Announcements

GCR affirms AECI Limited’s rating of A(ZA); Outlook Stable.

Johannesburg, 10 May 2018 — 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:

The ratings are supported by AECI’s strong market position as a leading manufacturer and supplier of mining explosives and chemicals throughout Africa, with its specialty chemical segments gaining increasing end-market and geographical diversity through acquisitions. In this regard, the recent acquisition and integration of Much Asphalt and internationally based Schirm GmbH during FY18 are expected to enhance the chemicals franchise of AECI and unlock further synergies amongst its existing businesses. Nevertheless, note is taken of potential integration risk associated with large acquisitions.

While the two transactions are expected to cumulatively add R4.1bn in debt in FY18, AECI’s low leveraged balance sheet allows for significant funding flexibility, with net gearing and net debt to EBITDA having closed at 5.5% and 19% respectively at FY17. Accordingly, gross debt is projected to rise notably to around 2x EBITDA in FY18, key credit protection metrics are expected to remain commensurate with the rating level, including net debt to EBITDA no higher than 2.5x and net interest cover of at least 3.5x. That said, gearing headroom for any further large debt-funded capital expenditure plans in the near term has reduced.

Cognisance is taken of the very high front-loaded debt profile as a result of the acquisition bridge facilities and R500m in maturing debt. Management is currently negotiating longer term refinancing options, whilst liquidity flexibility is provided by ample unutilised bank facilities (c.R3.3bn) and around R1.2bn in cash balances.

The group posted a solid operational and financial performance in FY17, despite trading conditions remaining tepid. EBITDA and operating profit grew by 8% and 14% respectively, translating into firmer margins. GCR expects that future profitability will be underpinned by the resilience of core businesses and increasing contributions from recent acquisitions. This has translated into sound cash generation, although volatility in the working capital cycle is noted. Cash flows are expected to continue to benefit from organic growth projects and more stringent focus on operating and capital efficiencies, which should facilitate gradual deleveraging of the balance sheet.

Notwithstanding diversification efforts undertaken, the group continues to display a level of concentration risk in its product portfolio given its sizeable exposure to the cyclical mining sector, which is yet to show signs of a sustainable recovery, whilst volatile currency and raw material prices could continue to place pressure on overall growth. Positively, long standing client relationships and price competitiveness have helped to stem volume erosion in very challenging years.

Upward rating migration would depend on sound organic growth and visible earnings contributions from acquisitions and expansion projects, coupled with a track record of strong financial discipline through growth years. Ratings pressure could result if AECI’s credit metrics deteriorated markedly from a weaker-than-expected operating performance, or if additional debt-funded acquisitions were pursued and the working capital cycle is stretched further.

NATIONAL SCALE RATINGS HISTORY    

Initial rating (July 2015)

   
Long term: A(ZA)

Short term: A1(ZA)

   
Outlook: Stable    

Last rating (May 2017)

   
Long term: A(ZA)

Short term: A1(ZA)

   
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst    
Sheri Morgan    
Senior Analyst: Corporate Ratings    
(011) 784-1771    
morgan@globalratings.net    
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate Ratings    
(011) 784-1771    
shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2018

AECI Issuer rating reports (2015-18)

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

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Capital Expenditure Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
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.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.
Gearing With regard to corporate analysis, gearing (or leverage) 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.
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.
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 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.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.
Refinancing The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.
Risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.
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 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; 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 ratings.

The information received from AECI Limited and other reliable third parties to accord the credit ratings included:

  • The 2017 audited annual financial statements and integrated report (plus prior four years of comparative numbers)
  • Analyst presentations
  • A breakdown of debt facilities available at December 2017
  • Financial forecasts for FY18 and FY19.

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.

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