Johannesburg, 23 Dec 2013 — Global Credit Ratings has today affirmed the long term national scale and the short term national scale issuer ratings assigned to Nakumatt Holdings Limited of BB(KE) and B(KE) respectively; with the outlook accorded as Positive. The rating(s) are valid until 12/2014.
Global Credit Ratings has accorded the above credit rating(s) to Nakumatt Holdings Limited based on the following key criteria:
Nakumatt Holdings Limited (“Nakumatt”) is the leading formal sector retailer in the Kenyan economy, with a growing regional footprint. Having been established in 1987 as a small scale Fast Moving Consumer Goods (“FMCG”) retailer in Nairobi, the group has continued to grow through the rollout of new stores and the broadening of its product offering to encompass a diversity of durable and semi-durable goods. This has resulted in sustained topline and operating profit growth over the review period, translating to strong cash generation. These strong performances and the increasing market dominance have underpinned the positive outlook, albeit that an upward rating movement would be premised on improved gearing and other credit risk measures.
Operating cash flows, however, have been constrained by large working capital absorptions, totalling KShs6.2bn over the review period and amounting to KShs3.5bn in F13 alone. These working capital absorptions are a function of the rollout of new branches (which need to be fully stocked), as well as the unique conditions of the regional market- whereby Nakumatt receives relatively short creditor terms from its suppliers. Thus, the group has been required to fund its working capital through debt as opposed to trade creditors, with the result being sustained high levels of debt and gearing. Nakumatt’s gearing continues to remain well above the level associated with investment-grade rated entities, placing a key constraint on the ratings accorded. Furthermore, much of the debt raised has been short term in nature, placing liquidity pressure on Nakumatt. In addition, the high cost of funding has materially eroded operating profits, with interest cover measures remaining below 2x in F13 and 1H F14.
Despite the above, Nakumatt is very strongly positioned to capture regional growth, with the rollout of new stores now focussed on secondary cities in Kenya, and major regional centres in Uganda and Tanzania in particular. In addition, with the relative level of growth expected to slow due to the large size of the branch portfolio, working capital strain is expected to reduce going forward. Nonetheless, management is in advanced negotiations with a third-party investor to inject new capital into the business, which would markedly improve the group’s credit risk profile and provide funding for medium term growth; albeit that GCR notes that previous deals have not come to fruition.
Positive ratings movements would derive from sustained strong operating performances, together with improved credit protection metrics through new capital and/or strong operating cash flows. Conversely, a negative rating movement would likely be driven by further increases in gearing measures and/or adverse developments in terms of profitability (which could derive from a multitude of factors).
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Nov/2007)|
|Long term: BBB-(KE); Short term: A3(KE)|
|Last rating (Nov/2012)|
|Long term: BB(KE); Short term: B(KE)|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
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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.
Nakumatt Holdings 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 Nakumatt Holdings Limited with no contestation of the rating.
The information received from Nakumatt Holdings Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), 1H 2014 management accounts, full year budgeted financial statements, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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.