Johannesburg, 28 March 2018 — 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. A stable rating outlook has been accorded to the rating.
SUMMARY RATING RATIONALE
GCR has accorded the above credit ratings to Nampak Limited (“Nampak” or “the group”) based on the rationale summarised below:
While Nampak’s revenues declined by 2% on the back of a strengthening ZAR and challenging operating environments in key territories, note is taken of the robust performance of Nampak’s underlying operations. The EBIT margin improved to 11% (FY16: 10%), on strong performance from the higher margin Rest of Africa (“RoA”) operations, somewhat offset by some margin compression in the domestic operations. Total volumes are expected to remain under pressure in FY18, on the back of sluggish economic growth in South Africa (“SA”) and Nigeria, as well as the entry of a new competitor in the beverage can market. That said, the group’s existing long-term contracts, which make up 92% of domestic volumes, are expected to support sound revenue growth.
Cash generated by operations increased 8% in FY17, albeit that a working capital absorption (reversing the large release in FY16) saw net cash flow from operations decrease to R1.4bn in FY17 (FY16: R1.9bn). The R327m working capital absorption arose due to a management decision to take advantage of favourable financing to stock up on raw materials. Nampak, however, expects this to unwind rapidly during FY18 as the inventories are utilised. Note is also taken of a new sales and operations planning system implemented in FY17, which is expected to improve working capital management.
Cash extraction challenges persisted in certain territories as a result of foreign exchange liquidity shortages, with the group having built up balances of R2.8bn in Angola and Zimbabwe at FY17 (FY16: R1.3bn). Positively, a new foreign exchange auctioning system in Nigeria has restored liquidity in that country, while the group had increased its hedges in Angola to 89% of exposure at FY17 (FY16: 61%). Accordingly, fair value losses on foreign currencies and financial instruments declined to R276m from R655m in FY16. These mitigants notwithstanding, note is taken of the group’s significant USD-denominated debt at FY17, which amplifies the currency risk and puts pressure on the ratings.
Driven by a sharp increase in the use of overdrafts, interest-bearing debt increased 17% to a high R8.8bn at FY17, R5.1bn of which is USD-denominated. Thus, tangible gross and net gearing* increased marginally to 144% and 105% at FY17 (FY16: 139%; 98%). Similarly, gross and net debt to EBITDA increased to 307% and 223% respectively (FY16: 331%; 268%). Adjusted for the group’s moderate operating lease and capital commitments (c.R4bn), gearing remains within range for the current ratings. Looking ahead, Nampak intends to manage gearing downwards, supported by working capital releases and a reduction in capex as a tighter capital allocation regime has been implemented.
A ratings upgrade would likely only be considered in the medium-long term, based on a progressive reduction in USD-denominated debt and stronger debt serviceability metrics, achieved in tandem with sound profitability. Conversely, a further increase in debt will exert pressure on credit protection metrics and could warrant negative rating action. Persistent/renewed currency extraction challenges in key territories would also be negatively viewed.
*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.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (March 2001)|
|Long term: AA-(ZA); Short term: A1+(ZA)|
|Last rating (April 2017)|
|Long term: A(ZA); Short term: A1(ZA)|
|Primary Analyst||Committee Chairperson|
|Eyal Shevel||Patricia Zvarayi|
|Sector Head: Corporate & Public Sector Debt Ratings||Senior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for rating corporate entities, updated February 2018
Nampak Limited rating reports (2001-17)
Nampak Products Limited rating reports (2004-17)
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 2017;
- four years audited financial statements and Integrated Reports for 2013-2016;
- investor presentations; and
- applicable SENS announcements.
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), Stable outlook