Johannesburg, 29 May 2018 — Global Credit Ratings has affirmed the national scale Issuer ratings assigned to Sappi Southern Africa Limited at A+(ZA) and A1+(ZA) in the long and short term respectively; with a Positive outlook.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Sappi Southern Africa Limited (“SSA”) based on the following key criteria:
Sappi Limited (“Sappi”) is one of the leading global players in the paper and pulp industry. Its scale, and the continued focus on efficiencies and ensuring its mills fall within the lowest cost quartile, have positioned the group to report strong earnings, despite the declining volumes in traditional paper segments. In addition, the group has invested significantly in developing capabilities in higher margin segments, such as speciality paper and cellulose products.
Sappi is the largest global supplier of dissolving wood pulp (“DWP”), which, given the strong growth in demand from the textile industry, has significantly enhanced earnings. SSA’s profitability has substantially benefitted from this trend, as most DWP capacity is located in South Africa. DWP contributed 64% of SSA’s revenue in FY17, and provides a strong ZAR hedge as it is all priced in USD.
SSA’s revenue growth moderated to 3% in FY17, due to the strengthening ZAR, whilst the operating margin narrowed to 23.1% (FY16: 27.5%) as a result of higher raw material prices and general cost inflation. Nevertheless, operating profit of R4.1bn (FY16: R4.8bn) remains well above historical levels. Although the strong ZAR is likely to constrain growth in FY18, SSA is projecting robust growth over the longer term, underpinned by rising DWP capacity.
The Positive outlook is reflective of SSA’s strong cash generation and liquidity position. In this regard, cash flow from operations rose to R3.5bn in FY17, despite R1.3bn in taxes paid. After covering all capex, and notwithstanding that R3.2bn was transferred to other group companies to reduce debt and support capex, SSA sustained a net cash position of R1.3bn at FY17.
Gross debt was reported at a review period low of R1.6bn at FY17, of which R500m was settled post year end. Funding flexibility is supported by a R1bn committed syndicated facility and R275m in short term credit lines, as well as a R5bn DMTN programme. Sappi Limited has also reported a steady decline in gearing metrics, which are well within covenant levels. Although, an increase in debt is projected as the group pursues expansion activities, funding and liquidity risks are considered low, with management’s target to maintain net debt to EBITDA at or below 200%.
SSA has a fairly large expansionary capex pipeline, with R6bn related to the DWP capacity expansion, and additional investments in complimentary products and green/energy initiatives also being explored. Nevertheless, internal cash flows should cover much of the spend, and although the company will likely raise additional debt to supplement internal cash flows, it is not anticipated that this will lead to gearing pressure.
A ratings upgrade is dependent upon the successful execution of planned expansionary projects and other investments, whilst maintaining conservative gearing levels. Sustained strong earnings and cash flows would also support a higher rating. Conversely, cost overruns on projects or unsuccessful acquisitions/investments, could result in excess gearing and thus lower ratings. Changes in market dynamics that further impact demand and raise costs could also lead to rating pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial (November 2015)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (June 2017)|
|Long term: A+(ZA); Short term: A1+(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for rating corporate entities, updated February 2018
Sappi Southern Africa Limited Issuer rating report, 2015-2017
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Bond||A long term debt instrument issued by either a company, institution or the government to raise funds.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|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.|
|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.|
|Institutional Investors||Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.|
|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.|
|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.|
|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.|
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 ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Sappi Southern Africa Limited participated in the rating process via face-to-face management meetings, teleconferences as well as 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 Sappi Southern Africa Limited with no contestation of the ratings.
The information received from Sappi Southern Africa Limited and other reliable third parties to accord the credit ratings included:
- audited financial results for Sappi Limited for 30/09/2017, and five years comparative financial statements;
- audited financial results for Sappi Southern Africa Limited for 30/09/2017, and five years comparative financial statements;
- Quarterly analyst presentations for Sappi Limited
- details of funding facilities;
- financial projections for Sappi South Africa to 2023;
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 Sappi Southern Africa Limited’s rating at A+(ZA); Outlook Positive.