Announcements

GCR affirms ARM Cement Limited’s rating of A(KE); Outlook Stable.

Johannesburg, 5 Jun 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to ARM Cement Limited of A(KE) and A1(KE) in the long term and short term respectively; with the outlook accorded as Stable. Concurrently a Commercial Paper rating of A1(KE) has been accorded. The rating(s) are valid until 06/2016.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to ARM Cement Limited (“ARM”) based on the following key criteria:

ARM is becoming an increasingly important player in the East African cement industry, with its market share having grown to 18% in 2014, from 11% in F10. On-going expansion has underpinned ARM’s double digit revenue growth over the review period, with the exception of F14 when no new capacity was introduced. New capacity will come on stream in F16, which will drive growth, albeit tailing off thereafter.

With the completion of the Tanga plant in 4Q F14, ARM has secured clinker sufficiency which is a major competitive advantage, given the clinker shortfall in the region. This should help reverse the downward trend in the operating margin evidenced over the review period, driven in large by the high cost of imported clinker.

Due to the substantial capex spend, debt has increased from KES8.7bn at FYE10 to KES21bn at FYE14, with net gearing and net debt to EBITDA peaking at 224% and 666% respectively (FYE13: 168%; 497%). With short term debt accounting for 66% of the total at FYE14 and negligible operating cash cover of debt, liquidity metrics were weak. Concerns about the high gearing and weak liquidity have, however, been tempered by the redemption of KES2.7bn (USD28m) in maturing facilities in 1H F15, as well as the likely conversion of the USD50m AFC facility to equity. In addition, ARM has engaged three banks to restructure its remaining USD150m in debt through a syndicated loan that will likely comprise a mix of long and medium term facilities.

Key to any upwards rating movement is reducing debt and gearing metrics to more sustainable levels. To this end, current efforts to reduce the debt burden and improve the liquidity profile are positively noted. Sustained growth in profitability and firmer margins also bodes positively for the group. However, delays in public infrastructure spend and thus decreased demand for cement, as well as unanticipated working capital pressures, leading to increased debt, may further strain gearing and warrant a downward rating review.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Oct/2001)
Long term: BBB(KE); Short term: A3(KE)
Outlook: Stable

Last rating (Jun/2014)
Long term: A(KE); Short term: A1(KE)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate ratings
(011) 784-1771
shevel@globalratings.net

Secondary Analyst
Farai Mauchaza
Junior Analyst
(011) 784-1771
faraim@globalratings.net

Committee Chairperson
Patricia Zvarayi
Senior Analyst
(011) 784-1771
patricia@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015
ARM Cement Limited, rating reports, 2001-2014

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

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.
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.
Syndicated Loan A large loan arranged by a group of funders, usually international banks, that form a syndicate, headed by a lead manager.
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.

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 ratings.

The information received from ARM Cement Limited and other reliable third parties to accord the credit rating(s) included;
• Audited financial results of Company per 31 December 2014.
• Four years audited financial results for 2010-2013.
• Circular to investors.
• Industry comparative data.

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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