Johannesburg, 27 October 2017 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to FTG Holdings Ltd of BB+(KE) and B(KE) in the long term and short term respectively; with the outlook accorded as Stable. Concurrently, a Commercial Paper rating of B(KE) has also been accorded. The ratings are valid until September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to FTG Holdings Limited (“FTG”) based on the following key criteria:
FTG’s ratings are underpinned by diversified manufacturing interests and well-entrenched product offerings across East and Southern Africa, particularly its strong operating history in plastic bulk water storage. The operating model is supported by a scalable cost structure, the adaptability of its manufacturing equipment and processes, as well as an extensive distribution network.
Acquisitions and sustained investments to enhance manufacturing capacity supported a five-year compound growth of 13%, bringing group revenue to a new high of KES2.5bn in FY16. That said, the operating environment has become increasingly challenging, due to the effect of the regional drought and resultant inflationary pressures on consumer spending, constrained market liquidity following the collapse of three domestic banks, and restrained business activity ahead of the general elections. Accordingly, FTG’s 1H FY17 volumes were constrained, with stability in the top line only likely well into FY18.
Internal efficiencies have underlined relative margin resilience, with the tapering in EBITDA seen in FY16 (10.7%, from a five-year high of 12.7% previously) followed by a modest pick up to 11.2% in 1H FY17. Margins are set to remain under pressure in the short term, with FY17 earnings also expected to be curtailed somewhat by adverse movements in the Metical and the Rwandan Franc.
While cash generation has been bolstered by acquisitions and economies of scale, working capital pressures have driven a volatile discretionary cash flow trajectory. Albeit adequate for the ratings, debt service ratios have also charted an erratic trend, while the significant short-term debt exposure curtails funding flexibility. The group is reviewing its funding policies and facilities in a bid to enhance its debt maturity profile, while initiatives are under way to improve the efficiency of the cash conversion cycle.
While debt has trended within a relatively narrow range, peaking at KES338m at FY16 (FY15: KES232m; 1H FY17: KES312m), the cost of funding is disproportionately elevated due to increased recourse to overdrafts. Net gearing and net debt to EBITDA rose to 37% and 86% respectively at FY16 (FY15: 25%; 48%), and registered at a respective 33% and 81% at 1H FY17. Notwithstanding the moderation seen amidst subdued market dynamics in the interim reporting period, variability in gearing metrics is expected to persist.
FTG’s risk factors are exacerbated by the group’s expansion into increasingly income elastic product ranges, competitive pressures and challenges integrating or bedding down bolt-on acquisitions/new brands (inter alia).
Positive rating movement is dependent upon sustained profit growth over the medium term, driven by rising revenue and firmer margins, combined with the maintenance of moderate gearing metrics. Conversely, external pricing pressures or renewed working capital pressures resulting in weaker profitability could result in the deterioration of earnings metrics and would be negatively considered. Similarly, higher than expected debt and gearing metrics due to debt funded acquisitions would also have an adverse impact.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (September 2015)||Last rating (September 2016)|
|Long term: BB+(KE)||Long term: BB+(KE)|
|Short term: B(KE)||Short term: B(KE)|
|Commercial Paper: B(KE)||Commercial Paper: B(KE)|
|Outlook: Stable||Outlook: Stable|
|Sheri Few||Eyal Shevel|
|Senior Analyst: Corporate Ratings||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
FTG rating reports, 2015-16
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|Debt Service Ratio||A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows over a period to the sum of interest and principal payments over the same timeframe.|
|Economies Of Scale||Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.|
|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.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|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||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
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 were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
FTG Holdings Ltd 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 FTG Holdings Ltd with no contestation of the rating.
The information received from FTG Holdings Ltd and other reliable third parties to accord the credit ratings included;
- Audited financial results of Company per 31 December 2016;
- Unaudited interim results of Company per 30 June 2017;
- A breakdown of facilities available and related counterparties;
- Corporate governance framework.
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.
GCR affirms FTG Holdings Limited’s rating of BB+(KE); Outlook Stable.