Johannesburg, 26 October 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to FTG Holdings Limited 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 affirmed. The ratings are valid until September 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to FTG Holdings Limited (“FTG”) based on the following key criteria:
The ratings take cognisance of FTG’s strong position in its core plastics business supported by diversified interests in FMCG in East Africa, with a number of market leading brands, underpinned by long standing supplier relationships and an extensive distribution network. Recent growth has been driven by successful bolt-on acquisitions, although note is taken of potential execution risks associated with such in unfamiliar segments.
Due to political and weather-related shocks in the operating environment, FTG has experienced significant variability in revenues and earnings over the review period. That said, GCR notes that the underlying operations are efficiently run and the product mix, as well as end-markets are diversified. Following a 5% decline in FY17, revenue growth recovered to 4% in 1H FY18 as political tensions have stabilised. Similarly, lower food prices have supported a recovery in the operating margin to 7.1% at 1H FY18 from a review period low of 4.1%, albeit that sustained high global polymer prices may put pressure on further margin progression. GCR takes cognisance of FTG’s investment in more efficient production plants, which should be supportive of a level of margin resilience going forward.
The group’s volatile cash generation and free cash flows is viewed as a key credit challenge and constraining factor to the rating. Accordingly, the group has resorted to debt to finance its growth, particularly short-term facilities which amplifies its exposure to higher refinancing risks if earnings come under severe pressure. Although interest-bearing debt increased to KES475m at 1H FY18 (FY17: KES423m), gearing metrics have remained relatively conservative, with net gearing and net debt to EBITDA at 66% and 135% respectively (FY17: 58%; 217%). Debt serviceability remains adequate, with net interest cover at 2.8x (FY17: 2.0x).
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 to fund acquisitions could also have an adverse impact.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (September 2015)||Last rating (October 2017)|
|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|
|Primary Analyst||Secondary Analyst|
|Sheri Morgan||Tavonga Muchemedzi|
|Senior Analyst: Corporate Ratings||Junior Analyst: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
FTG Holdings Limited Issuer rating reports, 2015-17
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.
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 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 ratings have been disclosed to FTG Holdings Limited.
The information received from FTG Holdings Limited and other reliable third parties to accord the credit ratings included;
- Audited financial results of Company per 31 December 2017;
- Unaudited interim results of Company per 30 June 2018;
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.