Johannesburg, 30 June 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to KenolKobil Limited of A(KE) and A1(KE) in the long term and short term respectively; with the outlook maintained as Negative. The rating(s) are valid until 06/2015.
Global Credit Ratings has accorded the above credit rating(s) to KenolKobil Limited based on the following key criteria:
KenolKobil Limited’s (“KenolKobil”) position as a leading regional oil marketer is underpinned by a highly visible brand, extensive distribution network and a sizeable balance sheet, which enables the group to secure ample trade financing to fund its working capital intensive operations. In order to address operational inefficiencies that led to a KShs6.3bn net loss in F12, the group has made efforts to derisk its balance sheet, and has significantly scaled back its open tender system (“OTS”) participation. As such, sales volumes were reduced by 47% in F13, translating to a 43% decline in turnover to KShs109.7bn, while a KShs560m net profit was achieved. The conservative operational focus is expected to be sustained, with stable revenue growth and earnings envisaged. Coupled with the decision to substantially reduce purchases of foreign currency forward contracts, the turnaround saw foreign currency losses moderate to KShs105m, from a high of KShs4.6bn previously. While the sector inherently reflects thin margins, the group expects profitability to be enhanced by continued cost rigour and further streamlining. GCR would nonetheless expect to see consistent follow through in terms of strategy execution before the Negative outlook is lifted.
Stricter working capital controls amidst reduced OTS activity supported a modest cash release of KShs1.2bn in F13 (F12: KShs11.7bn), with more predictable movements anticipated going forward. Note is also taken of efforts to improve relationships with suppliers, with a settlement reached with the Kenya Petroleum Refinery during the year. While cases from other parties are pending, none are expected to result in material losses. Net debt had been reduced to KShs10.1bn at 1Q F14, from a high of KShs15.6bn at FYE11 (FYE13: KShs13.6bn), in line with a board mandate to reduce borrowings to sustainable levels. Net debt to equity declined moderately to 234%, from 259% (against a target of 133%), while net debt to EBITDA of 431% was well above a 222% budget. Debt serviceability measures remained constrained, although a more predictable earnings stream should see earnings based gearing trend below 3x, with interest cover reverting to comfortable levels.
Adherence to the more conservative operating mandate, and the ability to achieve a stable earnings trajectory despite the loss of scale, would be positively viewed. Should this translate to a continued reduction in debt to levels commensurate with the reviewed operating model, upward rating movement may be warranted in the medium term. However, operations remain highly susceptible to exogenous factors, and as such, marked commodity price and exchange volatility could result in erratic earnings despite efforts to reduce operational risk. In addition, a marked elevation in interest rates could materially impact the group’s credit risk profile.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (Nov/2004)
Long term: AA-(KE); Short term: A1+(KE)
Last rating (Jun/2013)
Long term: A(KE); Short term: A1(KE)
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria for Rating Corporate Entities, updated August 2013
KenolKobil Limited Rating Reports, 2004-2013
RATING LIMITATIONS AND DISCLAIMERS
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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.
KenolKobil 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 KenolKobil Limited with no contestation of the rating.
The information received from KenolKobil Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), 2014 profitability and capex projections, corporate governance and enterprise risk framework, capital management policy, industry comparative data, regulatory framework and a breakdown of facilities available (including related counterparties). In addition, information specific to the rated entity and/or industry was also received.
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 KenolKobil Limited rating of A(KE); Outlook Negative.