Announcements

GCR cautions against KenolKobil’s increased risk profile with Rating Watch

GCR has affirmed KenolKobil’s national scale KShs currency long term rating at A+ (single A plus) and short term rating at A1 (single A one). However the rating was placed on Rating Watch, reflecting the high gearing levels in the period under review.

KenolKobil’s gearing level at a particular point in time is largely dependent on the timing of its working capital cycle. In brief, KenolKobil procures its petroleum inventories utilising trade credit facilities provided by suppliers, and backed by LCs that mature 30 to 45 days after the date of the bill of lading. At maturity, the LCs are converted into short term loans from its banking partners, which are then settled as the petroleum is sold and payment received from customers. Where the LCs have yet to mature, KenolKobil’s liability is reflected as creditors, while the liability is reported as short term debt post maturity. In general, the combination of creditors and debtors tends to mirror the level of inventories and outstanding debtors.

Gross debt spiked to KShs13.8bn at FYE10, from KShs4.3bn at FYE09, attributed largely to the above working capital cycle. Whereas, creditors comprised the bulk of working capital funding at FYE09, with a low level of short term debt, the position reversed at FYE10. Accordingly, net gearing rose to 98% (FYE09: 4.5%), while net debt to EBITDA increased 267% (FYE09: 16%). This notwithstanding, despite a higher interest charge, net interest coverage improved to 10.1x (F09: 8.4x), a review period high.

The rating was supported by KenolKobil’s very strong operating performance. Efforts to diversify operations geographically and into non-regulated businesses have proved successful, driving revenue and profit growth. While KenolKobil reported moderate 5% growth in revenue to KShs101.8bn in F10, EBITDA climbed by 43% to KShs4.4bn. This was despite the negative impact of legal disputes with industry authorities.

KenolKobil expects strong earnings growth to continue into F11, supported by a mix of organic growth, strength of some new business lines, and acquisitions where available. Investment activity is increasingly being focused on expanding outside of Kenya, in countries such as Uganda (given recent oil discoveries) and the SADC inland markets. While significant opportunities exist, rising trading volumes across the group have resulted in higher inventory levels and thus persistently elevated debt levels. As such, short term debt rose further as at 1Q F11. Although, debt will unwind as the working capital cycle progresses, management indicated that the combination of debt and trade creditors is generally rising, given the higher volume of activity. Depending on the position in the working capital cycle, this may translate into substantial gearing. Thus debt peaks are expected to be higher and remain elevated for longer periods. Notwithstanding the robust profitability, GCR considers the increasing recourse to debt to have added to the risk profile of the business, and will continue to monitor gearing, and credit protection metrics.

Eyal Shevel
https://globalratings.net/uploads/files/July_2011.pdf

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