Announcements Corporate Rating Alerts

GCR affirms AECI Limited’s national scale issuer ratings at A+(ZA)/A1(ZA). Outlook Stable

Rating Action

Johannesburg, 11 June 2021 – GCR Ratings (“GCR”) has affirmed the national scale long term and short-term issuer ratings assigned to AECI Limited (“AECI” or the “group”) of A+(ZA) and A1(ZA) respectively, with a Stable Outlook.

Rated Entity Rating class Rating scale Rating Outlook / Watch
AECI Limited Long Term Issuer National A+(ZA) Stable Outlook
Short Term Issuer National A1(ZA)

Rating Rationale

The ratings reflect the group’s earnings resilience and stable cash flow generation throughout COVID-19, supported by strong market positions and business diversification, whilst also maintaining conservative financial policies and very good liquidity.

AECI’s strong business profile is underpinned by leading positions in commercial mining explosives and chemicals manufacturing, where it one of the five largest global suppliers. The group’s business profile also benefits from integrated processes, a strong supply chain, as well as good end-market and geographic diversification of revenues. This is somewhat counterbalanced by AECI’s relative concentration of sales to mining and high exposure to sub-Saharan Africa (which continues to represent around 80% of revenues), where socio-political factors could curtail mining productivity.

AECI experienced mixed demand across its business segments as a result of the COVID-19 pandemic. Some operating activities were disrupted which negatively impacted revenues and earnings, which saw certain businesses evidence material goodwill impairments. Nevertheless, the group’s business diversity and the relative counter-cyclicality of the product mix, together with savings from past/ongoing optimisation initiatives helped to support margins during a very difficult year. EBITDA registered 9.7% lower at R2.9bn in FY20, with the EBITDA margin holding relatively steady at 11% (FY19: 12%). GCR does expect firmer margins in the mining and agri divisions as activity continues to pick up amidst the more favourable operating environment, whilst chemical volumes should also improve on the back of new road contracts, translating into an overall profit recovery for the group in FY21.

The ratings are also supported by the group’s prudent financial management, reflecting low debt leverage, a disciplined approach to shareholder returns and acquisitions, and very good liquidity. AECI’s debt structure is diversified with a well laddered maturity profile. Net debt to EBITDA reported at a lower 0.8x at FY20 (FY19: 1.2x) and we expect to continue to see conservative gearing in view of the settlement of some maturities over the rating horizon. Interest coverage registered at a sound 10.5x (FY19: 7.1x), while operating cash flow coverage of debt strengthened to 52% (FY19: 30%), as a result of tight working capital management and robust cash flows, with these metrics expected to remain at strong levels. Notably, the group has not had to seek any covenant relief measures, and we do not expect covenant pressures in view of the ample current headroom.

GCR expects AECI to maintain a very comfortable liquidity cushion going forward, with the Uses vs. Sources coverage ratio estimated at least at 2.0x over the next 12 months. Funding characteristics are strong with solid access to both the bank and capital markets, and with ample unutilised committed lines of credit and ongoing strong cash generation will ensure the group has adequate liquidity to support capital spending needs, dividends and the settlement of debt maturities over the rating horizon.

Outlook Statement

The Stable Outlook reflects our expectations that the group will continue to demonstrate a stable credit profile through the cycle, supported by its strong diversification and low leverage.

Rating Triggers

An upgrade of the ratings could follow sustained earnings growth and higher profit margins, whilst simultaneously maintaining strong debt serviceability metrics and liquidity coverage. Further expansion in developed market operations could also support improved ratings. The ratings could be lowered from a sustained erosion in profitability, liquidity decreases, or if the group adopts a more aggressive financial policy that weakens its credit profile.

Analytical Contacts

Primary analyst Sheri Morgan Senior Analyst: Corporate Ratings
Johannesburg, ZA Morgan@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
GCR Rating Scales Symbols and Definitions, May 2019
Criteria for Rating Corporate Entities, May 2019
GCR’s Country Risk Score report, March 2021
GCR’s SA Corporate Sector Risk Score report, April 2021

Ratings history

AECI Limited

Rating scale Review Rating class Rating Outlook/Watch Date
Long Term Issuer Initial National A(ZA) Stable Outlook Jul 2015
Short Term Issuer National A1(ZA)
Long Term Issuer Last National A+(ZA) Stable Outlook Aug 2020
Short Term Issuer National A1(ZA)

Risk Score Summary

Factors & sub-factors Risk scores
Operating environment 10.75
Country risk 6.75
Sector risk 4.00
Business profile 2.00
Competitive position 2.00
Management & governance 0.00
Financial profile 2.00
Earnings profile 0.00
Leverage and cash flow 1.00
Liquidity 1.00
Comparative profile 0.00
Government support 0.00
Peer analysis 0.00
Group support 0.00
Total Risk Score 14.75

Glossary

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.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to 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.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings process 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 ratings have been disclosed to the rated entity. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

The rated entity participated in the rating process via management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered to be adequate, and has been independently verified where possible. The information received from the rated entity and other reliable third parties to accord the credit ratings included:

  • The audited financial results for December 2020
  • Four years of comparative audited numbers
  • Industry presentation for 2020
  • Debt facility details as of December 2020 and YTD 2021
  • SENS releases
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