Johannesburg, 21 June 2016 – Global Credit Ratings has today affirmed the national scale long term debt rating for Mabati Rolling Mills Limited at A+(KE), whilst the national scale short term debt rating has been affirmed at A1(KE). The ratings have been accorded a Stable outlook. The rating(s) are valid until June 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) 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 supplies steel at various levels of processing to the Kenyan market, while also benefiting from exports through its sister company’s networks across the region.
The most significant factor in 2015 was the substantial decline in metals prices. Although the plunge in steel prices had a dampening effect on revenue (which was a function of flat volumes and declining steel prices), MRM was able to maintain margins. Thus, the gross margin widened to 20% (F14: 17.4%), while the operating margin improved to 11.1% (F14: 9.9%). This translated to increased operating profit of KES1.9bn (F14: KES1.6bn).
Despite the sound operating performance, MRM reported a large KES2.3bn working capital absorption in F15. This was driven by a KES1.2bn increase in debtors on the back of extended terms to customers and a concurrent decrease in payables due to raw materials being purchased on sight terms using bank borrowings. According to management, working capital funding will need to be increased by USD25m over the next two to three years (which has already been secured), to support the longer cash conversion cycle and volume growth from colour coating lines. As a result of the working capital pressure during the year, gross debt rose to KES6.1bn at FYE15 (FYE14: KES3.4bn), being short term in nature. This saw net gearing and net debt to EBITDA increase to 134% and 266% respectively (FYE14: 76%; 158%).
While capex has been relatively low since the last major round of capital expenditure in F10, spend was ramped up somewhat in F15 as MRM began refurbishing one of its cold rolling mills during the year. In addition, MRM is currently constructing a new colour coating line in Mariakani, with the total cost of both projects estimated at USD28m. Looking ahead, robust economic growth and increasing infrastructural development should sustain demand for MRM’s products in the medium term.
Positive rating action will be dependent on strong growth in earnings, whilst maintaining moderate debt levels and gearing metrics over the medium term. Conversely, volatility in the steel industry 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)|
|Last rating (July 2015)|
|Long term: A+(KE); Short term: A1(KE)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
MRM rating reports (2000-2015)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital Expenditure||Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.|
|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.|
|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.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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 ratings have been disclosed to Mabati Rolling Mills Limited with no contestation of the ratings.
The information received from Mabati Rolling Mills Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of Mabati Rolling Mills per 31/12/15 (plus four years comparatives);
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework; and
- Industry comparative data.
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.