Announcements Corporate Rating Alerts

GCR affirms Eat ‘N’ Go Nigeria Limited’s Issuer rating of BBB(NG); Outlook Stable.

Lagos Nigeria, 29 December 2020 — Global Credit Ratings has affirmed the long term and short term national scale issuer ratings of BBB(NG) and A3(NG) respectively accorded to Eat ‘N’ Go Nigeria Limited, with the Outlook accorded as Stable. Concurrently, the national scale rating accorded to ENG Finance SPV Plc’s N11.5bn Bond Issuance was also affirmed at BBB(NG). The ratings are valid until October 2021.

RATING RATIONALE OF THE ISSUER

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Eat ‘N’ Go Nigeria Limited (“ENG” or the “Group”) based on the following key criteria:

The ratings reflect ENG strong position in the Nigerian Quick Service Restaurant (“QSR”) sector, underpinned by well-established international brands, alliances with suppliers, experienced management team, as well as strong shareholder and franchisor support. However, the continued adverse impacts (declining consumer spend and restaurants daily traffic) of the COVID-19 pandemic on the QSR sector constrain the rating in the short term. While long term industry growth prospects are strong, expansion must be achieved amidst other more systemic operating challenges.

ENG reported consistent earnings growth up to FY19 supported by its rapid store expansion across the nation. Interim performance (up to 63% FY20) was impacted by the negative effect of COVID-19 crisis, but this is likely to be temporary and future earnings should be supported by the country’s large and predominantly youthful population and rapid urbanisation.

Notwithstanding the increase in operating costs due to rising inflationary pressure and business expansion, earnings margins remain relatively strong over the review period. While management expects the EBITDA margins to be maintained at 14.7% for FY20 on the back of the implementation of cost containment initiatives, GCR expects this to be constrained due to the rising inflationary pressures.

ENG has reported rising operating cash flow to FY18 supported by strong working capital management. However, this has moderated significantly in FY19 and 8M FY20 due to substantial working capital absorptions and higher finance charges. Accordingly, operating cash flow coverage of total debt declined significantly to 5% in FY19, from levels around 80% to 132% historically. GCR expects this to remain low attributable to rising working capital pressure in view of the expanding business.

Gross debt spiked to N15.9bn in FY19 (FY18: N2.5bn) following a bond issue and additional bank facility. While gross debt to EBITDA rose to 722% in FY19, the ratio declined to 572% at 8M FY20 as proceeds were used to settle bank loans. GCR expects gearing metrics to decrease going forward as the earnings grow on the back of expansion. Furthermore, interest coverage remains negatively impacted by the persistent increase in debt. This presents a material risk to the sustainability of the financial position. Although ENG expects this to be addressed by robust income growth, the weak coverage provides only limited headroom to withstand earnings shock in the short term.

ENG exhibits moderate liquidity coverage, with cash generation expected to support liquidity coverage over the 13-month period. Nevertheless, this is dependent on ENG’s ability to improve earnings substantially, in conjunction with effective cost management to drive a meaningful revenue recovery.

The Series 1 Bonds constitute direct, irrevocable and senior unsecured obligations of ENG Finance SPV Plc. There has been no change to the structure of the transaction. Any change in the rating assigned to the ENG will directly affect the rating of the Series 1 Bonds.

Positive rating action is dependent on significant improvement in earnings and profitability. An improvement in interest coverage ratios and earning based gearing metrics could also bode well. Conversely, the ratings could come under pressure if gearing metrics approach or exceed the proposed covenant level and if liquidity pressure worsens. Risks in this regard could arise from earnings underperformance, delays in project rollout and adverse exogenous factors which may constrain sales volumes.

NATIONAL SCALE RATINGS HISTORY

Rating class

Rating

Date

Outlook

Initial ratings

     

Issuer- Long term

BBB+(NG)

December 2018

Stable

Issuer- Short term

A2(NG)

December 2018

Stable

Series 1 Bonds

BBB(NG)

March 2020

Stable

       

Last ratings

     

Issuer- Long term

BBB(NG)

November 2019

Stable

Issuer- Short term

A3(NG)

November 2019

Stable

Series 1 Bonds

BBB(NG)

March 2020

Stable

ANALYTICAL CONTACTS

Primary Analyst

Busola Akinrolabu

Credit Analyst

busola@gcrratings.com

+234 1 9049462

Committee Chairperson

Dave King

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