Johannesburg, 14 December 2015 — Global Credit Ratings (“GCR”) has today affirmed the national scale ratings assigned to SIFCA Group (“Sifca”) of A(CI) and A1(CI) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to the Sifca based on the following key criteria:
Sifca is a conglomerate of numerous agronomic companies operating in the West African rubber, palm oil and sugar industries, with it reporting productive operations in the Ivory Coast, Ghana, Nigeria and Liberia, as well as sales out of Senegal and France. The group has historically been concentrated in the cultivation and basic processing of rubber, palm oil and sugar, but has increasingly diversified its operations downstream to capture more of the value chain, and reduce its exposure to global commodity price cyclicality. This has seen substantial investment made in the palm oil operations in particular. Resultantly, Sifca has reported strong improvements in productivity over the review period across all three core business lines, which have somewhat mitigated the negative affect of depressed commodity prices. As such, it is strongly positioned for revenue and earnings growth once commodity prices improve.
Despite the above, the group remains highly exposed to developments in global rubber, sugar and palm oil prices, and has been severely impacted by the negative price developments over the past three years. In particular, the large slump in rubber prices has seen the group’s underlying rubber businesses report large operating losses. While sugar and palm oil operations continue to generate positive earnings, their profitability has been severely curtailed by the lower prices. Lower commodity prices have been compounded by several other challenges, including: the difficulties experienced by the Ghanaian economy and sharp devaluation of the Cedi, the negative impact of low global oil prices on the Nigerian economy, and the regional impact of the Ebola virus crisis (with Liberia especially affected). As a result, having peaked at XOF536.3bn in F12, turnover has reduced to just XOF449bn in F14. The drop in operating income was more severe, falling from XOF139.4bn in F11 to XOF27.1bn in F14, with the operating margin reducing to just 6%. Accordingly, with net finance charges having risen to XOF15.9bn in F14, net interest cover has slumped from 13x in F13 to just 1.7x in F14.
Growth in net working capital and capital expenditure has seen debt rise from just XOF86bn at FYE11 to XOF182.5bn at FYE14. Concomitant to this, cash holdings have fallen from XOF65.6bn to just XOF40bn, resulting in an even more pronounced rise in net debt. Accordingly, gearing metrics have risen sharply, with net debt to equity and net debt to EBITDA rising to 49% and 220% respectively at FYE14, from respective values of just 8% and 13% at FYE11. As such, Sifca is now considered to be at the gearing limits for an A(CI) rated entity.
Looking ahead, positive ratings action is only likely over the medium-long term, and would be premised upon improvements in agricultural commodity prices, as well as a large reduction in Sifca’s gearing. Conversely, further negative developments in respect of commodity prices could have severe adverse ramifications for the group, which in turn could see downward rating movement. Additionally, given that current gearing is at the threshold of an A(CI) rated entity, further sustained rises in gearing could see the ratings be downgraded.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (November 2006)|
|Long term: A-(CI); Short term: A2(CI)|
|Last rating (December 2014)|
|Long term: A(CI); Short term: A1(CI)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Sifca Group rating reports, 2006-2014
RATING LIMITATIONS AND DISCLAIMERS
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|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Expenditure||Expenditure on long-term assets such as plant, equipment or land, which will form the productive assets of a company.|
|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.|
|Conglomerate||A company made up of subsidiaries that operate in several business sectors that are unrelated to each other.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Downstream||Downstream refers to the processing of raw materials into a product required by end users and consumers.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|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||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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Turnover||The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.|
|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.|
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.
SIFCA Group 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 SIFCA Group with no contestation of the rating.
The information received from SIFCA Group and other reliable third parties to accord the credit rating(s) included:
- The 2014 audited financial statements, plus four years’ comparative numbers;
- The management report based on the audited 2014 financial statements;
- The 2014 annual report of Sifca, as well as for SAPH and SIPH; and
- Budgets for the 2015 financial year.
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 SIFCA’s rating of A(CI); Outlook Stable.