Lagos, Nigeria, 5 May 2021 – GCR Ratings (“GCR”) has affirmed the national scale long-term and short-term Issuer ratings of BBB+(NG) and A2(NG) respectively accorded to Global Accelerex Limited, with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Global Accelerex Limited||Long Term Issuer||National||BBB+(NG)||Stable Outlook|
|Short Term Issuer||National||A2(NG)|
The ratings accorded to Global Accelerex Limited (“GAL” or “the Company”) are underpinned by supportive operating environment for the Nigerian financial technology sector, as well as the Company’s strong earnings progression and cash flow stability which has enabled moderate credit protection metrics. However, these rating strengths are counterbalanced by its relatively modest competitive position within the sector.
Nigerian financial technology (“fintech”) sector continues to leverage technological advances, as well as government enabling policies and initiatives towards promoting financial inclusion. The sector is considered less cyclical given the nature of the essential services being rendered, but is highly susceptibility to technology disruptions, as activities are largely through online platforms. Also, its moderately low barriers to entry have opened the industry to potentially many competitors, thus impacting industry’s longer-term margin. However, the industry outlook remains positive given the favourable demographic and rising internet penetration. The COVID-19 pandemic and the prolonged social distancing regulation have provided a stronger business case for the sector growth, disrupting the competitive landscape for the conventional banking.
GAL engages in the provision of electronic payment terminals and financial technology solutions in Nigeria and is licenced by Central Bank of Nigeria. The Company’s overall competitive position is relatively low given its modest niche within the broader financial services sector, and as its products and services are easily replicated. However, GCR believes the fintech players (including GAL) are raising the bar within the payment system, and the financial system infrastructure is more stable than financial companies, hence some uplift. Additional concern is the Company’s over dependence on its major supplier of point-of-sales terminals (“POS”) and the resultant supply disruption witnessed in recent period. However, management has indicated that the Company is far advanced with the plan to engage additional terminal suppliers to mitigate the dependency risk.
Earnings is neutral factor to the rating. The Company has recorded strong revenue progression over the review period, supported by ongoing business expansion within its POS sales and agent banking business. However, its EBITDA margin has declined steadily since FY17 due to the rising inflationary pressures, registering at 15.4% at 8M 2020 (FY19: 23.1%). The Company expects margins to improve going forward on the back of further scale economies and some cost rationalisation, but GCR expects earnings margin to remain below the strong level reported in FY19.
GAL has reported strong cash flows over the years on the back of sustained earnings progression, but partly offset by rising trade receivables in recent period. While the cash flows have been sufficient to cover operations and have reduced the need for debt through to FY19, growing dividends and rising capex spend in view of business expansion have created some funding pressures, necessitating debt support. Accordingly, the Company obtained a USD5.2m convertible shareholder loan, out of which USD2.6m has been drawn, demonstrating strong shareholder support. Even if the convertible loan is treated as debt, in line with the auditor’s treatment, GAL will still maintain a strong Net debt to EBITDA. As such, credit protection metrics are currently considered moderate.
GAL is planning to raise funds from the capital market through a N6bn Series 1 Senior Unsecured Bond Issue, with the bond proceeds expected to be utilised to finance its expansion strategy and increase market share. Notwithstanding the amount raised, the ability to scale up earnings should see net debt to EBITDA, and EBITDA coverage of net interest within moderate level over the medium-term rating horizon.
The Company’s uses and sources liquidity coverage is estimated at above 2x, over the next 12 months. This is predicated on the ability to successfully raise the N6bn in new debt to supplement projecting moderately strong cash flows and existing cash holding, while cash outflow is mainly working capital funding for POS terminals trading and for expanding its agent banking business over a 24-month period.
The Stable Outlook reflects GCR’s expectation that the successful issuance of the proposed bond would stimulate higher POS terminal trading and agent transaction volume, underpinning strong revenue growth of 30% over the next two years and sustainable cash flow. These should also see net debt to EBITDA register within 2x, and funds from operations to net debt ratio above 30%. While earnings margins are expected to remain within moderate levels, this could be adversely impacted by the rising inflationary pressure and foreign currency shortages within the Nigerian operating environment.
Negative rating action would be considered following materially adverse regulatory developments within the fintech sector, and a weakening in credit protection metrics due to 1) Net debt to EBITDA rising above 2x, 2) EBITDA coverage of net interest reducing below 5x, and 3) Funds from operations to net debt ratio declining below 30%. Moreover, a positive rating migration is unlikely in the short term, given the Company’s modest niche within the Nigerian financial sector. That said, a dominant market position within the POS terminal trading and financial inclusion agent network, while maintaining a strong credit profile could be positively considered.
|Primary analyst||Femi Atere||Senior Analyst|
|Lagos, Nigeria||femi@GCRratings.com||+234 1 9049462|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||Matthewp@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Services Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, February 2021|
|GCR Nigerian Non-Bank Financial Institutions Sector Risk Scores, February 2021|
|GCR Nigerian Telecommunication Sector Risk Scores, February 2021|
Global Accelrex Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long term Issuer||Initial||National||BBB+(NG)||Stable||November 2020|
|Short Term Issuer||Initial||National||A2(NG)|
|Long term Issuer||Last||National||BBB+(NG)||Stable||April 2021|
|Short Term Issuer||Last||National||A2(NG)|
RISK SCORE SUMMARY
|Country risk score||3.75|
|Sector risk score||2.50|
|Management and governance||0.00|
|Leverage and Cash flows||1.25|
|Earnings v Risks||0.00|
|Total Risk Score||6.75|
|Credit Rating||See GCR Rating Scales, Symbols and Definitions.|
|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 exposures 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.|
|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. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|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.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Rating horizon||The rating outlook period, typically 18 to 24 months.|
|Risk Management||The process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
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 ratings have been disclosed to Global Accelerex Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Global Accelerex Limited participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Global Accelerex Limited and other reliable third parties to accord the credit ratings included:
- 2019 audited annual financial statement, and prior four years annual financial statements;
- 8-month Management Accounts to 31 August 2020;
- 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;