Lagos, 11 May 2021 – GCR Ratings (“GCR”) has assigned national scale long and short-term issuer ratings of BBB-_(NG) and A3_(NG) respectively, to Coleman Technical Industries Limited, with a Stable Outlook.

Rating Rationale

Coleman Technical Industries Limited’s (“Coleman” or “the Company”) ratings reflect its relatively strong position within the Nigerian cables and wires manufacturing sector, underpinned by continuous capacity expansion which has facilitated stronger earnings growth. However, the ratings are constrained by the relatively high gearing, and ongoing requirement for funding to drive expansion.

Coleman’s competitive advantages include its established operational track record and strong relationships with key vendors, albeit that concentration towards two major distributors who jointly account for about 35% of revenue is a rating constraint. On the back of ongoing investment in capex, Coleman has established itself as the dominant producer of aluminium and copper cables (installed capacity of c.100,000 tons per annum), with diverse product lines relative to other African peers. Thus, the Company has a c.10% market share in the Nigerian cables sector, with major competition being from imported finished products from Asia. GCR expects the successful completion of ongoing expansion projects to better position Coleman to compete favourably with imported products.

At the current rating level, GCR view of management and governance remains neutral despite the dominance of the Board by the owning family negatively (including the Chairman and CEO), given the presence of two independent directors.

Supporting the ratings, Coleman has maintained strong volumes-driven revenue progression over the review period, with 24.2% CAGR over the 5-years to FY20. Coleman is projecting an aggressive growth of about 3.5x in FY21, driven by the expected completion of the 11,000 tons/month (combined) backward integration project and the new fibre optic manufacturing plant, which are expected to help capture further high value demand opportunities in the power and telecommunications sectors in the medium term. GCR believes that even if these projects are not fully realised, the 70% leap in 1Q FY21 still provides a strong case for sustainable business growth for the full year and into FY22.

While EBITDA margins have been persistently impacted by volatile commodity prices, fluctuating between 16.8% and 33.6%, earnings are stronger than the level reported by the available comparable peers. GCR expects some margin enhancement to come from the introduction of higher margin products, greater economies of scale and cost savings upon the completion of the backward integration project.

Constraining the rating somewhat, Coleman has relied on debt to fund its expanding business. Debt rose to N13.8bn in FY20 and N14.9bn 1Q FY21, from N9bn in FY17. Exacerbated by the weakening in core earnings, net debt to EBITDA spiked to 532% at FY20 (FY19: 366%). The Company intends to raise an additional N30bn in FY21 to finance expansion and support working capital requirements, while refinancing short-term debt, resulting in projected gross debt more than doubling to N35.2bn at FY21. Assuming that strong earnings are maintained for the full year, GCR expects that the net debt to EBITDA will likely improve to a moderate range of 200%-250%. Discretionary cash flow coverage of debt and EBITDA coverage of net interests are weaker metrics, both trending well below the intermediate range. Looking ahead, GCR expects interest coverage to improve primarily underpinned by stronger earnings, but weak/negative cash flow coverage is likely to persist. Coleman’s diversified funding sources, including nine banks and government concessional facilities (40% of total debt) and the longer tenured debt profile do mitigate financing risk somewhat.

The liquidity assessment is neutral to the ratings. While Coleman has arranged sufficient funding sources to cover its capex and working capital requirements, coverage is only around 1x. New debt funding is anticipated in the short term, but should it not materialise, capex spend will be curtailed accordingly. GCR takes cognisance of the strong lending relationships and the fact most of the short-term debt are revolving. There is an all-asset debenture on Coleman’s factories, but these are mostly related to the short-term facilities which are generally below 30% of gross debt and around 20% of the total asset base.

Outlook Statement

The Stable Outlook is predicated on GCR’s expectation that Coleman will sustain a strong earnings trajectory on the back of an expanding production capacity and improved cost efficiencies. Accordingly, we expect leverage metrics to remain moderate, even with the planned increase in debt.

Rating Triggers

Positive rating action could result from the successful and timeous completion of the ongoing projects which translates to meaningful earnings growth and net cash flows. A successful debt issue which helps to refinance existing obligations, and further stretch the debt maturity profile would also be positively viewed. Conversely, the ratings could come under pressure if further earnings pressure manifests, resulting in further deterioration in credit protection metrics, higher leverage metrics and/or weaker liquidity assessment.

Analytical Contacts

Related Criteria and Research

Ratings History

Coleman Technical Industries Limited

Risk Score Summary

Glossary

Salient Points 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Coleman Technical Industries Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Coleman Technical Industries Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Coleman Technical Industries Limited and other reliable third parties to accord the credit ratings included:

• 2020 audited annual financial statement, and prior four years annual financial statements;
• unaudited management accounts for the first quarter ended 31 March 2021;
• Industry comparative data and a breakdown of facilities available and related counterparties;
• Information specific to the rated entity and/or industry was also received;