Johannesburg, 29 November 2016 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to The SIFCA Group of A(CI) and A1(CI) in the long and short term respectively; with the outlook accorded as Negative. The Issuer ratings expire on 30 November 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to The SIFCA Group (“SIFCA”) based on the following key criteria:
GCR takes cognisance of SIFCA’s position as an established producer of rubber, oilseeds and sugar, underpinned by a network of vertically integrated businesses in Ivory Coast, Ghana, Nigeria and Liberia, and a strategic marketing function that operates from Senegal and France. Its operations have evolved rapidly to include beneficiation and higher-yielding, down-stream capabilities. Specifically, SIFCA has acquired bolt-on operations, entered joint ventures and expanded processing capacity to reduce its exposure to commodity price cyclicality.
These strengths notwithstanding, GCR has accorded a negative outlook on SICFA’s ratings, premised on the protracted commodity price downturn, which continues to curtail the group’s performance, despite progressive improvements in productivity. Specifically, the average palm oil price declined by 25% in 2015, while rubber prices averaged a lower 20% and sugar 23% year on year. Global prices have since picked up from the lows reported in 2H 2015, but continue to trend below stronger averages reported in prior years. Currency volatility, including devaluation of currencies related to consolidated entities, has added to the erratic earnings trajectory.
Accordingly, revenue has progressively declined in the past three fiscal years, registering at a low of XOF428.8bn in F15 (F14: XOF449bn). While the margins normally achieved at the peak of the commodity cycle are not expected to be consistently sustained, current levels are below SIFCA’s expectations.
Operating profit fell by 37% to XOF17.5bn in F15, while primary shareholders have absorbed a cumulative XOF2.9bn in losses in the past two years. 1H F16 revenue was largely unchanged year on year, with a tentative pick up in margin, albeit full year performance is not likely to show substantial improvement from F15. GCR notes pressures inherent in the underlying operations, such as the impact of ageing trees on yields, as well as side marketing and other logistical challenges, which include internal fraudulent transactions that recently cost SIFCA around XOF2.8bn. The SAP rollout is expected to enhance efficiencies and internal controls, while planned regulations will increase oversight of the local rubber and palm oil industry.
From XOF86bn at FYE11, debt has risen markedly to fund capex, peaking at XOF207.8bn at FYE15 (FYE14: XOF182.5bn). As such, net gearing and net debt to EBITDA registered at highs of 57% and 279% respectively, and despite moderating at 1H F16, remain well above legacy levels. Capex was cut from XOF71bn in F14, to XOF48bn in F15 (F16 projection: XOF43bn), which will alleviate some funding pressure, albeit the XOF debt service ratios will continue to be inflated by adverse currency movements.
Looking ahead, an upgrade is only likely in the medium-long term, based on a rebound in earnings due to higher commodity prices and the bedding down of ongoing capex; plus a large reduction in debt levels. Conversely, further increases in debt and gearing levels, even to fund ongoing capex, would unduly elevate funding pressure, warranting a ratings downgrade. Sustained losses and/or persistently weak performance could also result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2006)||Last rating (December 2015)|
|Long term: A-(CI)||Long term: A(CI)|
|Short term: A2(CI)||Short term: A1(CI)|
|Rating outlook: Stable||Rating outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Credit Analyst||Sector Head: Corporate and Public Sector Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
SIFCA Group rating reports, 2006-2015
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. 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATES GLOSSARY
|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 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 Rating Agency||An entity that provides credit rating services.|
|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.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|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.|
|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 Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or “’Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate. Also an agricultural term describing output in terms of quantity of a crop.|
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.
The 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 ratings have been disclosed to The SIFCA Group with no contestation of the ratings.
The information received from The SIFCA Group and other reliable third parties to accord the credit rating included:
- the 2015 audited financial statements, and full annual report for SIFCA group;
- four years’ comparative numbers;
- The SIFCA Group’s AGM minutes reviewing the 2015 annual results;
- the management report based on the audited 2015 financial statements; and
- group management account extracts for The SIFCA Group for the six months to June 2016.
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 The SIFCA Group’s rating of A(CI); Outlook Negative.