Announcements Corporate Rating Alerts

GCR affirms Emzor Pharmaceutical Industries Limited’s national scale long-term and short-term Issuer ratings of A-(NG) / A2(NG), Stable Outlook.

Lagos, 8 December 2021 – GCR Ratings (“GCR”) has affirmed Emzor Pharmaceutical Industries Limited’s national scale long-term and short-term Issuer ratings of A-(NG) and A2(NG) respectively, with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Emzor Pharmaceutical Industries Limited Long Term Issuer National A-(NG) Stable
Short Term Issuer National A2(NG)

Rating Rationale

The ratings of Emzor Pharmaceutical Industries Limited (“Emzor”, “the Group”) reflect its strong competitive position as a leading manufacturer within the Nigerian pharmaceutical industry, with well-established brands and diverse product offering, which has supported sound earnings. Offsetting these rating strengths are the working capital pressure and the recent rise in debt, which have impacted the Group’s financial profile.

Emzor ranks as one of the largest players within the sector. Its competitive position is supported by its well-established brands, offering of over 200 products and strong distribution network. Furthermore, solid relationships with international suppliers and technical partners give it access to up-to-date technology and processes and guarantee a steady source of raw materials and consumables. While over 95% of active pharmaceutical ingredients (“APIs”) are currently imported, Emzor is embarking on a backward integration initiative into APIs for anti-malaria drugs, and production of its primary packaging materials to reduce import dependence.

The Group has reported consistent growth in revenue over the review period, with CAGR of 18% from FY16 to FY20. Growth has been supported by rising production volumes, higher selling prices and introduction of new products across the therapeutics classes. For the 9 months to 30 September 2021 (“3Q FY21”), the Group reported an annualised growth of 17% in earnings. Although the Naira devaluation and forex scarcity in Nigeria has resulted in higher input costs, Emzor tends to pass this through to consumers within a short period, given the essential nature of its products. This has supported an earnings margin of around 20% in recent periods. Over the medium term, GCR expects around 20% y/y growth in revenue, with EBITDA margin increasing steadily given the expanding product portfolio. if revenue targets are surpassed, economies of scale should have further positive impact on the margin.

Emzor continued to experience working capital pressure due to the need to increase inventory to support expanding business volumes and mitigate against stock-outs, while pressure from related party transactions has significantly reduced. GCR believes that cash absorptions will persist in line with the anticipated revenue growth, which may result in further operating cash outflows if Emzor does not garner significant scale, amidst a good working capital oversight. As such, Emzor has utilised various external facilities and convertible shareholder loan to fund its working capital requirements and expansionary capex. Around 93% of the debt is currently long tenured, with maturity in 2024 and beyond. Emzor registered a N50bn Bond Issuance Programme during 4Q FY20 and subsequently raised an initial N13.7bn in Series 1 Bond Issue in January 2021, which is being utilised to fund its capex and support working capital requirement. With the bond issue, debt (including the convertible shareholder loan) rose to around N24.5bn at 3Q FY21, and net debt to EBITDA registered at 2.8x (FY20: 1.7x). This gearing metric is expected to remain within the intermediate level until debt is significantly paid down and/or the shareholder loan is converted to equity. Similarly, cash coverage of debt and net interest coverage are also expected to remain at moderately weak levels due to the rise in debt.

Supporting the credit profile is Emzor’s uses vs. sources liquidity coverage, which is estimated at 1.7x over the 12-month period in 2022. Liquidity is underpinned by the large cash holdings of about N5bn, N2bn in undrawn committed facilities, and an expectation of an improved operating cash flow. The majority of this will be utilised for debt redemption and to finance its expansion drive, but Emzor has the flexibility to shore-up liquidity by withholding some capex spend. An additional positive consideration is the Group’s strong relationships with financial institutions, which has allowed for steady access to funding on favourable terms.

Outlook Statement

The Stable Outlook reflects GCR’s view that Emzor’s recognised brands will continue to underpin strong earnings, which is supportive of the Group’s relatively strong credit profile through the expansionary capex phase.

Rating Triggers

An upward rating movement could be supported by the attainment of the aggressive medium-term earnings targets, underpinned by the successful completion of the various expansion projects. Maintaining a relatively strong financial profile through the expansionary capex phase would also need to be demonstrated.

Downward rating movement could emanate from an underperformance of earnings against a rise in debt, which burdens Emzor with high debt service costs. Continued disruptions to the operating environment, and/or a material cost overruns with severe working capital pressure, could also negatively impact group performance.

Analytical Contacts

Primary analyst Femi Atere Senior Analyst
Lagos, Nigeria Femi@GCRratings.com +234 1 904 9462
Committee chair Sheri Morgan Senior Analyst, Corporate Ratings
Johannesburg, ZA Morgan@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 Country Risk Scores, October 2021
GCR Nigeria Corporate Sector Risk Scores, November 2021

Ratings History

Emzor Pharmaceutical Industries Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial/Last National A-(NG) Stable November 2020
Short Term Issuer Initial/Last National A2(NG)

Risk Score Summary

Rating Components & Factors Risk scores
Operating environment 7.00
Country risk score 3.75
Sector risk score 3.25
Business profile 1.00
Competitive position 1.00
Management and governance 0.00
Financial profile (0.50)
Earnings profile 0.50
Leverage and capital structure (1.50)
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 7.50

Glossary

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.
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.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
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.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Refinancing The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.

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 rating has been disclosed to Emzor Pharmaceutical Industries Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Emzor Pharmaceutical Industries Limited in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Emzor Pharmaceutical Industries Limited and other reliable third parties to accord the credit ratings included:

  • 2020 audited annual financial statement, and prior four years annual financial statements;
  • Nine-month management accounts to 30 September 2021;
  • Internal and/or external management reports;
  • 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;


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