Johannesburg, 16 August 2016 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Sappi Southern Africa Limited of A(ZA) and A1(ZA) in the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Sappi Southern Africa Limited (“SSA”) based on the following key criteria:
Sappi Limited is one of the leading global players in the paper and pulp industry. While the group continues to be impacted by the structural decline in the demand for paper, it has focussed its operations on coated and specialty paper, areas where it has significant expertise and intellectual property that can be leveraged to maintain a significant market share. In addition, the group’s position as the largest supplier of dissolving wood pulp (“DWP”) provides important diversification from the challenges facing the paper and packaging markets. DWP now accounts for approximately half of group EBITDA.
Within South Africa, SSA maintains strong market positions in several paper and pulp segments. While these businesses have seen demand decline, SSA has been able to maintain business volumes due to efficiencies and price competitiveness, with the company increasing market share in several segments at the expense of competitors. In this regard, SSA’s extensive forestry assets provide an important competitive advantage in terms of access to raw materials and quality control.
SSA dual strategy of investing capacity in the high growth DWP production, while focussing on efficiencies and competitiveness in the general paper segments has substantially bolstered earnings since F13. Thus, while revenue rose by 7% in F15 to R15.8bn, operating profit spiked 27% to R2.8bn, a four-fold increase over F12. Although profitability was bolstered by the weak ZAR (given that DWP is sold in USD), SSA now reports a much stronger sustainable income base and robust earnings growth is expected to continue over the medium term.
Earnings growth has translated into strong cash flows from operations, which were sufficient to meet all capex requirements in F14 and F15. In addition, excess cash has been utilised to repay R1.5bn in debt during F15 and F16, with gross debt decreasing to R1.65bn at 3Q F16 (from a high R3.8bn at FYE12). Combined with the build-up of cash to R4bn at FYE15, the company now reflects a net ungeared position. Sappi Limited has reported a steady decline in gearing metrics, whilst a restructuring of facilities on more favourable terms has also eased funding pressures. Thus funding and liquidity risks for both Sappi Limited and SSA are considered low. With cash flow projected to remain robust, and relatively moderate capex requirements, SSA is likely to generate substantial excess cash over the medium term, which would likely be used for potential future investments, as well as to reinstitute dividend payments and effect some transfers to the group treasury.
Positive rating action could derive from sustained growth in earnings and cash flows over the medium term, demonstrating the long term benefits of the more specialised business lines. Conversely, a further contraction in key market segments, leading to lower volumes and/or necessitating further impairments and restructuring, could result in negative action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/ last rating (November 2015)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Sappi Southern Africa Limited Issuer rating report, 2015
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|LC||An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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 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.|
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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 30/09/2015, and five years comparative financial statements;
- audited financial results for Sappi Southern Africa Limited for 30/09/2015, and five years comparative financial statements;
- management accounts for Sappi Southern Africa Limited as at 31/03/2016;
- quarterly results presentations (2012-2016);
- details of funding facilities;
- financial projections for Sappi South Africa to 2020;
- 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 Sappi Southern Africa Limited’s rating of A(ZA); Outlook Stable.