Lagos, Nigeria, 06 August 2021 – GCR Ratings (“GCR”) has affirmed the national scale long term and short-term Issuer ratings of A-(NG) and A2(NG) respectively assigned to Dufil Prima Foods Plc, with the Outlook accorded as Stable. Concurrently, GCR has accorded a long term Issue rating of A-(NG) to Dufil Prima Foods Plc. The Outlook on the ratings is Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Dufil Prima Foods Plc||Long Term Issuer||National||A-(NG)||Stable|
|Short Term Issuer||A2(NG)|
|N10bn Series 1 Bond||Long Term Issue||National||A-(NG)||Stable|
The ratings accorded to Dufil Prima Foods Plc reflects its dominant position in the Nigerian industry, underpinning strong earnings growth. However, this rating strength is counterbalanced by weak liquidity assessment and leverage and capital structure on account of high debt profile against unsustainable cashflows.
The ratings are supported by Dufil’s strong competitive position. Limited product diversification is balanced against its dominant (80%) market share in the expanding noodles subsegment. This position is underpinned by continuous capacity expansion, aggressive marketing and wide distribution network. In addition, backward integration initiatives are set to help reduce the Company’s exposure to volatility in foreign exchange market and further secure the supply chain. Furthermore, the commencement of operations at the Ghana plants should add some geographic diversification of earnings.
Earnings are a ratings strength. Dufil has reported strong revenue progression over the years, with 8% growth in earnings in FY20 despite COVID 19 pandemic crisis and other related issues. Growth was underpinned by slight increase in price and higher traded volume, reflecting the non-discretionary nature of its products. Impacted by persistent rise in international price of inputs (mainly wheat) and the adverse impact Naira devaluation, the EBITDA margin has generally decreased through the cycle, trending at around 12% in FY18-20, compared to the high of 20% reported in FY17. GCR expects the margin to remain in this range over the rating outlook as economic uncertainties persist.
The ratings are primarily constrained by weak leverage and capital structure due to high debt level, with the gross debt rising from N83.2bn at FY19 to N114bn at 1Q FY21. Debt has been utilised to finance capacity expansion and high working capital requirement, primarily related to high inventory holding and advance payments for supplies. Accordingly, net debt to EBITDA has remained weak, deteriorating to 3.4x in FY18 before moderating to 2.7x and 2.5x in FY20 and 1Q FY21 respectively. Except for FY17 and FY19, operating cash flow coverage of debt has registered at negative level over the cycle, due to weak cash flow amidst rising debt. Furthermore, interest coverage has trended at a very low levels of 2.7x and 2.5x in FY20 and 1Q FY21 respectively, due to high finance costs. GCR expects the metric to trend within historical levels over the outlook period, as working capital requirements are likely to remain elevated, necessitating additional debt.
GCR has taken a negative view of other capital structure elements. Refinancing risk is material, indicated by the high proportion of short-term debt (64% maturing within 3-9 months) amid low levels of net operating cash flows. The Company is also exposed to foreign currency risk, with 48% of debt denominated in USD. These concerns are partially mitigated by Dufil’s strong banking relationships, with facilities deriving from 18 different commercial banks and development finance institutions, as well as access to the Nigerian debt capital market.
GCR’s liquidity assessment is substantially negatively impacted by the N63.8bn in short term debt facilities. These are only partially covered by available cash holding of N23bn and committed revolving facilities of N23.4bn. However, GCR has also factored in a portion of the high inventory holding (c.N56.2bn in 1Q FY21), which are turned over and converted to cash within a relatively short period, implying that cash can be made available to meet debt obligations as they fall due. GCR has also taken some comfort in the large number of credits providers and assumed that it is unlikely that they will all call their facilities simultaneously. Furthermore, Dufil now intends to consolidate its substantial production capacity to drive volumes growth. As such, capex spending are expected to remain minimal at around N4.6bn, primarily related to asset replacement. Given these assumptions, GCR considers the moderate liquidity coverage of around 1.2x.
The N10bn Series 1 Bonds are direct, unconditional, senior, unsecured obligations of Dufil Prima Foods Plc (“the Issuer”), and therefore bear the same default risk as the Issuer. As such, the national scale long term Issue rating of the Bonds is equalized with the national scale long term Issuer rating of Dufil.
The Stable Outlook reflects GCR’s view that Dufil leading position within the noodles market and completed capacity expansion will support strong earnings growth over the medium term, and therefore support improvement in gearing and liquidity metrics. Liquidity shortfall is supported by the strong access diverse funding sources.
Positive rating action could emanate from successful completion of ongoing projects which translates into substantial earnings growth and sustainable higher cash flows. A meaningful reduction in debt and lengthening of the maturity profile could also be positively considered.
Conversely, any escalation in debt, particularly short-term debt could result in a ratings downgrade. Accordingly, any earnings underperformance, or the persistence of working capital pressures will be negatively views. In this regard, the rating could be downgraded if debt to EBITDA rises above 3x, or if interest coverage falls below 2.5x. Further, any perceived weakening in access to capital would also be negatively considered. Accordingly, any change in the Issuer’s long term rating would impact the Bond rating.
|Primary analyst||Biyi Baruwa||Analyst|
|Lagos, Nigeria||Biyi@GCRratings.com||+234 1 904 9462|
|Committee chair||Eyal Shevel||Sector Head: Corporates and Public Entities|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, February 2021|
|GCR Nigeria Corporate Sector Risk Scores, July 2021|
|Dufil Prima Foods Plc’s Rating Report, August 2020|
Dufil Prima Foods Plc
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||A-(NG)||Stable||June 2016|
|Short Term Issuer||Initial||A2(NG)|
|N10bn Series1 Bond||Initial||National||A-(NG)||Positive||October 2017|
|Long Term Issuer||Last||National||A-(NG)||Stable||August 2020|
|Short Term Issuer||Last||A2(NG)|
|N10bn Series1 Bond||Last||National||A-(NG)||Stable||August 2020|
RISK SCORE SUMMARY
|Country risk score||3.75|
|Sector risk score||3.00|
|Management and governance||0.00|
|Leverage & capital structure||(1.25)|
|Total Risk Score||7.00|
|Credit Rating||See GCR Rating Scales, Symbols and Definitions.|
|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|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|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.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|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 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.
The credit ratings have been disclosed to Dufil Prima Foods 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.
Dufil Prima Foods Plc participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Dufil Prima Foods Plc and other reliable third parties to accord the credit ratings included:
- 2020 audited annual financial statement, and prior four years annual financial statements;
- management accounts for the period to 31 March 2021;
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
- Information specific to the rated entity and/or industry was also received;