Lagos, 30 July, 2019 — Global Credit Ratings has affirmed the long term and short term national scale issuer ratings of A-(NG) and A2(NG) respectively, assigned to Dufil Prima Foods PLC (“Dufil” or “the Company”), with the outlook accorded as Stable. Concurrently, the rating of A-(NG) accorded to the N10bn Series 1 bond was also affirmed, with outlook accorded as Stable.
The long and short term Issuer and bond ratings are valid until June 2020.
Global Credit Rating Co Limited (“GCR”) has accorded the above credit ratings to Dufil based on the following key criteria:
Dufil’s ratings are supported by its substantial market share in the Nigerian noodles industry, underpinned by a long operational track record, high production capacity and significant assets/relationships across the value chain. Strong shareholders further provide access to market leading technologies and operational processes.
The Group has maintained an upward trend of robust revenue generation over the review period, underpinned, inter alia, by capacity expansion, business acquisitions and higher volumes. However, the high concentration to a single product category does pose a business risk, but the growth in palm oil and other related businesses is positively noted.
Dufil is highly sensitive to exogenous cost pressures (wheat, crude oil, currency). This was evidenced in the contraction in operating margin in FY18, as the price of inputs moved negatively, while the competitive environment prevented the company from passing on costs to customers. Management expects the margins to remain flat in FY19, but widen over the medium term, driven by higher economies of scale and efficiencies.
GCR takes a negative view of earnings concentration to a sole distributor, with Dufil facing a potential loss of revenue and cash flow, if adverse situations manifest. Moreover, delayed payment from the distributor have already translating to some working capital pressure.
Gross debt spiked by N19bn to a period high of N84bn in FY18 (75% short term) as additional facilities were drawn for working capital and expansion. While GCR takes cognisance of Dufil’s unutilised facilities (of over N23bn) with various Nigerian banks, the high and rising short term maturity is of concern. However, management plans to draw additional low rate BOI loans and increase its use of dollar denominated loans, which will be utilised to refinance expensive short term debts. The dollar based loans will be hedged to mitigate exposures.
The lower earnings combined with the elevated debt position, resulted in a significant deterioration in net debt to EBITDA to 339% in FY18 (FY17: 172%). Management expects it to moderate to around 300% in FY19 driven by stronger earnings. However, further spikes in the metrics would negatively impact the ratings. GCR also views the very high dividend payments to be credit negative in light of the Group’s ongoing expansion requirements.
Significant diversification of earnings base into new product lines and/or new customers and geographies would enhance stability of earnings. Moderation in debt funded expansion would likely see gearing metrics improve and positively impact the ratings. Conversely, additional high dividend payments could further weaken the capital position resulting in a rating downgrade. The persistence of margin pressure could reduce earnings and the cash flows available for debt service.
NATIONAL SCALE RATINGS HISTORY
(+2341) 904 9462-3
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Dufil Prima Foods PLC Issuer and Bond Rating Reports, 2016-18
Glossary of Terms/Ratios (February 2018)
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.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. 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.COM.NG.
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 are an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until June 2020.
Dufil Prima Foods 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 Dufil.
The information received from Dufil to accord the credit ratings included;
• 2018 audited annual financial statements (plus four years of comparative numbers),
• unaudited management accounts for the period ended 31 March 2019
• industry comparative data and regulatory framework
• five year projections
• a breakdown of facilities available and related counterparties.
• information specific to the rated entity and/or industry was also received.
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.