Johannesburg, 17 December 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Nakumatt Holdings Limited of BB(KE) and B(KE) in the long term and short term respectively; with the outlook accorded as Stable. Concurrently a Commercial Paper rating of B(KE) has been accorded. The rating(s) are valid until December 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Nakumatt Holdings Limited based on the following key criteria:
Nakumatt is the single largest retailer in Kenya and the East Africa region, following the sustained rollout of new branches over the past decade. As such, it now reports 61 stores in four countries (of which 42 are in Kenya). Moreover, the group’s product offering has evolved from fast moving consumables to include a plethora of durable and semi-durable products, being in line with management’s “all under one roof” philosophy.
The group has reported sustained revenue and operating income growth over the review period, with revenue rising by a five-year CAGR of 14% to reach KES51.6bn in F15 and operating income rising by a CAGR of 26% to KES2.2bn. However, profits have been heavily eroded by rising interest charges, associated with the large quantum of debt that has been used to fund growth. Thus, operating profit of KES2.2bn in F14 and F15 equated to net interest cover of 1.2x in both years, compared to 1.8x in F13. Moreover, NPBT has decreased from KES823m in F13 to KES305m in F15.
Whilst capex costs have been high, the greater utilisation of debt has come from the working capital funding necessary to purchase stock for new stores. Gross debt has almost tripled from KES4.2bn at FYE11 to KES15bn at FYE15. This has seen high gearing metrics reported in all years under review, with net gearing and net debt to EBITDA reaching review period highs of 389% and 503% respectively at FYE15 (FYE14: 303% and 395%), well above the levels characteristic of investment grade companies.
Nakumatt has been actively seeking a minority equity investor for several years, with the dual intention of raising capital and benefitting from the technical expertise that such an investor would need to bring. According to management, a deal with a new equity investor is expected to be concluded in 2015. The deal would see substantial capital injected into the business, which would markedly ease funding pressure and facilitate the further planned rollout of new branches. With economic prospects for Kenya and the region as a whole being very strong, the robust economic growth reported across the region (with rising consumer wealth and disposable income levels) is expected to sustain strong growth in the formal retail sector going forward. Nonetheless, each country within the region continues to face endemic challenges, which pose downside risks to growth over the short term.
A ratings upgrade is only likely once Nakumatt reports improved credit risk metrics, as well as sustained positive operating cash flows. The introduction of an equity investor would also be positively considered. In contrast, further increases in gearing and low liquidity, even in the face of continued earnings growth, would bode negatively.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2007)|
|Long term: BBB-(KE); Short term: A3(KE)|
|Last rating (December 2014)|
|Long term: BB(KE); Short term: B(KE)|
|Primary Analyst||Secondary Analyst|
|Richard Hoffman||Farai Mauchaza|
|Senior Analyst||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Nakumatt ratings reports, 2007-2014
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|CAGR||The compound annual growth rate is the year-on-year percentage growth rate of an investment over a given period of time. It is found by calculating:|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|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 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.|
|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.
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(s) included;
- Audited financial results of Nakumatt per 28 February 2015;
- Four years audited financial results for 2010-2014;
- 1H 2016 management accounts;
- Budgets for 2016-2018; 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.
GCR affirms Nakumatt Holdings Limited’s rating of BB(KE); Outlook Stable.