Lagos, 26 November 2020 — Global Credit Ratings has assigned long term and short term national scale Issuer ratings of A-(NG) and A2(NG) respectively to Emzor Pharmaceutical Industries Limited, with the ratings placed on Stable Outlook. The ratings expire in November 2021.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Emzor Pharmaceutical Industries Limited (“Emzor” or the “Group”) based on the following key criteria:
Emzor is a locally owned pharmaceutical company that has expanded to produce about 200 different products, with sales through a network of over 160 distributors across Nigeria, and West Africa. Emzor’s operations are further underpinned by strong relationships with international suppliers and technical partners, which have supported solid competitive positioning.
The Group reported a 19% cumulative average growth rate in revenue between FY15 to FY19, supported by rising production volumes, and the introduction of new products. Supply chain disruptions occasioned by the COVID-19 crisis have affected production and targets for FY20, as evidenced by the constrained year-on-year growth in 1H FY20, but, earnings have since recovered and prospects remain strong, underpinned by Nigeria’s fast growing population and generally low penetration for medicines.
Despite the adverse impact of the Naira devaluation and inflationary pressures, Emzor has reported competitive margins over the years. This has also helped sustain adequate interest coverage, amidst the higher charge. While input costs are expected to remain high, successful backward integration into the production of active inputs and higher economies of scale should see import dependency reduce and earnings margins register above historical levels.
Emzor has reported negative operating cash flows in recent periods, driven by working capital pressures arising from growing trade receivables, inventory, and related party transactions. While GCR expects such working capital pressures to persist in view of the expanding business, management has indicated that related parties now have access credit facilities for their own operations
The ratings are also supported by Emzor’s relatively strong credit risk profile, underpinned by support from shareholders. In this regard, an equity injection and a convertible shareholder loan have enabled Emzor to contain net debt to EBITDA below 1.3x in recent periods, despite the working capital and expansionary spend. If the convertible shareholder loan is treated as equity, the metric would register below 0.7x. Even as Emzor gears up for additional funding through a debt issue to support its expansion drive, GCR expects this to have limited impact on credit metrics, provided strong earnings are maintained. However, a renewed working capital support for related parties may weaken Emzor’s financial profile in times of material cash flow stress.
Emzor evidences strong relationships with financial institutions, which has allowed for steady access to funding and favourable terms, amidst the challenging operating environment. Its debt maturity profile is enhanced by a sizeable long term debt and N1.7bn in unutilised committed facilities.
Positive rating movement is contingent on bringing the capex projects to fruition on time and within budget, supporting a substantial increase in scale and improve financial strength. Conversely, an underperformance of earnings against a rise in debt profile, could burden Emzor with high debt service costs. Continued disruptions to the operating environment, could also negatively impact group performance.
NATIONAL SCALE ISSUER RATINGS HISTORY
|Long term||A-(NG)||Stable||November 2020|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Glossary of Terms/Ratios (February 2018)
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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 November 2021.
Emzor Pharmaceutical Industries 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 Emzor Pharmaceutical Industries Limited.
The information received from Emzor Pharmaceutical Industries Limited to accord the credit rating included;
- 2019 audited annual financial statements (plus four years of comparative numbers),
- Six-month management accounts to 30 June 2020
- Seven-year projections for 2020 to 2026
- industry comparative data and regulatory framework
- 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.