Lagos, 31 March 2022 – GCR Ratings (“GCR”) has affirmed SFS Capital Nigeria Limited’s national scale long and short-term issuer ratings of A-(NG) and A2(NG) respectively; with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook|
|SFS Capital Nigeria Limited||Long Term Issuer||National||A-(NG)||Stable|
|Short Term Issuer||National||A2(NG)|
SFS Capital Nigeria Limited’s (“SFS Capital” or “the manager”) ratings balances its strong expertise in Real Estate Investment Trust (“REIT”) management, fairly diversified asset mix, moderately sound liquidity, ungeared balance sheet, and its modest market position.
SFS Capital is a mid-tier player within the Nigerian asset management space, with total Assets Under Management (“AUM”) of N81.9bn and an estimated market share of 3.7% as at 31 December 2021. Positively, the manager has consistently demonstrated strong expertise in REIT management, as evidenced by the fact that it currently manages two of the three publicly listed REITs in Nigeria. Also, included under its AUM are four mutual funds, which are managed on both discretionary and non-discretionary basis. While concentration by investors is considered low, with the twenty largest investors constituting 8% of total AUM at FY21, geographic diversification is viewed to be limited, as all revenue is derived from the local market (Nigeria) in line with industry trends. Going forward, SFS Capital expects further increase in its client base and AUM, through the expansion of the size of the existing REIT Funds as well as digital offerings in 2022. Management and governance is considered neutral to the rating, in line with peers.
Leverage and cash flow assessment is a positive ratings factor, predominantly underpinned by the ungeared balance sheet, due to the nature of its operations and typical of Nigerian asset managers. We expect this trend to be sustained over the rating horizon.
Earnings is considered sound in support of the ratings. SFS Capital’s revenue stream has been stable and largely derived from management and commission fee income, contributing 76% of total revenue as at FY21 unaudited position (FY20: 72%). EBITDA margin stood at 35.9% at FY21 (FY20: 39.6%) and averaged 38.7% over a five-year period, which is considered strong and remained above the 35% GCR benchmark. Return on equity was slightly lower at 14.4% in FY21 (FY20: 14.8%) due to an increase in operating costs, while return on assets increased slightly to 2.0% at FY21(FY20: 1.6%), comparing well with peers. We expect earnings to remain strong over the rating horizon, particularly with expected growth in the REIT funds coupled with cost curtailment measures being adopted by management.
Liquidity is considered modest. The manager maintained sizeable investment in treasury bills and other short-term money market instruments to support the current operational scale. Coverage of uses versus sources of funds was estimated at 1.08x at FY21 (FY20: 1.02x) and we expect the position to continually improve on the back of expected growth in business volume.
The stable outlook balances our expectation that SFS Capital will continue to maintain a conservative financial profile. With the REITs expansion plan, we expect some AUM growth and improved performance, with minimal risk exposure.
The ratings may be reviewed upward on the back of significant improvement in competitive position, substantial AUM growth, as well as improvement in earnings. However, a material reduction in AUM resulting in lower earnings capacity, decline in cash generating capacity or an introduction of sizeable debt to the balance sheet could result in downward rating movement.
|Primary analyst||Ifeoluwa Haruna||Financial Institutions Analyst|
|+234 1 904 9462
Senior Analyst, Financial Institutions
+234 1 904 9462
|Committee chair||Vinay Nagar||Senior Analyst, Financial Institutions|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, January 2022|
|Criteria for Rating Asset Managers, November 2019 (appendix to the Criteria for Financial Services Companies, May 2019)|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, December 2021|
|GCR Financial Institutions Sector Risk Score, December 2021|
SFS Capital Nigeria Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Long Term Issuer||Initial/last||National||A-(NG)||Stable||March 2021|
|Short Term Issuer||Initial/last||National||A2(NG)||March 2021|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||2.00|
|Management and governance||0.00|
|Cash flow and Leverage||2.00|
|Earnings vs. Risk||1.25|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|Leverage||Regarding corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to SFS Capital Nigeria Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
SFS Capital Nigeria Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from SFS Capital Nigeria Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2020
- Three years of comparative audited numbers
- Unaudited financial results as at 31 December 2021
- Other related documents.