Lagos, 31 January 2019 — Global Credit Ratings has affirmed the long term and short term national scale issuer ratings of AA+(NG) and A1+(NG) respectively, assigned to Dangote Cement Plc, with the outlook accorded as Positive. The ratings expire in September 2019.
RATING RATIONALE OF THE ISSUER
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Dangote Cement Plc (“DCP” or “the Group”) based on the following key criteria:
The ratings take cognisance of the evolution of DCP into Africa’s leading integrated cement manufacturer and one of the world’s top 20 cement companies by installed capacity, as well as its position as the largest corporate on The Nigerian Stock Exchange (“NSE”). This has been achieved through rapid fixed capital formation, which increased its capacity to 45.6 million tonnes per annum across ten countries by FY17, from 8mtpa in 2011.
DCP is very profitable at 50% capacity utilisation because of its low fixed cost model, scale economies and clinker sufficiency in Nigeria, which allow DCP to price its product competitively. While the EBITDA margin has retreated from the FY13 high of 59% to 41.7% in FY16, better fuel mix and improved operating efficiencies drove an improvement to 48.1% at FY17, which should be sustained over the medium term.
DCP is budgeting for a substantial growth in profitability. Although earnings had improved significantly as at 9M FY18, attainment of FY18 and medium term targets will be dependent on sustained operating efficiencies, effective cost management and positive earnings contribution across Pan-African operations. Operating performance has been mixed in the Pan-African region, with a myriad of challenges witnessed in some countries. The region contributed 9% of group EBITDA in FY17 (FY16: 10%).
Cash generation remains robust and peaked at N379.7bn in FY17 (FY16: N243.9bn), supporting an improvement in operating cash flow coverage of total debt to 79% (FY16: 65%), despite substantial expansion related working capital absorptions. DCP reflects conservative gearing metrics, with net gearing reported at 28% at FY17 (FYE16: 36%) and net debt to EBITDA having almost halved to 57% at FY17. Although short term debt exposure increased to 53% at 9M FY18 (FY17: 37%), net interest cover remains firm (9M FY18: 12.5x; FY17: 7x) and is forecast to improve significantly by FY19. The Group has scaled down capex plans which will mainly be funded through internal cash generation. Thus, gross gearing and gross debt to EBITDA are expected to remain below 50% and 90% respectively over the medium term, while the Group expects to be in a net ungeared position by FY19.
Ratings uplift could be achieved if debt reduces significantly such that DCP is in a strong net cash position. The resolution of challenges within Pan-African operations should also support stronger free operating cash flows and profitability. Conversely, downward rating pressure could result from earnings underperformance and liquidity strain, which could emanate from adverse regulatory changes, slower than anticipated economic growth, delays in rolling out public infrastructure projects and increased competitive threats. In addition, foreign exchange scarcity may impede debt service of foreign currency denominated loans and could result in negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2016)
Long term rating: AA+(NG)
Short term rating: A1+(NG)
Last rating (September 2017)
Long term rating: AA+(NG)
Short term rating: A1+(NG)
Senior Credit Analyst
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
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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. The ratings expire in September 2019.
Dangote Cement 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 Dangote Cement Plc.
The information received from Dangote Cement Plc and other reliable third parties to accord the credit ratings included:
– the 2017 audited annual financial statements and audited comparative results for the preceding four years,
– revised financial forecasts spanning 2018 to 2023,
– unaudited management accounts to September 2018,
– a completed rating questionnaire containing additional information on Dangote Cement Plc,
– Insurance schedule for Dangote Cement Plc,
– breakdown of facilities available and related counterparties.
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.