Announcements

GCR affirms Mabati Rolling Mills Limited’s national scale ratings

Johannesburg, 03 July 2014 — 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 Positive. The ratings are valid until July 2014.

RATING RATIONALE

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

Mabati Rolling Mills Limited (“MRM”) is an entrenched player in the Kenyan and East African steel roofing industry, accounting for the single largest portion of Kenya’s production. Moreover, as a wholly owned subsidiary of Safal Investments (Mauritius) Limited (“Safal“), MRM reflects captured demand across the continent for its products. MRM is a working capital intensive business, with its inventory and debtors assets more than 1.5x the level of payables. Nonetheless, working capital levels are carefully managed, while the company reports substantial short term debt facilities to bridge liquidity gaps.

Following the diminished performance in F12 (associated with expensive inventories, product dumping by competitors and lower market prices), the company returned to profitable growth in F13. In this regard, despite a moderate 8% increase in turnover, the gross margin widened to 16.5% (F12: 11%), while the operating margin improved to 9.7% (F12: 4.4%). This improved debt serviceability, with net interest cover rising to 6.5x (F12: 3.2x). The strong operating performance, coupled with comparatively stable working capital levels, resulted in robust operating cash flows in F13. Together with limited capex, this saw a sizeable net cash flow reported and enabled a KShs798m reduction in gross borrowings. Accordingly, gearing measures were considerably lower at FYE13, with net gearing reported at 60% (FYE12: 78%) and net debt to EBITDA at 135% (FYE12: 309%). This combination of improved earnings and lower gearing led to the ratings being placed on a positive outlook.

The company’s cost of production, and to some extent its gross margins, is strongly influenced by prevailing exchange rates and raw material prices (steel, as well as aluminium and zinc to a lesser extent). As such, and despite exchange rate hedging, volatility in these prices has negatively impacted earnings in recent years, and will continue to affect MRM going forward. Demand factors in the East African region are particular strong, with robust economic growth driving emerging middle classes, greater wealth levels and increased private-sector construction activity underpinning demand for roofing products.

The F14 budgets provided to GCR indicate a very strong operating performance, significant reductions in borrowing and gearing levels, and a general improvement in all credit risk metrics. The attainment of this budget, in respect of gearing and other credit protection metrics in particular, would likely trigger an upward rating movement. Conversely, volatility in market conditions (and/or further competitive pressure) could drive a slump in margins and earnings, thereby reducing debt serviceability. Significant working capital pressure and associated debt funding requirements would drive higher gearing metrics and an elevated credit risk profile; which in turn could trigger negative rating action.

For a detailed glossary of terms utilised in this announcement, please click here

NATIONAL SCALE RATINGS HISTORY

Initial rating (Jun/2000)
Long term: A-(KE); Short term: A1-(KE)
Outlook: Stable

Last rating (Aug/2013)
Long term: A+(KE); Short term: A1(KE)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Richard Hoffman
Analyst
(011) 784-1771
hoffman@globalratings.net

Committee Chairperson
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
shevel@globalratings.net

Analyst location: JHB, South Africa

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, Updated August 2013
MRM Ratings Reports, 2000-2013

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/RATING-SCALES-DEFINITIONS. 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.

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 the 2013 audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year 2014 budgeted financial statements, 1Q 2014 management accounts, production & sales statistics, hot rolled coil prices, corporate governance and enterprise risk framework, and details of debt facilities utilised and available.

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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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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