Johannesburg, 18 August 2016 – Global Credit Ratings has today affirmed the national scale debt issuer ratings for Omnia Holdings Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Omnia Holdings Limited based on the following key criteria:
Omnia is a leading regional producer and supplier of fertilizers, mining explosives and industrial chemicals. This position is supported by a vertically integrated operating model, ample production capacity, as well as the Group’s evolving, client-focused products and solutions across all its business units.
While Omnia is exposed to the current weakness in the agriculture sector, its specialised product offering and active customer engagement sustained largely stable volumes in SA despite the drought. The positive offset across business units partially mitigated downward pressure in the mining division from subdued commodity prices and the volatile Rand. Thus, management’s ability to sustain turnover at R16.8bn in an especially tough operating environment further emphasised strong execution through the cycle, and is positively noted. Nevertheless, the gross margin fell to 20.3% in F16 (F15: 23.4%), mainly due to pricing pressures in the Mining division and the inverted ammonia: urea ratio. Despite this, and other non-cash restructuring costs, the decline in the operating margin was contained to two percentage points, to 7.6% in F16, translating to an 18% decrease in operating profit to R1.3bn. F17 is expected to see an improvement in nearly all divisional margins, supporting further traction in earnings.
Cash generated by operations rose by 11% to a new high of R2bn in F16. The Group unwound the anomalous F15 absorption that had arisen from elevated fertilizer inventories at FYE15, which contributed to a nearly threefold increase in operating cash flows to R1.9bn in F16. The much higher F16 cash flows were used to pay down debt, which was reduced to a new low of R344m (and R228m net cash position). As such, the Group closed F16 in an ungeared position. With most of Omnia’s expansionary capex near completion, debt levels are not likely to change materially. While interest cover moderated to a new low of 6.3x, F17 should see a significant improvement, given the markedly reduced debt. GCR also noted the substantial cash coverage of gross debt of 540% in F16, from just 38% previously.
The persistence of largely exogenous operational challenges could curtail Omnia’s ability to achieve targeted margins and cash flows. Comfort is however, taken from ample untapped facilities and the virtually ungeared balance sheet, which could support capex or potential acquisitions without unduly elevating funding pressures.
While the uncertain operating environment is a constraint on the ratings, positive rating action would be driven by a sustained improvement in margins, and operating efficiencies derived from the nitric acid plant and ongoing capex, leading to sustained growth in operating profit and strong cash flows. Conversely, the ratings could come under pressure due to, inter alia; commodity price volatility or other environmental factors that translate into materially elevated working capital requirements and thus higher gearing metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (March 2009)|
|Long term: BBB+(ZA); Short term: A2(ZA)|
|Last rating (July 2015)|
|Long term: A-(ZA); Short term A1-(ZA)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
Omnia Holdings Limited Rating Reports 2009-2015
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Financial Year||The year used for accounting purposes by a company or government. It can be a calendar year or it can cover a different period, often starting in April, July or October. It can also be referred to as the fiscal year.|
|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 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.|
SALIENT FEATURES 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 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 ratings.
The information received from Omnia Group Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of Omnia per 31 March 2016 (plus four years of comparative numbers);
- Results presentation booklet for financial year end 31 March 2016;
- A breakdown of facilities available and related counterparties;
- 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 Omnia Holdings Limited’s rating of A-(ZA); Outlook Stable.