Johannesburg, 31 March 2016 — Global Credit Ratings has today affirmed the national scale ratings assigned to Nampak Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Nampak Limited based on the following key criteria:
Nampak is Africa’s largest packaging manufacturer. Its sizeable local market share across product lines is underpinned by well entrenched relationships with its customers and extensive fixed capital. A streamlined focus on glass, metals and plastic packaging and targeted growth in the rest of Africa (“RoA”) has seen the group largely exit marginal operations, concluding the sale of its SA paper businesses in F15. At the same time Nampak has invested further in its local capacity, converting their tinplate beverage can lines to aluminium and constructing a third glass furnace. However, the primary driver of growth over the past few years has been the African expansion, with the addition of a beverage can line in Angola (2015) and the USD301m acquisition of Bevcan Nigeria (2014), being the most recent transactions.
The strong RoA performance saw group revenue rise 13% in F15, while the operating margin eased to 10.2% (F14: 11%) due to the weaker performance in SA (partly due to delays in commissioning the new glass furnace). Nevertheless, operating profit strengthened to R1.8bn (F14: R1.7bn). Further to this, cash generated by continuing operations declined by 27% to R2bn in F15. A rise in inventories due to improved glass performance and stock build ahead of peak beverage season, drove the large R669m working capital absorption, which overshot the atypical high last seen in F11. Nonetheless, Nampak does not expect this to repeat.
To acquire the Nigerian business, Nampak raised USD301m in debt during F14, which introduced substantial foreign currency risk. This materialised with the large devaluations of Nampak’s three major operating currencies, being the ZAR, Nigerian Naira and Angolan Kwanza, leading to a R141m forex loss in F15. Combined with the working capital pressure, the depreciation of the ZAR saw debt rise 18% to R8.3bn at FYE15. Although net gearing was flat at 133% at FYE15, this is well above the previous guidance of 100% given by management prior to ZAR weakness. Net debt to EBITDA was high at 268% (FYE14: 255%), whilst net interest cover was sound at 4.6x in F15 (F14: 4.7x).
Given the need to service USD debt from primarily local currency earnings, Nampak remains highly exposed to currency volatility. This is exacerbated by the currency restrictions in Nigeria and Angola, which has significantly inhibited the group’s ability to repatriate earnings. While currency risk is somewhat mitigated by USD indexed pricing, management have indicated that reducing USD denominated debt and restructuring the balance sheet is a core focus in 2016. The group has also scaled back its planned capex activity and is reviewing its dividend policy to conserve cash and allow for additional debt to be redeemed.
Positive rating action is unlikely in the short term given the weak economic environments and market volatility in Nampak’s core countries of operation. However, maintaining the current rating will be dependent on its ability to reduce its currency exposure, through settling a portion of its USD debt and demonstrating an ability to repatriate cash as necessary. Further currency weakness could impact the attainment of debt reduction targets and result in weaker earnings from Nigeria and Angola. Similarly, were the SA businesses to slow further this could negatively impact the credit rating.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (March 2001)|
|Long term: AA-(ZA); Short term: A1+(ZA)|
|Last rating (March 2015)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, February 2016.
Nampak Limited Rating Reports (2001 – 2015).
Nampak Products Limited Rating Reports (2004-2015).
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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.|
|Currency Risk||The potential for losses arising from adverse movements in exchange rates.|
|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.|
|Exchange Rate||The value of one country’s currency expressed in terms of another.|
|Fixed Capital||Fixed capital is the part of a company’s total capital that is invested in fixed assets such as land, buildings and equipment that remains on the balance sheet, usually for years, but for at least one accounting period.|
|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 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; and d.) the validity of the rating 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 rating/s has been disclosed to Nampak Limited with no contestation of the rating.
The information received from Nampak Limited and other reliable third parties to accord the credit rating(s) included;
- Audited financial results of Nampak per 30 September 2015;
- Four years audited financial results for 2010-2014;
- Management presentations;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
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); Outlook Negative.