Johannesburg, 06 October 2020 – GCR Ratings (“GCR”) has affirmed Centum Investment Company Plc’s national scale long and short term issuer ratings at A+(KE) and A1(KE) respectively, with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Centum Investment Company Plc||Long Term issuer||National||A+(KE)||Stable Outlook|
|Short Term issuer||National||A1(KE)|
Following the sale of the bottling businesses in FY20, Centum’s concentration towards real estate has deepened, comprising around 65% of the investment portfolio. GCR considers this to be a particularly risky segment of the real estate market, given its susceptibility to economic cycles and changes in consumer confidence. Concerns have been heightened by the uncertain economic environment in light of the COVID-19 disruptions, and the large number of new residential units being developed in Nairobi in particular. Counterbalancing these risks, GCR has considered the substantial investment Centum has already funded in its current real estate development projects, combined with entrenched project risk protocols that have helped to de-risk the projects somewhat. Centum’s strong brand recognition has also enabled robust pre-sales for its real estate pipeline (75% of current projects under construction have been pre-sold). GCR could improve the risk assessment related to real estate investments as developments progress from the construction phase to the delivery of units.
GCR considers Centum’s proven track record of developing new projects and selling mature investments as a key ratings strength, as demonstrated by the significant capital gains realised in the years under review. However, Centum is yet to deploy any capital into new private equity ventures, as part of its second private equity fund. Centum’s commitment to the fund is USD50m, with the total size likely to be around USD200m after crowding in other investors. Closing transactions has become more challenging amidst the COVID-19 related restrictions and uncertainty, but the pandemic has increased the level of opportunities for the new private equity fund. GCR could improve the portfolio quality assessment as the fund’s scale increases, and sectoral diversification within Centum’s investment widens. The group’s commitment to maintain a high amount of high-quality liquid investments, also benefit the investment risk score. Thus, government treasuries comprise around 7.8% of the total portfolio value, bank placements 6% and 4.8% other slightly higher risk equity or bond investments.
Centum’s low level of debt relative to its investment portfolio and its large cash and liquid asset holdings are a rating strength, although concerns over the presence of guaranteed debt does constrain the rating. In this regard, Centum utilised the proceeds from asset sale and internal cash to redeem c.KES15bn over the past 12 months, with the KES6bn bond repaid post year-end. However, as the debt guarantees to subsidiaries represent a potential liability for Centum, GCR has included the c.KES6.5bn in guaranteed subsidiary debt as part of the group exposure. Concerns over the guaranteed debt are, nevertheless, mitigated by the still low gearing metrics. Even after applying a stress to the NAV of the investment portfolio, and a haircut to the corporate sector related investments the group continues to report a net debt to investment asset of below 25%.
The large cash and cash equivalent holdings, combined with around KES3bn in unutilised committed facilities also support strong liquidity coverage of almost 3.0x over a 12-month basis. This includes the assumed initial cash call for the private equity portfolio.
The stable outlook reflects GCR’s view that Centum’s strong investment track record is likely to continue and that the financial profile will remain robust over the medium term, with sufficient financial resources to meet all investment requirements.
A rating upgrade would only be considered once Centum evidences a much larger and more diversified portfolio. Similarly, a shift towards assets that generate more stable inflows, would be positively considered
Downwards rating pressure could arise if 1) Centum experiences delays in bringing real estate projects to fruition or if sales targets are not met; 2) if there is an increase in gearing at the holding company level, or 3) Centum issues additional debt guarantees to subsidiaries.
|Primary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Eleanor Kigen||Senior Analyst|
|Nairobi, KE||EleanorK@GCRratings.com||+254 20 367 3618|
|Committee chair||Mathew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MathewP@GCRratings.com||+27 11 784 1771|
Risk Score Summary
|Rating Components and Factors||Risk Scores|
|Country risk score||4.00|
|Sector risk score||2.50|
|Portfolio size and diversification||(2.50)|
|Investment quality and track record||2.50|
|Management and governance||0.00|
|Leverage and capital structure||1.50|
|Total risk score||9.50|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Investment Holding Companies, August 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Corporate Sector Risk Scores, July 2020|
Centum Investment Company Plc
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||A(KE)||Positive||July 2012|
|Short Term Issuer||Initial||National||A1(KE)|
|Long Term Issuer||Last||National||A+(KE)||Stable||January 2020|
|Short term Issuer||Last||National||A1(KE)|
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Weighted Average||An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.|
SALIENT POINTS 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument;.
Subsequent to an appeal by the rated entity, the rating on the national scale long term issuer rating was revised as reflected in the announcement. The credit ratings have been disclosed to Centum Investment Company Plc. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Centum Investment Company Plc participated in the rating process through management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Centum Investment Company Plc and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 March 2020
- Full breakdown of investment portfolio and valuation
- Analyst presentations
- Detailed facility breakdown
- Financial information and presentations pertaining to Centum Real Estate Limited