Announcements

GCR affirms African Oxygen Limited’s rating of A-(ZA); Outlook Stable

Johannesburg, 30 May 2016 — 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 established regional position as a leading supplier of gases and welding products. This is underpinned by the relationship with parent Linde Group AG (“Linde”), which has provided technological support and strong management skills. Volumes have, however, been impacted by the challenging operating environment. To combat this, Afrox initiated a major restructure program which resulted in an extensive operational overhaul, focusing on rationalising the business and product mix, as well as improving asset utilisation and overall efficiencies. After restructuring costs of R79m in F15 (F14: R185m), Afrox reported cost savings of R144m for F15 and expected annualised savings should be c.R277m. The restructuring also placed Afrox in a strong position to procure new business, as demonstrated by the large new contracts entered into during F15.

Revenue was flat in F14 and decreased by 6% to R5.5bn in F15, underpinned by the decrease in LPG prices and the revised business mix during the year. Nevertheless, benefits of the restructure were evident in the strong increase in the EBITDA margin to 16.8% in F15 (F14: 14.2%) and operating margin to 10% (F14: 8.2%), both review period highs. While revenue growth will likely be moderate in F16, there is the potential for an improvement in profitability with the EBITDA margin expected to edge towards the 20% level and the operating margin likely to expand above 10%.

The balance sheet is conservatively leveraged, with unchanged debt of R1bn at FYE15, translating to gross and net gearing of 30% and 4% respectively (FYE14: 34%; 17%). Net debt to EBITDA also decreased to 16% at FYE15 (FYE14: 61%), while net interest cover rose to a new high of 8.6x (F13: 5.7x). Afrox remains a highly cash generative business, with improved working capital management (particularly inventory) aiding the strong cash flows reported over the past two years. This has strengthened liquidity metrics, with both cash flow coverage of total debt and interest coverage remaining strong. Whilst these cash flows have been used to cover the relatively high capex costs, going forward free cash flow is likely to exceed the lower projected investment spend and be available for dividend payments or to redeem debt.

Upward rating migration in the medium term could result from the continued focus on optimising efficiencies, translating to sustainable volume growth and the attainment of internal profitability targets, despite the challenging domestic operating environment. Downward rating pressure could, however, arise from material volume erosion, and/or unanticipated working capital pressure. This could result in higher debt levels and could impair the group’s credit risk profile.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (September 2001)    
Long term: A+(ZA); Short term: A1(ZA)    
Outlook: Stable    
     
Last rating (May 2015)    
Long term: A-(ZA); Short term: A1-(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst    
Farai Mauchaza    
Analyst    
(011) 784-1771    
Faraim@globalratings.net    
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate Ratings    
(011) 784-1771    
Shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2016

Afrox Rating Reports, 2001-2015

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.
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 See Gearing.
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 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.
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 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 2015 (plus four years of comparative data);
  • 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

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