Lagos, 13 November 2019 — Global Credit Ratings has downgraded the national scale Issuer ratings assigned to Eat N’ Go Limited to BBB(NG) and A3(NG) in the long term and short term respectively, with the Outlook accorded as Stable. The ratings expire in October 2020.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Eat N’ Go Limited (“ENG” or “the Company”) based on the following key criteria:
Eat N’ Go 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. ENG was established in 2011 and fully commenced business in August 2012, operating international food brands franchises; Domino’s Pizza (now Domino’s) and Cold Stone Creamery. 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 100 stores (2018: 84 stores), across seven States and the Federal Capital Territory, Abuja.
ENG has recorded robust revenue growth over the review period in line with rapid store expansion. However, the benefits of the strong topline growth have been largely eroded by substantial operating costs, exacerbated by inflationary pressures, high distribution and staff costs. The EBITDA margin and operating margin contracted sharply to 9.2% and 1.7% respectively at FY18 and the company would have reported a large operating loss in FY18 if not for an exceptional item. Net interest cover fell to just 0.4x in FY18 and 0.5x in 7M FY19. With such low interest coverage, ENG has very little headroom to withstand earnings shocks. ENG indicated that earnings were adversely impacted by the significant delay in the planned bond issuance which translated into high expansion-related set up costs causing a significant strain in earnings. Management expects interest coverage to improve to 1.5x for the full year.
The Company benefits from a favourable working capital cycle which has supported strong operating cash flows, as inventories have been largely financed by creditors. Historically, operational cash flows have generally been sufficient to fund a significant portion of capex, although the rapid expansion drive necessitated both new equity and debt funding in FY18 and 7M FY19. Working capital pressures are expected to intensify from FY20 as store count increases. 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 broader geographical area.
In March 2019, the Company incorporated a Special Purpose Vehicle, Eat & Go Finance SPV Plc, to provide funding for ENG through the issuance of Bonds to the public. ENG will act as Sponsor and Guarantor to the proposed N15bn bond issuance programme (“BIP”). A combined sum of N10bn is expected to be raised in two Series before the end of 2019. The net bond proceeds will be on-lent to ENG under the terms of a Master Intercompany Bond Purchase Agreement. Post the BIP, gross debt will exceed N12bn at FY19, although much stronger earnings are projected to sustain net debt to EBITDA at a manageable 243% at FY20, before moderating annually to a net ungeared position by FY23. However, the bond issuance will include a net debt to EBITDA covenant of 4x, which could be tested if the very strong earnings projections do not materialise.
ENG will have to improve earnings substantially, in conjunction with effective cost management to drive a meaningful recovery in margins and ensure that debt serviceability is not materially impaired. Management indicated that measures have been taken to absorb cost increases through careful menu pricing and restructuring of promotions.
A positive rating movement is unlikely until a material increase in earnings and profitability is sustained and leads to an improvement in interest coverage ratios and earning based gearing metrics. Meanwhile, a ratings downgrade would materialise if gearing metrics approach or exceed the proposed covenant level and if liquidity pressure worsens. Risks in this regard could arise from earnings underperformance, delays in project rollout and the proposed bond issuance or an unanticipated rise in debt.
NATIONAL SCALE RATINGS HISTORY
Initial rating/Last 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
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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 October 2020.
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:
– the 2018 audited annual financial statements and audited comparative results for the preceding four years,
– revised financial statement forecasts for the years 2019 to 2023,
– 7-month unaudited management accounts to July 2019,
– 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.