Lagos Nigeria, 4 October 2019 — Global Credit Ratings has affirmed the long term and short term national scale issuer ratings of BBB+(NG) and A2(NG) respectively accorded to Axxela Limited, with the Outlook accorded as Stable. The ratings are valid until September 2020.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Axxela Limited (“Axxela” or “the Group”) based on the following key criteria:
The ratings reflect Axxela’s leading position within the Nigerian natural gas distribution market, with the largest gas distribution capacity. The Group’s competitive position is supported by its Nigerian Gas Marketing Company franchise within the core Lagos and Port Harcourt regions, long term distribution arrangements and strong relationship with technical partners.
Following a resolution of the Niger-delta unrest during FY16, Axxela has reported strong revenue growth, supported by rising volumes, higher selling prices and an expanded clientele base. The Group is embarking on several gas infrastructure developments, which should see revenue increase in the coming years, as well as hedge against over dependence on a single supplier. In the interim, operations remain susceptible to supply disruptions and regulatory uncertainties.
Although the gross margin on gas sales witnessed slight pressure in FY18 due to the gas sales mix, the overall gross margin rose to 26.2% in FY18 (1H FY19: 23.8%), underpinned by decline in costs that are unrelated to gas volumes. The strong gross margin filtered through to EBITDA margin, supporting solid earnings growth. Accordingly, operating profit rose sizeably by 61% to N11.2bn in FY18 (1H FY19: N5.4bn), well above historical levels.
Axxela has reported positive cash flow from operation in all years, reflecting the strong EBITDA. Although this has been reduced by working capital absorptions due to related party payables and prepayments. Excluding this, a large working capital release from operating activities was reported in FY18, as debtors were better managed.
Axxela reported negative tangible equity at FY18, although this was compensated by a N22bn convertible shareholder loan provided in FY16 (which represents c.80% of total debt). Treating the shareholder loan as debt, gearing metrics are elevated, with negative equity based gearing and net debt to EBITDA of 229% at FY18 (FY17: 314%). Moreover, interest on the shareholder loan caused net interest cover to register at 3.4x in 1H FY19. Excluding the shareholder loan, net interest cover would be 6.3x, and net debt to EBITDA would register below 30%, creating headroom for additional borrowings given the low external debt of N6.2bn at 1H FY19.
Axxela is far advanced with the plan to restructure its external debt with new debt from the capital market. As debt is expected to rise to N52.6bn by FY19, Axxela could be burdened with excessive debt service obligations if targets are not met. This could exacerbate the risks in the funding structure.
Positive rating action is dependent on strengthening the capital structure through direct equity or other tangible support. The ratings are also sensitive to attainment of forecasts, translating to an improved earnings and debt serviceability over the medium term. Conversely, a delay in rolling out projects and/or reduction in sale volumes would see earnings deteriorate and further cash flow pressure. Excessive debt utilisation would see credit protection deteriorate.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (September 2018)
Rating outlook: Stable
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Axxela Limited Issuer rating report 2018
Glossary of Terms/Ratios, February 2018
RATING LIMITATIONS AND DISCLAIMERS
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 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 ratings are valid till September 2020.
Axxela 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 Axxela Limited.
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.
The information received from Axxela Limited and other reliable third parties to accord the credit ratings included:
– 2018 audited annual financial statement, and four years pro-forma annual financial statements;
– 6-months management accounts to 30 June 2019;
– Internal and/or external management reports;
– A completed rating questionnaire containing additional information on Axxela Limited and its subsidiaries;
– Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties; and
– Information specific to the rated entity and/or industry was also received.