Announcements

GCR affirms Mabati Rolling Mills Limited’s rating of A+(KE); Outlook Stable

Johannesburg, 17 July 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Mabati Rolling Mills Limited of A+(KE) and A1(KE) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until July 2016.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Mabati Rolling Mills Limited (“MRM”) based on the following key criteria:

MRM is a subsidiary of Safal Group, a pan-African steel roofing manufacturer and supplier, servicing markets in East, Central and Southern Africa. Having the largest production facilities, MRM plays an integral role in supporting some of its sister companies by supplying steel at various levels of processing, while also benefiting from exports through their sales networks.

MRM has reported a robust operating performance over the review period, despite significant currency and steel price volatility. Whilst revenue and operating profit have fluctuated somewhat, the company has consistently reported strong bottom line profitability. Particularly in F14, revenue grew by just 2% to KES16.3bn, as weak metal prices largely offset volume growth. However, market conditions supported firmer margins, with the gross margin registering at 17.4% in F14 (F13: 16.5%). Further to this, greater sales of higher value-add colour coated products also supported margin enhancement.

Despite the strong operating performance, MRM reported a KES913m working capital absorption in F14. However, positive cash flow from operations has been generated by the group over the review period. As a result of the working capital pressure, gross debt increased to KES3.4bn at FYE14 (FYE13: KES2.8bn). This saw net gearing and net debt to EBITDA increase to 76% and 158% respectively (FYE13: 60%; 135%). Cognisance is taken of forecasts that project a decline in net debt and gearing metrics to around 42% at FYE15.

The company’s cost of production is strongly influenced by prevailing raw material prices and exchange rates, with volatility remaining a business risk to MRM. Nevertheless, the general economic environment in the East African region is strong, with increased construction activity underpinning demand for roofing products, and an emerging middle class demanding higher quality products.

Positive rating action will be dependent on strong growth in earnings going forward, with sustained operating profits, alongside the maintenance of moderate debt levels and gearing metrics. Conversely, volatility in market conditions and increasing competitive pressures could drive a slump in margins and earnings. Significant working capital pressure and associated debt funding requirements could also drive an elevated credit risk profile.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (June 2000)    
Long term: A-(KE); Short term: A1-(KE)    
Outlook: Stable    
     
Last rating (July 2014)    
Long term: A+(KE); Short term: A1(KE)    
Outlook: Positive    
     

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Eyal Shevel   Farai Mauchaza
Sector Head: Corporate Ratings   Junior Analyst
(011) 784-1771   (011) 784-1771
shevel@globalratings.net   faraim@globalratings.net
     
Committee Chairperson    
Richard Hoffman    
Senior Analyst    
(011) 784-1771    
hoffman@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015

MRM rating reports (2000-2014)

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

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Commercial Paper Commercial paper is a negotiable instrument with a maturity of less than one year. 
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
EBITDA Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.
Exchange Rate The value of one country’s currency expressed in terms of another.
Liquidity Risk The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.
Working Capital Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.
   

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.

Mabati Rolling Mills 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 Mabati Rolling Mills Limited with no contestation of the rating.

The information received from Mabati Rolling Mills Limited and other reliable third parties to accord the credit rating(s) included;

  • Audited financial results of Company per 31/12/14 (plus four years comparatives).
  • Budgeted financial statements for 2015.
  • A breakdown of production and earnings mix.
  • A breakdown of facilities available and related counterparties.
  • Corporate governance and enterprise risk framework.

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.

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