Announcements

GCR affirms ALAF’s national scale ratings

Johannesburg, 07 July 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Aluminium Africa Limited of A-(TZ) and A1-(TZ) in the long term and short term respectively; with the outlook accorded as Positive. The ratings are valid until July 2015.

RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Aluminium Africa Limited based on the following key criteria:

Aluminium Africa Limited (“ALAF”) is an entrenched player in the Tanzanian steel roofing and long products industry. Moreover, as a 76% held subsidiary of Safal Investments (Mauritius) Limited (“Safal“), ALAF reflects captured demand for its products in other African markets through related parties. The Government of Tanzania holds the remainder of ALAF’s shares, which is also considered positively. Having undertaken capex until 2009 to upgrade to new machinery and raise capacity, ALAF has gradually reported increased output. While operations have been hampered by the erratic domestic power supply in the past, improved reliability and growing demand for roofing products are expected to sustain the growth impetus. The positive outlook on the ratings is premised on the fact that no major capex is anticipated over the medium term, while the company continues to report sound performances and sustained improvements in gearing and other credit risk measures.

The company reported a 28% rise in sales tonnage and 16% rise in sale value in F13. Despite this and the stable gross margins achieved, ALAF reported flat operating profits of TShs15bn in F13, with the operating margin thus contracting to 8.6% (F12: 9.9%). However, net finance charges were much lower at TShs2.6bn in F13 (F12: TShs4.8bn), as a result of reduced average debt balance and an easing of interest rates. Accordingly, net interest cover improved to a review period high of 5.7x in F13 (F12: 3.1x). Similarly, free cash flow covered debt service charges (scheduled principal and all interest) by an improved 1.7x in F13 (F12: 1.1x). Reduced capex and an easing of working capital pressure have seen positive retained cash flows in F12 and F13. This has facilitated reductions in gearing metrics, with net gearing falling from a peak of 91% at FYE11 to 52% at FYE13 (FYE12: 74%) and net debt to EBITDA improving from 200% at FYE11 to 128% (F12: 147%). Positive trends notwithstanding, ALAF is an inherently working capital intensive business, necessitating the usage of overdrafts to bridge funding gaps. The company, however, continues to report ample unused debt facilities, which mitigate liquidity concerns. Inherently exposed to metal prices and exchange rates, ALAF uses hedging and swap arrangements to limit currency and commodity price risks.

Looking ahead, the group expects to continue its positive performance into the future, and continued improvements in capacity utilisation would drive earnings growth. Coupled with a sustained decrease in borrowings and gearing measures, this would improve ALAF’s credit risk profile and could trigger an upward ratings movement. In contrast, significant adverse developments in domestic demand conditions would impair earnings and thus augur negatively for ALAF’s ratings. Furthermore, high growth levels, precipitating material working capital pressure, could raise the company’s financial risk and negatively affect the ratings.

For a detailed glossary of terms utilised in this announcement, please click here

NATIONAL SCALE RATINGS HISTORY

Initial rating (Jun/2007)
Long term: A-(TZ); Short term: A1-(TZ)
Outlook: Stable

Last rating (Aug/2013)
Long term: A-(TZ); Short term: A1-(TZ)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Richard Hoffman
Analyst
(011) 784-1771
hoffman@globalratings.net

Committee Chairperson
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
shevel@globalratings.net

Analyst location: JHB, South Africa

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, Updated August 2013
ALAF Rating Reports, 2006-2013

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.

ALAF Limited participated in the rating process via face-to-face management meetings, teleconferences as well as 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 ALAF Limited with no contestation of the rating.

The information received from ALAF Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements, 1Q 2014 management accounts, corporate governance and risk framework, reserving methodologies, capital management policy, industry comparative data and regulatory framework, as well as 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.

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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