Lagos Nigeria, 17 July 2019 — Global Credit Ratings has assigned national scale issuer ratings of BBB(NG) and A2(NG) in the long term and short term respectively to TAK Logistics Limited, with the outlook accorded as Stable. The ratings are valid until July 2020.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to TAK Logistics Limited (“TAKL” or “the Company”) based on the following key criteria:
TAKL operates within the broader TAK Agro Group (“the Group”), which covers the full array of agricultural products and services. The Company engages in the movement of fertiliser raw materials (i.e. imported Phosphate and Potash, and locally sourced Urea and Limestone) from ports and locations to the various fertiliser blending plants under the Presidential Fertiliser Initiative (“PFI”). The blended fertilisers are delivered to the Agro-dealers, farm gates and distribution/aggregation centres. On the return leg, TAKL moves grains/farm produces from aggregation centres to Silos and warehouses, and afterwards helps in the distribution of Silos processed farm produce to food processors, manufacturers or end-users. Thus, TAKL enjoys a captive market along the Nigerian agricultural value-chain due to the Group businesses.
GCR‘s credit rating are constrained by TAKL’s limited track record, having only commenced operations in 2017. Within the two years, the business underwent a major reorganisation, which bolstered earnings margins in FY18 but at the expense of a 37.9% decrease in revenue. Further risks materialise from TAKL’s inherent earnings cyclicality (given its operations within the agricultural sector), which was reflected in the annualised 13.8% decline in revenue in the 1Q FY19 results. Nevertheless, GCR has taken cognisance of projections provided to GCR, which forecast significant revenue growth in FY19 as the trucking fleet expands, and then moderate 5% growth from FY21.
Revenue is concentrated amongst three strategic customers (including Nigeria Sovereign investment Authority under the PFI) which account for over 60% of earnings annually. This concern is partly mitigated by the long term contracts in place, as well as the latent demand implied by the Nigerian government’s increased focus on agricultural development. This notwithstanding, a change within the Nigerian political space and ideology to terminate or modify the PFI program would pose a risk to future earnings sustainability.
The Company currently owns no trucks and has been engaging third party transporters to provide its logistics requirement. However, the company has suffered from low cycle-time due to the limited availability of trucks and challenges within the transport logistics sector in Nigeria. To foster efficiency in its delivery system, TAKL is embarking on acquisition of its own trucks (about 250 units) which should see performance improve in the coming years, as well as hedge against over dependence on third party transporters.
Although cash flow from operation has remained positive in all years, working capital absorptions have resulted from delays in payment from some large customers, and related parties receivables (which was fully settled in 1Q FY19). While strong cash flows are expected from the planned business expansion, the strength of the balance sheet will depend on the timely collection of debtors, which GCR will monitor.
Currently, the Company has no debt, and operations have been funded by equity. TAKL plans to raise N15bn from the debt capital market to finance its asset acquisitions. This will see gearing metrics spike at FY19, from a historically ungeared position. While this will lead to some gearing pressure, forecasts indicate that TAKL will return to an ungeared position by FY21. Should earnings fall short of target, TAKL could be burdened with excessive debt service obligations.
To attain a ratings upgrade, TAKL will need to demonstrate that it can sustainably enhance earnings in line with its projections, while broadening its client base and ensure strong management of working capital. Conversely, excessive debt utilisation could see the ratings decline, particularly if accompanies by lower than expected sales volumes and cash flow pressure. Persistent debtors absorptions, particularly from related parties, would thus be negatively considered.
NATIONAL SCALE RATINGS HISTORY
Initial/new rating (July 2019)
Rating outlook: Stable
Last rating: n/a
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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
RATING LIMITATIONS AND DISCLAIMERS
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 rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings are valid till July 2020.
TAK Logistics 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 TAK Logistics Limited.
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.
The information received from TAK Logistics Limited and other reliable third parties to accord the credit ratings included:
2017 and 2018 audited annual financial statement;
3-month management accounts to 31 March 2019;
Internal and/or external management reports;
A completed rating questionnaire containing additional information on TAK Group and its subsidiaries; and
Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties