Announcements

GCR affirms Omnia Holdings Limited rating of A-(ZA); Outlook Positive.

Johannesburg, 25 Jul 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Omnia Holdings Limited of A-(ZA) and A1-(ZA) in the long and short term respectively; with the outlook retained as Positive.

RATING RATIONALE

Global Credit Ratings accorded the above credit ratings to Omnia Holdings Limited (“Omnia”) based on the following key criteria:

Omnia’s established position as a leading regional producer and supplier of fertilisers, mining explosives and industrial chemicals is underpinned by its substantial manufacturing capacity. This has been enhanced by a second, technologically advanced nitric acid plant, which is currently operating at around 75% capacity utilisation. Top line growth has been supported by burgeoning external demand for both fertilisers and explosives, against the backdrop of a weak Rand. This saw revenues rise by 21% to a new high of R16.3bn in F14. In view of constrained domestic economic activity, the growing regional footprint is expected to support volume growth until local demand (particularly from mining and manufacturing) rebounds.

Despite an unfavourable ammonia to urea ratio and disruptions to both the mining and agriculture businesses during the year, the operating margin was largely stable at 9.2% in F14 (F13: 9.4%), on the back of pass through pricing and continued cost rigour. Looking ahead, firmer margins are expected to be derived from further stability that should see a ramp up in production, and enhanced efficiencies. Operations are nonetheless susceptible to volatile commodity prices, whose impact is exacerbated by exchange rate fluctuations. While the geographic expansion is positively viewed, note is taken of the investment and capital risk associated therewith.

Robust cash generation has been underlined by the strong earnings achieved in recent years. Coupled with modest working capital absorptions, this saw operating cash flow rise by 22% to a new high of R1.3bn in F14. It is, however, noted that intra-year working capital pressures (which tend to peak at the interim) have been exacerbated by continued depreciation of the Rand. Although Omnia retains sufficient funding facilities from a number of banks, management plans to focus on tightening working capital management to minimise interim liquidity pressures. With R3.7bn in capex funded internally, debt has been low over the 5-year review period, declining to R673m at FYE14 (FYE13: R834m). Accordingly, gross gearing reduced to 13% (FYE13: 19%), while gross debt to EBITDA registered at a 5-year low of 38% (F13: 56%). Net interest cover remained robust, albeit moderating to 13.2x (F13: 15.3x).

Upward rating pressure could derive from continued scale enhancement, supporting sound earnings growth and cash flows in the medium term, despite the challenging operating environment. In addition, well-paced expansion into the rest of Africa and the successful bedding down of new capacity, while maintaining moderate gearing levels, would be positively viewed. However, substantial commodity price and/or currency volatility would significantly elevate short term debt to fund working capital, thus increasing liquidity pressure and gearing metrics materially, placing downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Mar/2009)
Long term: BBB+(ZA); Short term: A2(ZA)
Outlook: Stable

Last rating (Aug/2013)
Long term: A-(ZA); Short term: A1-(ZA)
Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Patricia Zvarayi
Senior Analyst
(011) 784-1771
patricia@globalratings.net

Committee Chairperson
Eyal Shevel
Sector Head: Corporate Ratings
(011) 784-1771
shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

GCR’s Global Master Criteria for Rating Corporate Entities, updated August 2013
Omnia Holdings Limited rating reports, 2009-2013

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

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.

Omnia Holdings 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 Omnia Holdings Limited with no contestation of the rating.

The information received from Omnia Holdings Limited and other reliable third parties to accord the credit ratings included the 2014 audited financial statements (plus four years of comparative numbers), the 2015 budgeted financial statements, corporate governance and enterprise risk framework, industry comparative data and regulatory 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS ANNOUNCEMENT

Capital Risk

The risk that a corporate will lose or need to write down a portion of or the entire amount invested.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Commodity

Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.

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.

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.

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.

Leverage

Or gearing. 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.

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 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 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.

GCR affirms Omnia Holdings Limited rating of A-(ZA); Outlook Positive.

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