GCR affirms Nampak Limited’s rating of A(ZA), Negative outlook
Johannesburg, 28 April 2017 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Nampak Limited of A(ZA) and A1(ZA) for the long and short term respectively; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
GCR has accorded the above credit ratings to Nampak Limited (“Nampak” or “the group”) based on the rationale summarised below. As part of its analysis, GCR makes a number of adjustments to the audited financials, which include stripping goodwill and other intangibles from the balance sheet, as well as excluding material non-recurring and non-cash items from the EBITDA calculation. Group results are also not adjusted for discontinued operations in retrospect beyond the YoY changes disclosed in the audited financial results.
GCR has taken cognisance of the sound performance of Nampak’s underlying operations despite the difficult operating climate in its key territories. Revenues rose by 11% to a new high of R19.1bn in FY16, while the EBIT margin eased slightly to 10% (FY15: 10.2%), supporting operating profit of R1.9bn (R1.8bn). Total volumes are expected to moderate in FY17, on the back of pressure in South Africa (“SA”) and Nigeria, albeit long term, renewable contracts with large multinationals ensure strong baseline demand.
As expected, Nampak’s foreign exchange loss worsened materially in FY16, rising to R655m, from R141m previously. The loss was largely attributed to Nigeria, where the decision to partially float the Naira effective June 2016, amidst persistent hard currency shortages, saw the currency depreciate by 58% against the USD in FY16. A sizeable portion of Nampak’s ample cash resources also sit in Nigeria and Angola, a factor attributed to the strong cash generative abilities of the underlying operations, and the challenges encountered in extracting cash from these countries. GCR has taken note of the hedges employed to mitigate currency risk, and the improved currency extraction rate, which should see restricted cash resources decrease materially as the Naira stabilises. However, as Nigeria and Angola together represent a large proportion of the group’s assets and earnings, the associated exposure currently restricts the ratings.
Cash generated by underlying businesses picked up slightly to R2.1bn in FY16, while tighter inventory controls and logistics oversight in the rest of Africa (“RoA”) underpinned a large working capital release, and saw operating cash flow more than double to R1.9bn. Free cash flow coverage of debt service registered at 2.3x, from a negative position in FY15, and is expected to stabilise at lower, but comfortable levels in the medium term.
Debt reduced to R7.5bn at FY17, largely due to a R1.7bn property sale and leaseback transaction, of which 75% of the proceeds were used to settle SA interest bearing debt. This notably eased covenant pressures and improved the debt maturity profile. That said, R5.2bn of Nampak’s non-current, interest bearing debt was USD-denominated at FY16, which further amplifies currency risk. Together with the adverse effect of largely exogenous challenges presenting in Nigeria and Angola on the group’s free cash flows, this continues to inform the negative outlook on the ratings.
As cash is largely restricted, GCR has focused on the gross metrics in its analysis of gearing metrics and liquidity. In this regard, gross gearing reduced to 139% at FY16 (FY15: 165%) and similarly, gross debt to EBITDA decreased to 271% (FY15: 331%). Some comfort with respect to liquidity is taken from ample banking facilities and entrenched relationships with strongly rated financial institutions.
Looking ahead, upward rating pressure could arise from a progressive reduction in USD-denominated debt and stronger debt serviceability metrics, achieved in tandem with sound profitability. Conversely, continued currency weakness, amplifying foreign exchange losses and constraining cash extraction from Nigeria and Angola would warrant rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (March 2001)|
|Long term: AA-(ZA); Short term: A1+(ZA)|
|Last rating (March 2016)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global master criteria for rating corporate entities, updated February 2017
Nampak Limited rating reports (2001-16)
Nampak Products Limited rating reports (2004-16)
RATING LIMITATIONS AND DISCLAIMERS
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|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Currency Risk||The potential for losses arising from adverse movements in exchange rates.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Multinational||A company that operates commercially in a number of countries outside of the one wherein it is based. Such companies are often listed on more than one stock exchange or have shares available via depository receipts.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
|Long Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Nampak 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 Nampak Limited with no contestation of the ratings.
The information received from Nampak Limited and other reliable third parties to accord the credit rating(s) included;
- audited financial results and the Integrated Report per 30 September 2016;
- four years’ audited financial statements and Integrated Reports for 2012-2015;
- management presentations;
- a breakdown of facilities available and related counterparties; and
- the pre-closing market update/teleconference by management dated 30 March 2017.
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 Nampak Limited’s rating of A(ZA), Negative outlook