Announcements Financial Institutions Rating Alerts

GCR Affirms CardinalStone Partners Limited’s Issuer National Scale Long Term Rating of BBB-(NG); Outlook Stable

Lagos, 30 September 2021 – GCR Ratings (“GCR”) has affirmed CardinalStone Partners Limited’s national scale long and short-term issuer ratings of BBB-(NG) and A3(NG) respectively; with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
CardinalStone Partners Limited Long Term issuer National BBB-(NG) Stable
Short Term issuer National A3(NG)

Rating Rationale

The national scale issuer ratings accorded to CardinalStone Partners Limited (“CardinalStone” or “the Group”) reflect its strong but high risk earnings profile, moderate liquidity position, and strong leverage and cashflow position, which are partly offset by the group’s limited competitive position.

CardinalStone is a diverse investment group in Nigeria, with operations across a wide spectrum of the financial services industry and a track record of over a decade. CardinalStone’s primary activities include the provision of investment banking, and proprietary trading. The Group has four subsidiaries through which it offers an array of services including consumer finance, financial advisory, asset management, share registration and securities trading. The group has continued to focus on its strategic plan of growth and expansion, aimed at better positioning it amongst competitors across its business lines. In line with this, the group has launched its first fund in the half of 2021 and is set to launch another before the end of the year, which should boost its earnings capacity. However, this is counterbalanced by its relatively modest market share within the financial services space.

Earnings are strong but this is counterbalanced against the associated risk, hence become neutral to the ratings. EBITDA margins have remained strong at around 90% over the review period. While we note the group’s diverse earnings stream, we consider these volatile, having a sizeable (42.3%) amount generated through market sensitive instruments (equity trading). Also of concern is the fact that about 70% of the group’s capital is being utilised to trade in the high volatile equity market at FY20, although per management, these exposures have been reduced to 40% at Q1 FY21. In addition, we view the possibility of a heightened credit risk, given the group’s strategy to shift towards margin lending. Looking ahead, GCR expects EBITDA margins to remain strong within the historical range, with earnings reflecting more diversity and less reliant on market sensitive instruments.

The strong leverage and cash flow assessment reflects the group’s low gearing level, with the coverage of net debt by EBITDA at 0.5x at FY20. However, we note the higher interest rate expensed by the group relative to the cash generated during the period. As such, EBITDA coverage of interest expenses is considered low at 2.8x. We do not expect CardinalStone to significantly increase its debt over the rating horizon, hence, we anticipate the sustenance of the low gearing level over the rating horizon.

The group’s liquidity position is assessed at an intermediate level, having liquidity sources sufficiently covering the anticipated uses by more than 1x at FY20. This position is supported by good cash flow generation, moderately strong balance sheet liquidity and the appropriate matching of the assets and liabilities. We expect this position to be sustained over the next 12-18 months, as the group continues to hold a sizeable amount of liquid assets, particularly in form of bank placement.

Outlook Statement

The Stable Outlook indicates GCR’s expectations that CardinalStone will continue to maintain a conservative balance sheet, which should support liquidity over the next 12-18 months. We also expect EBITDA margins to remain strong within the historical range, with earnings reflecting more diversification and less reliant on market sensitive instruments.

Rating Triggers

A rating upgrade could stem from further diversification of its earnings stream, and improvement in liquidity metrics to around 2x coverage of its uses vs sources. Conversely, a downward movement in the rating could result from increased concentration towards market sensitive income and a material deterioration in earnings and liquidity metrics.

Analytical Contacts

Primary analyst Adeyinka Olowofela Senior Analyst, Financial Institutions
Lagos, NG Yinka@GCRratings.com +234 1 904 9462
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Service Companies, May 2019
GCR Ratings Scale, Symbols & Definitions, May 2019
GCR Country Risk Scores, February 2021
GCR Financial Institutions Sector Risk Score, February 2021

Ratings History

CardinalStone Partners Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial/last National BBB-(NG) Stable June 2020
Short Term Issuer A3(NG)

Risk Score Summary

Rating Components & Factors Risk scores
Operating environment 5.75
Country risk score 3.75
Sector risk score 2.00
Business profile -2.00
Competitive position -2.00
Management and governance 0.00
Financial profile 2.50
Cashflow and leverage 2.00
Earnings vs. Risk 0.00
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 6.25

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
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.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
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.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
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 See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings were 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to CardinalStone Partners Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

CardinalStone Partners Limited participated in the rating process via video conference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from CardinalStone Partners Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2020
  • Four years of comparative audited numbers
  • Other related documents.
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