Lagos, 25 October 2021 – GCR Ratings (“GCR”) has assigned national scale long term and short term Issuer ratings of BBB-(NG) and A3(NG) respectively to Babban Gona Farmer Services Nigeria Limited, with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Babban Gona Farmer Services Nigeria Limited||Long Term Issuer||National||BBB-(NG)||Stable|
|Short Term Issuer||National||A3(NG)|
The ratings of Babban Gona Farmer Services Nigeria Limited (“Babban Gona” or “the Company”) balance its strong environmental, social and governance (“ESG”) impact on its host communities and strong liquidity coverage against fast rising debt amid persistently negative operating cash flows (due to huge inventory requirement as it scales operations), which has translated to weak leverage and cash flow metrics.
Babban Gona’s ratings are supported by the strong competitive position, which reflects the underlying positive environmental and social impact/mandate that the Company fulfils through its smallholder farmer partnership (“SHP”) model, which has helped to network cumulative c.250,000 farmers across Nigeria. Services provided to farmers include training, supply of inputs, financial credit, harvest advance loans, storage, and marketing services, which has helped the beneficiaries to achieve significantly higher yield per hectare and net income than the national average. The model has also underpinned ongoing financial support to Babban Gona from reputable global and local partners including, Bill & Mellinda Gates Foundation, KfW, Rippleworks, USAID, Nigeria Sovereign Investment Authority (“NSIA”), and the Central Bank of Nigeria.
Earnings have reported a sound positive trajectory with a 70% 5-year CAGR to FY20. While revenue growth has been slow in recent years due to a fall in price of maize, 1Q FY21 results have shown substantial annualised growth (2.4x), reflecting the doubling of both SHPs engaged (to c.40,000) and hectares cultivated (c.33ha) in 2020. That said, GCR expects strong growth to be sustained for the full year, with subsequent growth to be contingent on an increase in SHPs and hectares grown. The earnings assessment is constrained by the concentration of earnings toward maize, with contributions from rice and other business lines expected to remain relatively small over the medium term.
EBITDA margins have been variable over the cycle, bottoming out in FY19 due to the high sensitivity to volatile commodity prices. While some variability is still expected over the rating horizon, GCR expects the margins to be generally good and to remain above the historical average. Furthermore, GCR expects that Babban Gona will continue to benefit from grant incomes which are targeted towards offsetting rising direct operational expenses.
Leverage and cash flow is the weakest rating factor, due to the persistent rise in gross debt from N3.2bn in FY17 to N13.5bn in FY20. Necessitated by business expansion, debt is expected to rise further to N40.7bn in FY21 and furthermore to N65bn in FY22. However, supported by strong cash holding, net debt to EBITDA has remained moderate (between 1.4x and 2.3x) in most years, barring FY19. GCR expects this to trend around the higher range of 3x-3.5x in FY21-22 if earnings targets are met. Operating cash flows coverage is particularly very weak, due to negative net funds flow since FY17 and likely to persist over the medium term because of the high pressures from the substantial inventory holding requirement (in line with business growth) and harvest advance loans granted to farmers. However, GCR takes cognisance of Babban Gona’s access to a diverse pool of international and local funding, with most facilities obtained on concessional terms. Although 34% of debt is USD denominated, these are hedged through a back-to-back debt arrangement, with USD fund inflows lodged in a foreign currency fixed deposit account with local banks who in turn advance Naira debt to Babban Gona.
The ratings are bolstered by the strong liquidity coverage with uses versus sources of 2.6x over the short term, underpinned by the substantial cash holding of N11.9bn and undrawn committed facilities of N11.6bn (from FCMB and European Development Finance Institution) compared to moderate debt redemption and low capex commitments related to construction of additional storage facilities. However, a negative adjustment has been made to the overall score to reflect the expected negative operating cash flows over the medium term. GCR takes cognisance of the significant headroom against financial covenant thresholds.
The Stable Outlook is underpinned by GCR’s expectation that the strong revenue progression will be sustained over the medium term. GCR also anticipates that the positive ESG impact will continue over the medium term, facilitating strong support from international and local counterparties.
Positive rating action is contingent on demonstrated stability in earnings over the medium term, better management of cash flows that results in lesser recourse to debt funding and a moderation in the leverage metrics to around the 1.5x-2x range.
Inability to convert debt funded inventories to cash in a timely manner could threaten leverage and liquidity and result in a ratings downgrade. In addition, significant underperformance in earnings and/or material elevation in debt beyond expected levels could further weaken the debt service metrics and trigger a negative rating action.
|Primary analyst||Samuel Popoola||Analyst: Corporate and Public Sector|
|Lagos, Nigeria||Samuel@GCRratings.com||+234 1 904 9462|
|Committee chair||Julius Adekeye||Head of Ratings, Nigeria|
|Johannesburg, ZA||Adekeye@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Nigeria Country Risk Scores, October 2021|
|GCR Nigeria Corporate Sector Risk Scores, August 2021|
Babban Gona Farmer Services Nigeria Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date*|
|Long Term Issuer||Initial/last||National||BBB-(NG)||Stable||July 2021|
|Short Term Issuer||Initial/last||National||A3(NG)|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||2.25|
|Management and governance||0.00|
|Leverage and Cash flow||(2.25)|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with because of holding the security or asset. For a company, its exposure may relate to a product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||Regarding corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
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.
Babban Gona 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 Babban Gona 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 period to 31 March 2021;
- Internal and/or external management reports;
- Industry comparative data and a breakdown of facilities available and related counterparties; and
- Information specific to the rated entity and/or industry was also received.