Johannesburg, 26 June 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to TPS Eastern Africa Plc of A-(KE) and A2(KE) in the long and short term respectively; with the outlook accorded as Stable. The ratings are valid until 30 June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to TPS Eastern Africa Plc (“TPSEA”) based on the following key criteria:
The ratings take cognisance of TPSEA’s well-established hotel and hospitality network, trading under the Serena brand, and consistent support from its key shareholder, the Aga Khan Fund for Economic Development, S.A (“AKFED”). TPSEA is inherently exposed to the exogenous shocks in the operating environment, which have led to significant variability in earnings over the review period, thus constraining the ratings. That said, GCR notes that the underlying operations are efficiently run and the portfolio is well diversified, with the group posting operating profits in all the years under review.
While revenue was flat at KES6.4bn in FY17 impacted by the limited capacity at the Nairobi Serena Hotel, the flagship property in Kenya which is under refurbishment, it exceeded expectations due to strong performances in Tanzania and Uganda. Nevertheless, as staff costs were maintained at the Kenyan properties, earnings margins narrowed with a lower operating profit reported. Looking ahead, however, strong tourist arrivals into FY18, coupled with the scheduled completion of the first phase of upgrades at the Nairobi Serena Hotel, is expected to boost FY18 revenues, albeit that stable market conditions will be required to sustain such growth in the medium term.
Cash generation has varied in line with EBITDA over the review period. Positively, working capital changes have been moderate and predictable over the review period, reflecting the optimisation of stock control, procurement and debtors management for the group. Having been maintained at relatively low levels over the review period, group capital expenditure increased to KES1.9bn in FY17 (FY16: KES563m), driven by the upgrades on key properties. With only small capex projects planned beyond the completion of the Nairobi Serena Hotel upgrade, little funding pressure is expected from the capex trajectory.
Debt increased to a new high of KES4.5bn at FY17 (FY16: KES3.7bn), mainly due to additional drawdowns under the PROPARCO facility to finance the ongoing refurbishments. The group, however, remains well-capitalised, with gross gearing at 57% (FY16: 46%). While this is fairly moderate for the current ratings, GCR has taken into account the volatile nature of the tourism industry. Thus, fluctuations in earnings can have a substantial impact on credit metrics, as evidenced by the spike in net debt to EBITDA at FY17. TPSEA’s strong access to funding, underpinned by a strong shareholder base and long-standing relationships with commercial banks, development agencies and related parties is considered in support of the ratings.
Global Credit Ratings has also withdrawn the rating accorded to TPS Eastern Africa Plc’s Commercial Paper, as there is currently no Commercial Paper in issue.
Looking ahead, upward rating actions may arise from the successful completion of the Nairobi Serena Hotel upgrades and demonstrated sustained earnings enhancement therefrom. This should allow for a reduction in earnings-based gearing to below 400%. Conversely, protracted weak performance or losses due to a deterioration in the business and socio-political environment or adverse regulatory changes, resulting in elevated gearing and debt service metrics, could result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2009)|
|Long term: BBB+(KE)|
|Short term: A2(KE)|
|Last rating (July 2017)|
|Long term: A-(KE)|
|Short term: A2(KE)|
|Commercial Paper: A2(KE)|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Tavonga Muchemedzi|
|Sector Head: Corporate Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
TPS Eastern Africa Plc Issuer rating reports 2009-17
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
|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.|
|Economies Of Scale||Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.|
|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.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.
TPS Eastern Africa Plc 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 TPS Eastern Africa Plc with no contestation of the ratings.
The information received from TPS Eastern Africa Plc and other reliable third parties to accord the credit ratings included:
- Audited financial statements for FY17, and four years comparative numbers;
- Full details of funding facilities;
- Detailed FY18 financial budgets;
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 TPS Eastern Africa Plc’s rating of A-(KE), Outlook Stable.