Johannesburg, 27 June 2016 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to AECI Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to AECI Limited (“AECI”) based on the following key criteria:
AECI’s ratings are supported by the company’s strong position as a leading manufacturer of explosives and chemical products for the global mining industry. While the group’s significant exposure to the struggling mining industry is noted, AECI has been successful in maintaining explosive volumes through strong client relationships. Although this has been at the expense of margin, it positions AECI strongly to benefit from the eventual recovery in mining activity. Cognisance is also taken of the relative repositioning of the business portfolio geographically and towards higher margin specialty chemicals, which has provided diversification benefits through the downward commodity cycle.
Overall revenue increased by 6% to R18bn in F15, aided by explosives volume growth in certain regions or sectors, the integration of acquisitions in specialty chemicals, as well as the contribution from bulk land sales. Earnings also remained resilient despite challenging market conditions, underpinned by a continued robust performance in specialty chemicals, which reported higher margins of 11.3% in F15 (F14: 10.7%). Overall, revenues and earnings are expected to remain flat going forward due to the high uncertainty in the global economic outlook. Moreover, following the large bulk land sales over the past few years, there remains little surplus property and thus earnings from land sales will not be material going forward.
The group’s conservative capital structure, characterised by comfortable gearing measures, is considered a rating strength. Despite the ramp up in debt to R3.3bn at FYE15, net gearing was reported at 46% (FYE14: 33%), and net debt to EBITDA at 53% (FYE14: 31%). Leverage measures are expected to remain close to these levels going forward, as there are no large debt-funded capital expenditure plans.
Consistent strong cash generation has been sufficient to fund capital expenditure and working capital needs over the review period. While the large shareholder distributions tempered retained cash flow in F15, this is not expected to repeat in F16. As such, AECI’s strong liquidity position is supported by sizeable cash holdings of R2.2bn at FYE15, as well as its diverse funding sources, with R1bn in unutilised facilities available. The successful refinancing of R1.1bn in near-term debt maturities post year-end is also positively noted.
Upward rating migration could stem from the successful expansion into new regions and product lines that result in a steady increase in earnings, whilst maintaining strong cash flows and moderate gearing. Negative rating action could follow a further deterioration in the operating environment that results in a decrease in operating profit due, inter alia, to weaker revenue, margin compression or rising bad debt. Further, a significant increase in debt to fund acquisitions or working capital could place pressure on the ratings.
|NATIONAL SCALE RATINGS HISTORY|
Initial/last Rating (July 2015)
|Long term: A(ZA)
Short term: A1(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
AECI issuer rating report (2015)
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 CORPORATE GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commodity||Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|EBITDA||Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.|
|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.|
|Leverage||Or Gearing, 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.|
|Liquidity Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
AECI 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 AECI Limited with no contestation of the rating.
The information received from AECI Limited and other reliable third parties to accord the credit ratings included:
- The 2015 audited annual financial statements (plus prior year of comparative numbers)
- Analyst presentations
- A breakdown of debt facilities available and related counterparties at FYE15 and April F16
- Other public information
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 affirms AECI Limited’s rating of A(ZA); Outlook Stable.