Johannesburg, 19 Feb 2014 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to Aarti Steel Nigeria Limited of BBB(NG) and A3(NG) respectively; with the outlook accorded as Positive. The rating(s) are valid until 11/2014.
Global Credit Ratings has accorded the above credit rating(s) on Aarti Steel Nigeria Limited based on the following key criteria:
Aarti Steel Nigeria Limited (“Aarti or “the Company”) is engaged in the secondary processing of steel, iron and other related products. Although it remains a relatively small player, it has begun to carve out a strong position in the Nigerian steel market, with an estimated 25% market share of industry volumes in zinc galvanized roofing sheets. Its position is supported by the extensive steel industry and production experience of key shareholders. Ongoing capex projects, if successful, will significantly increase Aarti’s Nigerian production capacity and increase the range of products it sells.
While Aarti has generally witnessed robust revenue growth in line with expansion over the review period, revenue declined to N13.2bn in F12 (F11: N14.2bn) due to security threats in some parts of the North. Nonetheless, production efficiencies and scale economies have seen the EBITDA margin widen to 11.8% in F12 (F11: 8.2%) and further to 12.8% as at September 2013 (“3Q F13”). Similarly, NPBT rose 56% to N1bn in F12 and further by an annualised 36% as at 3Q F13. Underpinned by firm earnings, interest coverage improved from 3.2x in F11 to 4.9x at 3Q F13. Going forward, earnings are expected to improve even further as production is ramped up at all plants. While Aarti has historically met its budgets, some delays in capex are likely to push-out full production and income projections for a year.
As a result of capex and the working capital necessary to grow the business, debt has increased over the review period, to a high of N4.7bn at FYE12. However, the retention of dividends saw net gearing also improve to 104% and 60% at FYE12 and 3Q F13 respectively, while net debt to EBITDA declined to 274% and 146% respectively. Based on provisional figures from Aarti, net gearing remained around 60% (budget: 96%) as at FYE13, while net debt to EBITDA increased to 180% (forecast: 345%). The group has not revised its forecasts, but it is anticipated that gearing metrics may be lower than original budgets provided to GCR.
Successful completion of on-going capex is critical to a rating upgrade. This would help the attainment of budgeted revenue and earnings growth. Moreover, higher levels of production and a greater product range would improve Aarti’s competitive position in the domestic market and against imports. Conversely, delays in completion of capex projects could hinder attainment of earnings targets and have an adverse impact on credit protection metrics. In addition, greater recourse to debt than expected could also raise the company’s risk profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Nov/2012)|
|Long term: BBB(NG); Short term: A3(NG)|
|Last rating (Nov/2012)|
|Long term: BBB(NG); Short term: A3(NG)|
|Primary Analyst||Secondary Analyst|
|Kunle Ogundijo||Adekemi Adebambo|
|+23 41 462-2545||+23 41 462-2545|
|Sector Head: Corporates|
|+27 11 784 1771|
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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.
Aarti Steel Nigeria 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 Aarti Steel Nigeria Limited with no contestation of the rating.
The information received from Aarti Steel Nigeria Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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.