Johannesburg, 31 May 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to ASL Limited of BBB+(KE) and A2(KE) in the long and short term respectively; with the outlook accorded as Stable. Concurrently, Global Credit Ratings has also affirmed ASL Limited’s Commercial Paper rating of A2(KE). The ratings are valid until 31 May 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ASL Limited (“ASL”) based on the following key criteria:
The ratings take cognisance of ASL’s entrenched position as a leading supplier of building and hardware products in Kenya, underpinned by a network of vertically integrated businesses which provide a captive market for some of the products and a wide network of dealers and distributors. The group leverages off strategic partnerships with global hardware manufacturers and enjoys exclusive distributorship rights on some leading brands. While each division within the broader group is separately managed, ASL is able to exploit the operational synergies across Ramco’s entrenched supply chain, as well as the cost savings from a wide range of shared services.
Despite a slowdown in demand due to political instability during FY17, revenue improved on the back of contributions from the chemicals division. However, increased operating expenses related to the group’s expansion activities, resulted in the operating margin declining to 8.8% in FY17 (FY16: 10.9%). The rollout of a new ERP system is expected to boost efficiencies which, coupled with expected recovery in revenue growth, should see the operating margin rebound in FY18. Notably, 1H FY18 sales performance has exceeded budget by 10%.
The steady increase in cash generation over the review period is noted, but working capital management remains the key focus of the group, due to its trading nature. While ongoing expansion does entail some working capital absorptions, this should be somewhat offset by the improved inventory and debtors management afforded by the new ERP system.
The current ratings take into account the relatively high gearing profile. Nevertheless, at current levels fluctuations in earnings can have a substantial impact on credit metrics, as evidenced by the spike in net debt to EBITDA at FY17. Of more concern is the very low interest coverage (1.6x at FY17), particularly in light of the possible increase in interest rates. Management has indicated an aspirational interest cover of 2x which, if achieved, will be necessary for ratings stability.
The demonstrated shareholder support, and the current commitment from shareholders to inject a significant amount to finance ASL’s expansion plan is positively considered in support of the ratings. Liquidity is further enhanced by large untapped bank facilities at March 2018 and long-standing relationships with multiple reputable financial institutions.
Looking ahead, upward rating actions may arise from sustained growth in revenue and earnings that allow ASL to cover its interest obligations at a level of 3x or higher, while also reducing earnings-based gearing to below 400%. Conversely, increased debt utilisation, even to fund the expansion of the business could impair debt service metrics. A deterioration in in the business or socio-political environment, resulting in weaker earnings-based gearing and debt service metrics, could also result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (May 2017)|
|Long term: BBB+(KE)|
|Short term: A2(KE)|
|Commercial Paper: A2(KE)|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
ASL Limited Issuer rating report 2017
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 Corporates GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Economies Of Scale||Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|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.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ASL 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 ratings have been disclosed to ASL Limited with no contestation of the ratings.
The information received from ASL Limited and other reliable third parties to accord the credit ratings included:
- Audited financial statements for FY17, and four years comparative numbers
- Full details of funding facilities
- Organisational charts
- Ramco group profile
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 ASL Limited’s rating of BBB+(KE), Outlook Stable.