Johannesburg, 10 May 2017 — Global Credit Ratings has today affirmed the national scale issuer 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 Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Oxygen Limited (“Afrox”) based on the following key criteria:
The ratings are underpinned by Afrox’s well entrenched position as a leading regional supplier of gases and welding products in sub-Saharan Africa, with additional support also drawn from the increased operational integration of technological and management skills from its strongly positioned international parent, Linde AG.
Following an extensive restructuring exercise in FY14 and FY15, Afrox’s business profile has strengthened, underpinned by a more defensive earnings base. In this regard, progress in increasing the diversity of the customer base, enhanced production efficiencies and embedded cost controls have partially mitigated downward pressure from the current weakness of some key cyclical industrial end-markets. Management’s sound execution of the refocused growth strategy has seen turnover stabilise at R5.5bn in FY16, while the operating margin improved to review period high of 16% and operating profit increased by 64% to R898m in FY16.
Cash generation has remained strong over the review period, and has been further augmented by improved working capital management over recent years. Against limited projected expansionary capex given ample production capacity currently, strong free cash flows are expected to remain available for dividend payments or to redeem debt, further supporting the Positive rating outlook.
Afrox has demonstrated a consistent track record of prudent capital management. With debt levels having remained stable at R1bn over the past four years, strong cash flows saw the group close FY16 in a net ungeared position for the first time over the review period. Gross gearing and total debt to EBITDA were low at 28% and 81% respectively (FY15: 30%; 112%). Debt levels are not likely to change materially going forward, with management looking to further optimise its funding structure.
The group’s diversification is somewhat weakened by the fact that the portfolio is limited to investments mostly concentrated in South Africa. This heightens Afrox’s exposure to domestic macro-economic challenges, which are likely to have a mixed impact on Afrox’s performance going forward. Nevertheless, while a return to robust revenue growth is not expected until the commodity cycle turns definitively, operating margins and profits should remain resilient over the rating horizon.
Looking ahead, positive rating movement is dependent on progressive revenue growth, combined with further margin enhancement. This should lead to strong cash flows and profitability, which would further strengthen Afrox’s credit protection factors despite challenging operating conditions. Downward rating pressure could, however, arise from material volume erosion, thus impacting profitability levels and/or a weakening in credit metrics as a result of a more aggressive debt appetite.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2001)|
|Long term: A+(ZA);
Short term: A1(ZA)
|Last rating (May 2016)|
|Long term: A-(ZA)
Short term: A1-(ZA)
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2017
Afrox issuer rating reports, 2001-2016
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.|
|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.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Exercise||To exercise an option is to use the right of the holder to buy or sell the underlying asset on which the option is based at the strike price.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Turnover||The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.|
|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.|
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.
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 ratings have 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 2016 (plus four years of comparative data)
- Analyst presentations 2016
- Public financial information on Linde Group
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 Positive