Johannesburg, 13 May 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to African Oxygen 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 has accorded the above credit rating(s) to African Oxygen Limited (“Afrox”) based on the following key criteria:
Afrox’s regional position as a leading supplier of gases and welding products is underpinned by the relationship with parent Linde Group AG (“Linde”), which has provided technological support and strong management skills. Plant reliability has also improved from the problems faced in previous years, facilitating the retention of all major customers and the extension of some large contracts. Volumes have, however, been impacted by the challenging operating environment, particularly in the mining and manufacturing sectors, where Afrox derives most of its business. Thus, while revenue has grown over the review period on the back of contractual escalations, this has been at a diminishing rate. Furthermore, Afrox has been saddled with an inefficiently high cost structure due to its scale, and despite positive efforts to contain variable costs, the operating margin decreased from 9.8% in F11 to 8.2% in F14. Accordingly, operating profit declined from R519m in F12 to R481m in F14 (F13: R514m). To combat the weak margin and make the business more competitive, Afrox initiated a major restructuring program in F14. This is expected to result in a complete overhaul of the business, focusing on the product mix, optimising asset utilisation, rationalising sites and overall efficiency improvements. Benefits are likely to feed through in F16, and are expected to support the attainment of a medium term operating profit margin of 20%.
The balance sheet is conservatively leveraged, with gross debt unchanged at R1bn at FYE14, translating to a review period low net gearing of 17% (FYE13: 21%). Net debt to EBITDA also improved to 61% in F14 (FYE13: 77%), albeit that net interest cover decreased to 5.7x (F13: 7.1x). Afrox remains highly cash generative, with relatively low and largely predicable working capital movements, supporting strong operating cash flows. Thus, capex will continue to be funded internally, with little recourse to debt. As such, and with volumes remaining stagnant, net gearing is not expected to materially exceed current levels over the medium term. Afrox maintains ample funding flexibility, afforded by a R1.5bn syndicated facility, of which R500m was unutilised at FYE14, whilst debt is now split between three and five year maturities.
Operations remain highly dependent on the domestic economy, particularly the constrained manufacturing and mining output. In this respect, little volume growth is expected until there is a sustained recovery in these two sectors.
Upward rating migration in the medium term could result from the successful bedding down of the group’s restructuring process and the attainment of internal profitability targets, despite the challenging domestic operating environment. Downward rating pressure could, however, arise from a further weakening of the domestic economic environment that has a material negative impact on volumes and cash flows. The loss of market share would also be negatively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Sep/2001)|
|Long term: A+(ZA); Short term: A1(ZA)|
|Last rating (Apr/2014)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Farai Mauchaza|
|Sector Head: Corporate and Public Sector Debt Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
African Oxygen Limited Rating Reports, 2001-2014
|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.|
|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.|
|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 Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|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.|
|Syndicated Loan||A large loan arranged by a group of funders, usually international banks, that form a syndicate, headed by a lead manager.|
|Variable Costs||A cost that varies with the volume of production or sales, such as the cost of raw materials or packaging. In contrast with fixed costs, such as rent, which stay the same regardless of the volume of production or sales.|
|Working Capital||Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.|
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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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
African Oxygen 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 African Oxygen Limited with no contestation of the rating.
The information received from African Oxygen Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results for the year ending 31 December 2014 (plus four years of comparative data);
- Analyst presentations for 1H 2014 and 2014;
- Corporate governance and enterprise risk framework;
- Public financial information on Linde Group;
- Industry comparative data and regulatory framework; and
- A breakdown of facilities available and related counterparties
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 African Oxygen Limited’s rating of A-(ZA); Outlook Stable