Revenue rose to a review period high of KShs15.6bn, while operating profit doubled to KShs2.2bn.
Continued strong earnings have led to rising equity values, while minimising the need for external borrowings. Where debt has been assumed it was directed towards specific capex projects and repaid timeously. In this regard, after gross debt spiked at the initiation of the cogeneration project in F09, debt levels declined in F10, with net gearing falling to 8% at FYE10 (FYE09: 29%) and net debt to EBITDA decreasing to 29% (FYE09: 163%).
With little scope to expand sugar production in the short term, Mumias is focusing on developing complementary lines of business to drive growth. These include electricity cogeneration, ethanol production and bottled water, all of which can all be produced from the by-products of sugar milling. With the cogeneration plant having largely been completed (and expected to reach full capacity in F11), the company’s major focus is on the ethanol production plant. Cost of the plant is budgeted at US$45m, of which US$25m will be funded internally and US$20m through a loan from a consortium of banks. Ethanol production is expected to begin in early 2012 and is forecast to generate around US$20m in annual revenue. The smallest of projects is the US$5m bottled water plant. Mumias plans to have the plant operational by 2H 2011.
Utilising new debt to fund the new projects will result in a temporary spike in key gearing metrics. However, debt serviceability ratios are forecast to remain firm and continued cash generation should allow for repayments to proceed smoothly over the life of the debt. In addition, the new projects are expected to bolster revenues by around 20% over the next three years.
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