Johannesburg, 30 May 2017 — 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 maintains strong market positions in its core mining explosives and chemical segments. While the group is exposed to the depressed domestic economy and the cyclical mining and manufacturing industries, AECI has been able to largely maintain business volumes due to efficiencies and price competitiveness. Moreover, the increasing diversity of customers and supplied industries ameliorates this risk somewhat, although revenue growth (excluding bulk land sales) slowed to 4% in FY16 from 9% on a like-for-like basis in FY15. The continued focus on expanding operations geographically and broadening the range of higher margin chemical products should support strong earnings growth in the medium term.
AECI is expected to continue to deliver resilient operating results over the rating horizon, despite a persistent challenging operating environment. To this end, successful execution on improving expense efficiencies have supported margins in the key explosives and chemical operating units, with the overall decrease to 7.8% in FY16 (FY15: 9%) partly a consequence of non-repetitive bulk land sales.
AECI’s businesses remain strongly cash generative, and with improved management oversight, more predictable working capital movements are anticipated going forward. With cash flow stability across the cycle projected, and relatively moderate capex requirements, AECI is likely to generate substantial excess cash over the medium term, which could be used for potential future investments or dividends.
After peaking at R3.3bn in FY15, total debt registered at a review period low of R1.8bn at FY16. AECI’s minimal balance sheet leverage, substantial availability under its committed credit lines and large cash holdings provides the group with high financial flexibility.
Upward rating migration could follow significant increases in market share in the specialty chemicals businesses, with strong and sustainable credit metrics displayed throughout the medium-term economic cycle. Ratings pressure could result if AECI’s credit metrics deteriorated markedly from a weaker-than-expected operating performance, coupled with excessive debt from a substantial increase in investments or acquisitions, or deteriorating cash balances.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (July 2015)
|Long term: A(ZA)
Short term: A1(ZA)
Last rating (June 2016)
|Long term: A(ZA)
Short term: A1(ZA)
|Senior Analyst: Corporate ratings|
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2017
AECI issuer rating reports (2015-16)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|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.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or “’Evolving’ (the rating symbol may be raised or lowered).|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings 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 2016 audited annual financial statements (plus prior year of comparative numbers)
- Analyst presentations
- A breakdown of debt facilities available at April 2017
- 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.