Johannesburg, 30 April 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Nampak Products 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 Products Limited (“Nampak Products”) based on the rationale summarised below:
Nampak Products is a wholly-owned Nampak Limited (“Nampak”) subsidiary, which in turn owns the group’s packaging businesses in South Africa and Angola. GCR has considered inextricable linkages that emphasise the subsidiary’s strategic importance to Nampak and further entrench the rating alignment.
The ratings are premised on the explicit, unconditional and irrevocable guarantee provided by parent Nampak in respect of the subsidiary’s R2bn DMTN Programme and explicit, unconditional and irrevocable guarantees in favour of banks and other counterparties. The guarantees are meant to place creditors in the same position as they would have been had the group been the Issuer/debtor, and thus rank pari passu with other Nampak obligations. In March 2018, GCR affirmed Nampak’s long and short-term Issuer ratings of A(ZA) and A1(ZA) respectively, with a Stable outlook accorded.
Turnover rose 11% to R14.0bn on the back of a strong performance in Angola. Despite margin compression in the domestic operations, the strong performance in higher margin territories widened the operating margin to 10.2% (FY16: 9.2%). SA volumes are expected to remain under pressure in FY18, on the back of sluggish economic growth as well as the entry of a new competitor in the beverage can market. That said, Nampak Products’ existing long-term contracts, as well as robust economic growth in key African markets, are expected to support sound revenue growth.
Net interest declined by 25% to R498m against lower debt during the year and accordingly, net interest cover rose to 2.9x (FY16: 1.8x). Nonetheless, significant impairments of goodwill and other intangible assets resulted in a sharp decline in net profit to R174m in FY17 (FY16: R1.3bn).
Cash generated by operations strengthened in FY17, albeit that an increase in inventory drove a R313m working capital absorption (reversing the R124m release in FY16). This offset the lower interest cost and saw cash flow from operations decline to R976m (FY16: R1.0bn). Cash extraction challenges persisted in some key territories as a result of foreign exchange liquidity shortages, elevating currency risk. Positively, hedges have been employed to mitigate this risk which, coupled with continued improvement in the currency extraction rate in Nigeria, could materially reduce foreign exchange losses.
Gross debt increased 25% to a review period high of R7.4bn, driven by the use of overdrafts to support working capital. Accordingly, gross gearing and gross debt to EBITDA* increased to 175% and 368% respectively (FY16: 159%; 341%). Adjusted to exclude intercompany loans of R3.1bn, both gross gearing and gross debt to EBITDA reflected more conservative levels of 101% and 213% respectively. Nampak Products’ reported operating lease liabilities and capital commitments of R4.1bn are considered moderate for its size, and would not raise gearing metrics above acceptable levels.
With no major capex project imminent, and management committing to a tight capital allocation regime, debt is not expected to rise materially over the ratings horizon. Liquidity is further supported by R4.3bn in untapped facilities from strongly rated financiers at FY17. Domestic operations are expected to remain subdued given the sluggish economy, but the strong regional footprint and ongoing capacity expansion in Angola provide important earnings support, underpinning sound cash flows.
As Nampak Products’ Issuer ratings are underpinned by Nampak guarantees, a migration of the parent’s Issuer ratings would likely trigger an upgrade or downgrade. Furthermore, significant deterioration in the subsidiary’s operational performance and/or business fundamentals, or a material weakening of linkages with its parent would warrant negative rating action.
*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 (July 2004)|
|Long term: n.a; Short term: A1(ZA)|
|Last rating (May 2017)|
|Long term: A(ZA); Short term: A1(ZA)|
|Primary Analyst||Committee Chairperson|
|Eyal Shevel||Corne Els|
|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 (2001-18)
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 Products Limited and other reliable third parties to accord the credit rating(s) included;
- Four years audited financial results for 2014-2017;
- Financial and other information related to Nampak Limited (as per the credit rating report released in March 2018); and 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 Products Limited’s rating of A(ZA), Stable outlook