Johannesburg, 30 September 2016 — 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 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to FTG Holdings Ltd (“FTG”) based on the following key criteria:
FTG’s ratings are supported by its broad manufacturing interests and the leading market positions within many of its business units across East Africa, particularly its strong operating history in plastic bulk water storage. This is complemented by the flexibility of its manufacturing equipment and processes, as well as the common distribution network to achieve synergies.
The group’s market position and scale has been enhanced through acquisitions in the FMCG segment since its listing in late 2014. This, combined with increased plastics production capacity saw revenue advance by a robust 29% to a high of KES2.3bn in F15, largely in line with prelisting forecasts. While the group’s focus on product diversification is positively viewed, it increases the risk of potential startup issues as FTG increasingly works on new lines with new customers, where spending patterns are somewhat discretionary.
Whilst F14 business volumes were hampered by cash flow constraints, the additional liquidity from the listing and the greater traction in the higher margin FMCG business (particularly skin care products) boosted the operating margin to 11.3% in F15 (F14: 7.9%). Margins are, however, expected to narrow somewhat for F16, given additional distribution and marketing costs, as well as slower sales volumes in 1H F16. Cash generated by operations has been reflective of the strong earnings trajectory over the review period, although sizeable working capital absorptions have been reported in line with the enlarged capacity. While low free cash flow is expected to persist in F16, recent regulatory changes to interest rates are likely to provide some respite.
FTG’s gearing metrics remain moderate, owing to the proceeds from the share issue at listing and the strong level of retained earnings. While gross debt rose to a review period high of KES332m at 1H F16 (FYE15: KES232m), debt was largely short dated to meet renewed working capital pressures. This saw net gearing and net debt to EBITDA increase to 36% and 116% respectively at the interim (FYE15: 23%; 80%). Cognisance is taken of the volatility in gearing metrics YoY, a function of seasonal working capital requirements, reflecting the heightened financial risk for the company during its growth phase.
Positive rating movement is dependent on sustained profit growth over the medium term, driven by rising revenue and firmer margins, combined with the maintenance of moderate gearing metrics. Conversely, weaker profitability due to external pricing pressures or renewed working capital pressures could result in a deterioration of earnings or credit metrics, which would be negatively considered.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (September 2015)|
|Long term: BB+(KE)|
|Short term: B(KE)|
|Commercial Paper: B(KE)|
|Senior Credit Analyst|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
FTG rating report, 2015
RATING LIMITATIONS AND DISCLAIMERS
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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.|
|Commercial Paper||Commercial paper is a negotiable instrument with a maturity of less than one year.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|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.|
|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.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|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.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
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.
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 2015
- Unaudited interim results of Company per 30 June 2016
- 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 Ltd’s rating of BB+(KE); Outlook Stable.