Johannesburg, 25 Apr 2014 — 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.
RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to African Oxygen Limited based on the following key criteria:
African Oxygen Limited’s (“Afrox”) established position in the regional gases and welding products space, underpinned by strong technological support and operational oversight from parent Linde Group AG (“Linde”). Long standing client relationships have helped to stem further volume erosion in the challenging operating environment. In this regard, the group recently announced a five-year extension to the existing contract with Columbus (to supply oxygen and nitrogen via pipeline) until 2021, ensuring the continued viability of Afrox’s Witbank ASU.
Revenue has increased steadily in spite of the pressure on volumes, registering a four-year CAGR of 7% to achieve a new high of R5.8bn in F13. This has been underpinned by a return to high levels of plant reliability and productivity, and continued product innovation. Looking ahead, turnover growth is expected to trend with inflation until manufacturing sector output rebounds. Margins remain fairly stable, supported by efficiency optimisation and rigorous cost controls. While pricing pressures are likely to persist from imported finished goods, as well as rising costs of procuring certain product lines, management is targeting a 20% medium term EBITDA margin, leveraging efficiencies to be derived from the recently rolled out integrated business processes.
The balance sheet is conservatively leveraged, with debt of R1bn (FYE12: R912m) translating to net gearing of 21% (FYE12: 23%). Net debt to EBITDA was stable, at 77% in F13, while net interest cover rose to a new high of 7.1x (F13: 5.5x). Afrox also secured syndicated facilities amounting to R1.8bn during F13, notably improving its debt maturity profile. The group’s ongoing R1.5bn capex programme is meant to further entrench Afrox’s market position by ensuring adequate capacity. This will be largely funded internally, with moderate recourse to debt. While operating cash flows were constrained by working capital pressures, fairly robust free cash flows are anticipated to accrue going forward. As such, net gearing is not expected to materially exceed review period highs over the medium term.
Operations are susceptible to the vagaries of the domestic economy, particularly constrained manufacturing output, rising inflationary pressures and labour related disruptions. In this regard, plans to further entrench the group’s position in the region are noted, with the conservative vetting of new projects viewed positively.
Continued focus on optimising efficiency, cost containment and enhancing capacity, translating to sustainable volume growth and the attainment of internal profitability targets, despite the challenging domestic operating environment, could result in upward rating migration in the medium term. Downward rating pressure could, however, arise from protracted disruptions (directly or at Afrox’s clients), material volume erosion, delays in rolling out planned capex or unanticipated working capital pressures. These factors could curtail cash flows, resulting in higher than envisioned debt levels and impairing the group’s credit risk profile.
NATIONAL SCALE RATINGS HISTORY
Initial rating (09/2001)
Long term: A+(ZA); Short term: A1(ZA)
Outlook: Stable
Last rating (04/2013)
Long term: A-(ZA); Short term: A1- (ZA)
Outlook: Stable
ANALYTICAL CONTACTS
Primary Analyst
Patricia Zvarayi
Senior Analyst
(011) 784-1771
Patricia@globalratings.net
Committee Chairperson
Eyal Shevel
Sector Head: Corporates
(011) 784-1771
Shevel@globalratings.net
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s criteria for rating corporate entities, updated August 2013
African Oxygen Limited rating reports, 2001-2013
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/RATING-SCALES-DEFINITIONS. 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.
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 included the 2013 audited annual financial statements (plus four years of comparative numbers), extracts from the most recent board reports, profitability projections for 2014, corporate governance and enterprise risk framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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.