Johannesburg, 07 Mar 2014 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale Issuer ratings assigned to Nampak Limited of A(ZA) and A1(ZA) respectively; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) on Nampak Limited based on the following key criteria:
Nampak is the leading domestic manufacturer and supplier of packaging products, underpinned by scale economies and relationships with key multinational corporates. In addition, the group has actively pursued expansion into Africa, undertaking a number of large acquisitions, the most recent of which is the US$300m Alucan acquisition within Nigeria. The African expansion is expected to drive future profitability, supported by its first-mover advantage and the barriers to entry in many countries. Nevertheless, the strategy has introduced additional risks, in light of the less stable political/legal framework in some counties and the difficulties in procuring production inputs.
Operating conditions in South Africa have proved challenging, owing to subdued economic growth, increased competition and changing consumer preferences. As a result, Nampak offered more favourable pricing to major customers to secure new long term supply contracts, albeit with the domestic operating margin narrowing to 8.4% in F13 (F12: 10.5%). Nevertheless, the disposal of loss making businesses and cost rationalisation initiatives should support domestic profit growth going forward. In contrast, the rest of Africa saw revenue rise 11% in F13 and operating profit by 60% to R506m (operating margin: 26%). This helped temper the decline in the overall operating margin to a review period low of 9.7%, and while operating profit decreased marginally to R1.8bn, it was in line with the review period high reported in F12.
Gross debt rose to R6bn at FYE13 (FYE12: R3.2bn) from R2bn at FYE11, as Nampak has taken advantage of its excess borrowing capacity to fund acquisitions. With much of the new debt remaining in cash at FYE13, net gearing metrics were little changed, although gross gearing and gross debt to EBITDA rose to 98% and 244% respectively. As most of the cash will be utilised during F14, gearing is more likely to approximate the current gross levels at FYE14. Management has indicated that net gearing is not expected to exceed 80% in the medium term.
While domestic conditions are expected to remain weak, positive movement in the rating could arise from the successful implementation of the African strategy, resulting in margin enhancement and earnings growth. An uptick in the domestic environment would also be viewed positively. Conversely, an inability to bed down acquired African business, resulting in weaker earnings would be negatively viewed. Further increases in debt, even to finance positive acquisition opportunities may increase gearing levels above those characteristic of A rated companies.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Mar/2001)|
|Long term: AA-(ZA); Short term: A1+(ZA)|
|Last rating (Feb/2013)|
|Long term: A(ZA); Short term: A1(ZA)|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Thato Modungoa|
|Sector Head: Corporates||Junior Analyst|
|+27 11 784 1771||+27 11 784 1771|
|Banking Sector Head|
|+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; 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 included the 2013 audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, corporate governance and enterprise risk 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.