Lagos, 30 October 2019 — Global Credit Rating Co. Limited (“GCR”) has affirmed the national scale Issuer credit ratings assigned to Lafarge Africa Plc of A+(NG) and A1(NG) in the long term and short term respectively; with Stable Outlooks accorded. Concurrently, GCR affirmed the rating of the Series 2 Bonds at A+(NG), with the Outlook accorded as Stable. The Series 1 Bonds were redeemed upon maturity in June 2019. The ratings expire in August 2020.
Global Credit Ratings has accorded the above credit ratings on Lafarge Africa Plc (“LAP” or “Issuer” or “the Group”), as well as the Series 2 Bonds based on the following key criteria:
Lafarge Africa Plc has a strong domestic market position and benefits from ongoing technical and financial support provided by LafargeHolcim, a global leader in cement production. GCR also takes cognisance of LAP’s extensive production and distribution network.
Over the past few years, the impact of devaluation and inflation have weighed adversely on production and operating costs, with gross and EBITDA margins contracting sharply. LAP’s cost management initiatives, combined with its alternative fuel strategy have helped to manage rising costs and enhance earnings in FY18 and 1H FY19. Operating profit increased more than 3x to N25.1bn in FY18 and further by 37% y/y at 1H FY19, while operating margin registered at 14% (FY18: 8.1%). Looking ahead, LAP expects domestic performance to be stronger in the second half of the year, while performance will also not be burdened by the drag from the South African operations. Thus, the expectation is for FY19 earnings to outperform FY18.
LAP’s credit rating has been constrained by very high gearing. Although the recovery in earnings drove an improvement in net debt to EBITDA to 272% at end-June 2019, from 605% in FY18, net interest cover is remained insufficient at below 2x. To remedy the debt position, the Group has undertaken a significant capital restructuring over the past 18 months. This included an N88.4bn Rights Issue and the sale of Lafarge South Africa Holdings (Pty) Limited (“LSAH”), which allowed the Group to reduce debt from N207.7bn at FY17 to N56bn as at end-July 2019. Accordingly, LAP expects net gearing to register below 50% at end-2019 and net debt to EBITDA below 1x, with these ratios to be sustained at moderate levels over the medium term. Interest coverage should also improve to around 3x for the full year, underpinned by sustained earnings improvement and much lower debt service costs.
The performance of the cement industry is directly linked to general macroeconomic fundamentals, especially to activity within the construction sector. Thus, weak economic conditions may constrain LAP’s earnings. Competitive pressures are expected intensify over the medium term, as capacity utilisation is ramped up by domestic players. Industry challenges remain with erratic electricity supply, poor distribution network, substantial power costs, inter alia. Positively, LAP is adopting various strategies including efficient logistics and supply chain management as well as the planned commissioning of a 16MW power plant in 2020.
Upward rating migration may be driven by the improved capital structure, if low gearing metrics are maintained and debt service remains strong. An improved earnings performance would bode positively. Conversely, slower than anticipated economic growth, delays in rolling out public infrastructure projects, and competitive pressures may constrain demand and/or pricing flexibility. These factors could adversely affect earnings and result in liquidity strain, placing downward pressure on the ratings.
NATIONAL SCALE RATINGS HISTORY
Senior Credit Analyst
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Lafarge Africa Plc Rating Reports, 2010-18
Glossary of terms/ratios, February 2018
GCR affirms that a.) no part of the ratings were 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; and d.) The Issuer and Bond ratings expire in August 2020.
Lafarge Africa Plc 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 Lafarge Africa Plc.
The information received from Lafarge Africa Plc and other reliable third parties to accord the credit rating included:
– the 2018 audited annual financial statements and audited comparative results for the preceding four years,
– medium term budgets for Nigerian operations
– unaudited management accounts to June 2019,
– a completed rating questionnaire containing additional information on Lafarge Africa Plc,
– breakdown of facilities available and related counterparties
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.