Lagos, Nigeria, 9 September 2021 – GCR Ratings (“GCR”) has affirmed Lafarge Africa Plc’s national scale long-term and short-term Issuer ratings of AA-(NG) and A1+(NG) respectively, with the Outlook accorded as Stable. The Series 2 Senior Unsecured Bonds were fully redeemed in June 2021 and the related rating has been withdrawn.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Lafarge Africa Plc||Long Term Issuer||National||AA-(NG)||Stable Outlook|
|Short Term Issuer||National||A1+(NG)|
|N33.6bn Series 2 Senior Unsecured Bonds||Long Term Issue||National||WD(NG)||—|
The ratings reflect Lafarge Africa Plc’s (“LAP” or “the Group”) strong credit risk profile, improving earnings trajectory and relatively strong cash flows since the operational rationalisation in FY19.
Lafarge Africa Plc is the second largest cement producer in Nigeria, with a combined production capacity of 10.5 million metric tonnes per annum from four plants spread across the country. Its competitive position is further supported by demonstrated technical support from its parent company, Holcim, a global leader in cement production with 2,500 plants across 90 countries. While the company is geographically concentrated to Nigeria, the corporate restructuring and deleveraging between 2017 and 2019 has allowed it to focus on the more profitable Nigeria business, infrastructural enhancements at the existing plants and expansion opportunities. Nevertheless, the assessment of its competitive position is constrained by the market dominance of the largest cement producer (with a 61.3% market share), as well as the lagging earnings margin reported by LAP due to its relatively old production infrastructure.
Higher selling prices and rising demand, spurred by robust construction activity, has driven strong earnings growth since FY19, with the EBITDA margin rising from 28% in FY18 to 36% at 1H FY21 (FY20: 31%). Margin enhancement has been further supported by a cheaper fuel mix and lower power costs. COVID-19 has not had a meaningful impact on earnings, although inflationary pressure and foreign currency shortages are expected to continue to weigh adversely on production costs and operating expenses. Nevertheless, LAP’s strong financial profile will serve to moderate the impact of external shocks and GCR expects strong revenue and earnings progression to continue, on the back of a wider national footprint and solid margin.
Following the capital injection and operational rationalisation during FY19, LAP’s credit risk profile significantly strengthened. The new capital was utilised to reduce external debt to N64bn at FY19, from a review period high of N301.5bn at FY18. Gross debt further reduced to N19.8bn at 1H FY21, as the Series 2 Bonds were redeemed, and other loans partly settled. Moreover, with N57.8bn in cash, LAP registered a net ungeared position at 1H FY21. GCR expects the net ungeared position to be maintained in the short to medium term as capex is expected to be funded from operational cash flows, while the key focus will be on optimising existing production capacity.
Interest coverage registered at 8.4x in FY20 and GCR expects the level to trend comfortably above 10x (1H FY21: 15x) as long as the net cash position is maintained. Similarly, operating cash flow coverage of debt spiked to over 500% in 1H FY21 (FY20: 114%), supported by the low debt level and is expected to remain strong over the rating horizon.
LAP’s uses vs. sources liquidity coverage is calculated to remain above 1.6x over the next 18-month period. The liquidity assessment is underpinned by the current high cash holdings and an expectation that cash flows will remain strong. Against this debt maturities are low, and little capex spend is projected. While most remaining debt is short term, GCR also positively notes the unutilised committed funding lines from six domestic financial institutions and facility headroom.
The Stable Outlook reflects GCR’s expectation that LAP will continue to report strong earnings and strong cash flows, whilst maintaining a conservative funding profile. This will mitigate the increased risks within the Nigerian economy.
A rating upgrade could follow continued revenue growth and margin enhancement over the medium term, that allows the strong cash flows to be sustained. This could see further improvements in LAP’s funding and liquidity profile.
Downward ratings pressure could arise from unanticipated external shocks within the operating environment, that constrain pricing flexibility and adversely impact earnings. A material increase in debt, even to fund profitable acquisitions, that weakens credit protection metrics would also be negatively viewed.
|Primary analyst||Femi Atere||Senior Analyst|
|Lagos, Nigeria||Femi@GCRratings.com||+234 1 9049462|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, August 2021|
|GCR Nigeria Corporate Sector Risk Scores, August 2021|
|Lafarge Africa Plc Issuer rating reports (2010-20)|
Lafarge Africa Plc
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long term Issuer||Initial||National||A(NG)||Stable Outlook||July 2010|
|Short Term Issuer||Initial||National||A1(NG)|
|N33.6bn Series 2 Bond Long Term Issue||Initial||National||AA-(NG)||Stable Outlook||April 2016|
|Long term Issuer||Last||National||AA-(NG)||Stable Outlook||September 2020|
|Short Term Issuer||Last||National||A1+(NG)|
|N33.6bn Series 2 Bond Long Term Issue||Last||National||AA-(NG)|
RISK SCORE SUMMARY
|Country risk score||3.75|
|Sector risk score||1.75|
|Management and governance||0.00|
|Leverage & capital structure||2.00|
|Total Risk Score||9.50|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with because of holding the security or asset. For a company, its exposure may relate to a 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||Regarding 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 a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Rating horizon||The rating outlook period, typically 18 to 24 months.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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 Lafarge Africa Plc. 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.
Lafarge Africa Plc 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 Lafarge Africa Plc and other reliable third parties to accord the credit ratings included:
- 2020 audited annual financial statement, and four years annual financial statements;
- A six-month management accounts to 30 June 2021;
- 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;