Announcements

GCR affirms Idwala Industrial Holdings Limited’s rating at BBB-(ZA); Outlook Stable

Johannesburg, 26 June 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Idwala Industrial Holdings Limited at BBB-(ZA) and A3(ZA) in the long term and short term respectively; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Idwala Industrial Holdings Limited (“Idwala”) based on the following key criteria:

Idwala reports a leading position in the calcium carbonate industry, as a function of it holding the right to mine a scarce high-grade white marble resource. It is also one of only two main domestic players in the burnt lime industry, which has enabled it to provide product to almost half of the domestic market. Its competitive positioning in lime has also been strengthened by the recently completed capex for new lime kilns, which are much more energy efficient than the older kilns. This should enable the group to bolster its margins and/or more keenly price its products going forward.

Although the group has reported stagnant volumes and revenue due to the weak domestic economy, the new shaft kilns and other efficiency initiatives have seen improvements in margins and absolute profits. In this regard, the gross margin has risen from 30.1% in F11 to reach 40.6% for F14 (F13: 35.8%), while the EBITDA margin rose simultaneously from 28% to 33.5% (F13: 30%). Accordingly, operating profit was reported at a record R422m in F14 (F13: R390m). However, note is taken of the depressed performance of the lime division in the four months to 30 April 2015 (“YTD F15”). Nonetheless, Idwala’s operations are inherently highly cash generative, with limited working capital requirements. Accordingly, operating cash flows were reported at robust values of R296m and R262m for F13 and F14 respectively. This has enabled comfortable debt serviceability, with free cash flow covering net interest charges by 3.2x in F14 (F13: 3.3x) and net interest cover reported at a similar 3.2x (F13: 2.8x).

Idwala, as an unlisted and privately-owned entity, reports low solvency and high levels of debt. In this regard, and despite improvements since the equity refinance in 2008, the group reported equity of R261m as compared to gross debt of R1.5bn at FYE14 (FYE13: R79m and R1.6bn). Accordingly, Idwala remains relatively highly geared, with net debt to equity and net debt to EBITDA of 435% and 217% reported at FYE14 (FYE13: 1,594% and 267%). However, concerns over gearing are mitigated by the the strongly cash generative nature of the operations and the very long useful life of core productive assets.

Idwala is exposed to both the depressed domestic economy and certain cyclical industries within it (like mining and manufacturing). Although a diversity of customers and supplied industries ameliorates this somewhat, volumes have been impacted in 2014 and YTD 2015. As such, an upgrade of Idwala’s ratings would only be likely once improved domestic conditions manifest. Furthermore, such an upgrade would be premised on a strengthening of earnings and capitalisation, driving improvements in key gearing and credit risk indicators. In contrast to this, the loss of several key clients, or a substantial increase in borrowings and gearing, could result in a downgrade of Idwala’s ratings.

NATIONAL SCALE RATINGS HISTORY
Initial rating (April 2012)
Long term: BB+(ZA); Short term: A3(ZA)
Outlook: Positive
Last rating (May 2014)
Long term: BBB-(ZA); Short term: A3(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Richard Hoffman
Senior Analyst
(011) 784-1771
Hoffman@globalratings.net
Committee Chairperson
Eyal Shevel
Sector Head: Corporate and Public Sector Ratings
(011) 784-1771
Shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, February 2015
Idwala Industrial Holdings Limited Rating Reports, 2012-2015
New issuance report – Idwala Secured Notes, 2012-2013
Surveillence reports – Idwala Secured Notes, 2014-2015

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

Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Credit Rating Agency An entity that provides credit rating services.
Credit Risk The possibility that abondissuer or any other borrowers (including debtors/creditors) willdefaultand fail to pay theprincipaland interest when due.
Debt An obligation to repay a sum ofmoney. More specifically, it is funds passed from a creditor to a debtor in exchange forinterestand a commitment to repay theprincipalin full on a specified date or over a specified period.
Default Failure to meet the payment obligation of either interestorprincipalon adebtorbond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
Downgrade The assignment of a lowercredit ratingto a corporate or sovereign borrower’sdebtby a credit rating agency. Opposite ofupgrade.
EBITDA EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.
Equity Equity is the holding or stake thatshareholdershave in a company. Equitycapitalis raised by the issue ofnew sharesor by retaining profit.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded bydebtand can be calculated by dividing its debt byshareholders’ 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 theinterest rate, the amount borrowed orprincipaland the duration of the loan.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’soperating profitby its interest payments for a given period.
Interest Rate The charge or the return on an asset ordebtexpressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
LC An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.
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 asecuritycan be bought or sold quickly and in large volumes without substantially affecting the market price.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
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 Cash Flow A company’snetcashpositionover a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Operating Profit Profits from a company’s ordinaryrevenue-producing activities, calculated before taxes and interest costs.
Principal The total amount borrowed or lent, e.g. theface valueof abond, excluding interest.
REPO In a REPO one party sellsassetsor securities to another and agrees to repurchase them later at a set price on a specified date.
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 includingbasis risk, country risk,credit risk,currency risk,economic risk,inflation risk,liquidity risk, market orsystemic risk,political risk,settlement riskandtranslation risk.
Shareholder An individual, entity or financial institution that holds shares orstockin an organisation or company.
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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Idwala Industrial Holdings Limited 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 rating/s has been disclosed to Idwala Industrial Holdings Limited with no contestation of the rating.

The information received from Idwala Industrial Holdings Limited and other reliable third parties to accord the credit rating(s) included:

  • The 31 December 2014 audited financial statements, as well four years historical audited financials;
  • Management accounts for the for the four months to April 2015;
  • May 2015 board pack, as well as lime and carbonate reporting packs; and
  • 2015 and long range budgets included in the board pack.

The ratings above were solicited by, or on behalf of, Idwala Industrial Holdings Limited, and therefore, GCR has been compensated for the provision of the ratings.

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