Lagos, 31 January 2019 — Global Credit Ratings has assigned Eat N’ Go Limited a long term national scale Issuer rating of BBB+(NG) and a short term rating of A2(NG); with the Outlook accorded as Stable. The ratings expire in September 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Eat N’ Go Nigeria Limited (“ENG” or “the Company”) based on the following key criteria:
Eat N’ Go Nigeria Limited has developed a niche position in the Nigerian Quick Service Restaurant sector, underpinned by well-recognised international brands, key alliances with suppliers, experienced management team as well as strong shareholder and franchisor support. Incorporated in 2011, ENG fully commenced business in August 2012, operating international food brand franchises; Domino’s Pizza (now Domino’s) and Cold Stone Creamery (“CSC”). The Pinkberry franchise was recently added and its first store opened in 2018. Since 2012, operations have expanded significantly from two outlets in Lagos to 70 stores, across three States and the Federal Capital Territory, Abuja.
Supported by rapid expansion over its six-year operational history, ENG’s revenue has increased at a compounded growth rate of 64% to reach N10.7bn in FY17 (FY16: N8.1bn). GCR expects this growth trajectory to continue as new stores are rolled out. However, managing cost pressure remains a key challenge, with expenditure impacted by the devaluation in Naira, food cost inflation, as well as general operating and expansion costs.
In the early years, the EBITDA margin was either negative or small due to high operating costs (including start-up expenses) but this has improved as the company has gained scale. Following a peak of 15.3% in FY14, the EBITDA margin contracted sharply to 8.6% in FY16, as raw material costs were impacted by the Naira devaluation, while other operating costs almost doubled due to inflationary pressures. Exchange rates stabilised somewhat during 2H FY17 and costs were better contained, which saw the EBITDA and operating margins recover to 14.7% and 8.8% respectively in FY17 (FY16: 8.6% and 3.3%). The Company’s earnings underperformed during 7M FY18 due to a substantial rise in other direct costs and operating expenses, as additional stores were opened and a new brand launched. Management also attributed the decline in earnings to increased competitive pressures in Lagos and is committed to diversification into new markets to mitigate the risk.
ENG’s rating assessment benefits from a favourable working capital cycle, which has supported strong operating cash flows. These have been generally sufficient to fund a significant portion of capex, although the expansion has necessitated additional debt. Working capital pressures are expected to intensify from FY19 as store count increases. Debt (excluding a N1.2bn shareholder loan) reached N2.5bn at July 2018 (FY17: N1.5bn), which translated into moderate credit risk, with net debt to EBITDA at 180% (FY17: 90%). This notwithstanding, the volatility in interest coverage, declining from 3x in FY17 to 1.1x at 7M FY18, reflects the sensitivity of debt serviceability to earnings. Management expects interest cover for FY18 to be better than the interim position, as earnings improve significantly in the fourth quarter due to the festive season. Treating the shareholder loan as debt, net gearing and net debt to EBITDA will register above 160% and 260% respectively at July 2018.
Business risk is elevated by the rapid expansion drive over the medium term which will necessitate around N10bn in new debt funding, in addition to internally generated earnings. Key challenges include overseeing the timeous construction of new restaurants and supply chain management over a wider geographic area. ENG will have to sustain higher earnings to ensure that debt serviceability is not materially impaired.
Going forward, debt will be ramped up to exceed N10bn, as a result of which earnings based gearing will be elevated. If projected earnings are realised, forecasts indicate moderately strong interest cover of 3.6x in FY18, but there remains a risk that the low coverage persists, with increased debt placing further pressure on debt serviceability. ENG reflects strong shareholder support as demonstrated by the recent restructuring of a USD3m short term loan into a subordinated and convertible long term loan. The conversion and subordination clauses do partly mitigate refinancing risk.
Positive rating movement will be dependent on successful rollout of new stores with proven systems to manage the larger business that contribute to the attainment of the robust medium term earnings targets and enable ENG to fund a greater portion of expansion internally, thus reducing the need for debt. Conversely, an excessive increase in debt could see gearing metrics rise to uncomfortable levels and lead to substantial debt service pressure, particularly if earnings targets are not met, and could result in negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial/New rating (December 2018)
Long term rating: BBB+(NG)
Short term rating: A2+(NG)
Senior Credit Analyst
+23 41 904 9462-3
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
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.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. 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.COM.NG.
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 ratings expire in September 2019.
Eat N’ Go Limited 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 Eat N’ Go Limited.
The information received from Eat N’ Go Limited and other reliable third parties to accord the credit rating included:
– 2013-2017 audited annual financial statements,
– budgeted financial statements for the years 2018 to 2023,
– 7-month unaudited management accounts to July 2018,
– Risk Management & Audit Committee Charter
– a breakdown of facilities available and related counterparties
– a completed rating questionnaire.
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.