Johannesburg, 24 Jun 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to ARM Cement Limited (formerly Athi River Mining Limited) of A(KE) and A1(KE) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until 06/2015.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to ARM Cement Limited (“ARM”) based on the following key criteria:
ARM’s well-entrenched position in the East African cement industry has been augmented by an aggressive rollout of capacity in the past 5 years. With the completion of the Tanga plant, ARM will secure clinker sufficiency in F14/F15, which is considered a major competitive advantage.
Ongoing capacity building has seen ARM’s top line increase at a compounded annual growth rate of 29% over a 5-year review period, bringing turnover to a high of KShs14.2bn in F13 (F12: KShs11.4bn). The prohibitive cost of clinker imports and pricing pressures in Kenya have, however, seen the operating margin trend down to a 5-year low of 16% in F13 (F12: 20%; budget: 22%). Stronger medium term margins are envisaged despite rising competitive pressures, to be underpinned by the completion of the Tanga integrated facility (which will reduce imported cost inflation and enhance productive efficiency).
The capex rollout has, however, elevated operational and investment risk, and has seen debt more than treble to KShs16.3bn at FYE13 (US$189m). As such, net gearing and net debt to EBITDA peaked at 186% and 497%, against targets of 143% and 263% respectively. Nevertheless, net interest cover reached a high of 4x in F13 (F12: 2.8x), while operating cash flows remained sound.
ARM recently announced plans to raise US$300m for new projects, which would sharply increase debt and impair its credit risk profile unless it coincides with debt conversion, the redemption of maturing obligations and/or fresh capital injections. Some comfort in this regard is drawn from the cash flow projections provided to GCR that reflect that an additional US$55m will be raised in the next 3 years, with a total of just over US$150m paid down or converted to equity. In view of the mooted fund raising, however, GCR expects the unadjusted interest cover to be maintained above 2.5x to sustain ARM’s current ratings.
While long term industry prospects are positive, note is taken of rising competitive pressures as new entrants target East Africa. In addition to operational challenges stemming from capital constraints, inflationary pressures, high transportation costs and inadequate power supply, the region is phasing in new levies on cement, which will further erode producers’ competitiveness.
Sustainable margin enhancement to be derived from the Tanga plant, coupled with the planned redemption of ARM’s maturing obligations would exert upward pressure on the ratings in the medium term. Well-paced expansion, which is funded by an appropriate mix of equity and debt, would also enhance profitability and the group’s credit protection metrics. However, slower than planned rollout of public and private infrastructure projects, due to weak regional growth, funding constraints, or socio-political instability, could curtail cement demand and increase pricing pressures. A material elevation in ARM’s debt levels to fund continued expansion could impair the credit risk profile and thus warrant a downward rating review.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (Oct/2001)
Long term: BBB(KE); Short term: A3(KE)
Last rating (Jul/2013)
Long term: A(KE); Short term: A1(KE)
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated August 2013
ARM Cement Limited rating reports, 2001-2013
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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.
ARM Cement 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 ARM Cement Limited with no contestation of the rating.
The information received from ARM Cement Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), cash flow projections for 2014 to 2017, corporate governance and group risk frameworks, industry comparative data, regulatory framework and a breakdown of facilities available (including related counterparties). In addition, information specific to the rated entity and the 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 ARM Cement Limited’s rating of A(KE); Outlook Stable