Johannesburg, 25 July 2017 – Global Credit Ratings has today affirmed Centum Investment Company Plc’s national scale issuer ratings of A(KE), and A1(KE) in the long term and short term respectively. Concurrently, Centum Investment Company Plc’s Commercial Paper rating has also been affirmed at A1(KE). The ratings have been accorded a Positive Outlook. The ratings are valid until 07/2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Centum Investment Company Plc (“Centum”) based on the following key criteria:
Centum is a leading Kenyan investment company, with clear operating structures and well-defined investment strategy. The strength of the management team and the company’s leading position in the East African corporate environment has been borne out in the substantial value enhancement over recent years, with NAV rising from KES14bn at FY12 to KES45bn at FYE17. NAV, and thus the future prospects for Centum, is dominated by the property sector, and in particular the Two Rivers development. Nevertheless, the company is actively expanding its FMCG and financial services offerings, both of which already contribute strongly to earnings, whilst notable progress has been made in the power, agribusiness and education sectors. Along with the large Vipingo property development, these sectors offer long term value accretive opportunities.
Critical to Centum’s business model is extracting substantial value through the sale of assets. Centum has demonstrated an ability to generate cash from disposals, with realised profits greater than KES1bn in all years under review, and a cumulative realised profit in excess of KES10bn. This mitigates concerns over the relatively low level of annuity income, which nevertheless has been sufficient to cover finance and operating costs in most years under review, and with increasing headroom in FY16 and FY17.
At the holding company level, Centum’s gross debt rose to KES14.3bn at FY17 (FY16: KES10.5bn). Nevertheless, despite increasing somewhat, gearing metrics remained moderate and well within bond covenant levels. Net debt to equity ratio registered at 27.2% (FY16: 16.7%), whilst net debt to investment assets was just 20.8% (FY16: 24.9%). Management has established a targeted gearing level of 25%. Of some concern, however, is the high proportion of short term debt, with the KES7.6bn in term facilities set to mature in FY18. Centum intends to redeem a portion with internally generated cash, whilst the rest will be refinanced. In this regard, Centum has enjoyed strong access to debt markets when required, demonstrated by oversubscription to its bond issuances and a fairly wide range of banking relationships.
Although the weakening Kenyan economy may impact Centum’s profitability, the company benefits from sectoral diversification across its investments, as evidenced by the improved FMCG performance in FY17 offsetting the weaker financial services results.
Positive ratings action is dependent on continued strong profitability, both from annuity type income and asset sales. Gaining critical mass in other targeted sectors would be positively viewed, as it would lessen dependence on new property developments. Conversely, challenges in refinancing existing debt would have a negative ratings impact, whilst unexpected cash requirements could strain Centum’s resources. Adverse happenings in any of the subsidiaries/associates could be managed, but Centum’s ability to service its debt could be strained by simultaneous problems.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2012)|
|Long term: A-(KE), Short term: A1-(KE)|
|Rating outlook: Stable|
|Last rating (July 2016)|
|Long term: A (KE), Short term: A1 (KE)|
|Rating outlook: Stable|
|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 2017
Centum rating reports (2012-2016)
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
|Bond||A long term debt instrument issued by either a company, institution or the government to raise funds.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ 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.|
|Equity Ratio||A ratio that measures a company’s debt relative to its equity. Calculated by dividing long term debt by shareholders’ equity. GCR typically uses a tangible equity as the denominator, after stripping out goodwill and other intangible assets.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|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.|
|Under Review||Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.|
SALIENT FEATURES 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 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.
Centum Investment Company Plc 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 Centum Investment Company Plc, with no contestation of the ratings.
The information received from Centum Investment Company Plc and other reliable third parties to accord the credit ratings included:
- Audited financial results of Company per 31 March 2017
- 4 years of comparative numbers
- Cash flow forecasts
- 1H FY17 and FY17 Investor briefings
The ratings above were solicited by, or on behalf of, the Centum Investment Company Plc, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms Centum Investment Company Plc’s rating of A(KE); Outlook Positive.