Announcements

GCR affirms East African Cables Limited’s rating of BBB+(KE); Outlook Stable.

Johannesburg, 30 Oct 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to East African Cables Limited of BBB+(KE) and A2(KE) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until 10/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to East African Cables Limited (“EAC”) based on the following key criteria:

While revenue continued its steady growth trend to KShs4.5bn in F13 and KShs2.6bn in 1H F14, earnings margins have been impacted by a rising cost base and a shift towards inherently lower margin products and regional sales. Accordingly, the operating margin contracted to 12.5% in F13 and 12.1% in 1H F14, from the review period high 15.8% in F12, with operating profit declining to KShs602m in F13 (F12: KShs681m) as a result. Budgets indicate that margin pressure is likely to persist but earnings should be bolstered by strong revenue growth.

EAC has evidenced robust operating cash flows over the review period, although the company reported significant working capital pressure in F13, due to rising debtors and lower creditors. Some of challenges are likely to be once-off (and associated cash releases were evident in 1H F14), but EAC has indicated that competition from importers has necessitated offering longer payment terms to some customers, whilst trade creditor terms have not improved. The working capital funding gap has been met by short term debt, with gross debt climbing to KShs1.9bn at FYE13 (well above forecast), of which over 80% was short term. Capex funding saw gross debt rise to KShs2.4bn at 1H F14, albeit that this was mainly long term. Although current gearing is not higher than historical levels, the increase to 62% at FYE13 and 68% at 1H F14 did reverse the downward trend between FYE08 and FYE12. Net debt to EBITDA has been more volatile, with the weaker earnings in F13 and 1H F14 resulting in the ratio increasing to 250% and 262% respectively. Funding concentration risk is evident with Standard Chartered providing over 90% of facilities, albeit that there is a very long standing relationship between the parties.

EAC initiated a new KShs870m capex project in F14, aimed at expanding and modernising its facilities. The total project cost is KShs870m, of which around KShs600m had been spent by 1H F14, with completion expected before FYE14. Opportunities for EAC derive from the substantial investment in power generating capacity that is planned across the region over the next few years, and the strong relationships it has developed with key electricity suppliers.

Securing large public sector contracts would demonstrate EAC’s ability to take advantage of the significant opportunities in the region. Combined with the demonstrated ability to extract efficiencies from current capex projects, the higher volumes should see earnings margins and thus profitability improve, resulting in a rating upgrade. Conversely, a continued increase in debt, even to fund capex projects, could raise gearing metrics to unstainable levels. Further margin erosion could offset the benefits of the efficiency projects and result in a declining earnings trend and thus a lower rating, particularly if projected volumes are not met.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Nov/2007)
Long term: A-(KE); Short term: A2(KE)
Outlook: Stable

Last rating (Oct/2013)
Long term: BBB+(KE); Short term: A2(KE)
Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Committee Chairperson
Richard Hoffman
Senior Analyst
(011) 784-1771
hoffman@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated August 2014
EA Cables rating reports (2007-2013)

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.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was 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.

East African Cables Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to East African Cables Limited with no contestation of the rating.

The information received from East African Cables Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), interim accounts for the 6 months to 30 June 2014, internal and/or external management reports, full year budgeted financial statements for 2014, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Credit Risk

The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.

EBITDA

Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

Operating Cash Flow

A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.

Operating Margin

Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.

Operating Profit

Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.

Working Capital

Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.

GCR affirms East African Cables Limited’s rating of BBB+(KE); Outlook Stable.

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