Global Credit Ratings has accorded the above credit rating(s) on Kaluworks Limited based on the following key criteria:
Kaluworks reported a 14% increase in revenue to KShs4.3bn in F12, as the group benefitted from the additional production capacity following the recent capacity expansion. This saw total aluminium volumes processed increase by around 2,000 tons to 11,500 tons in F12, albeit slightly below budget. While fuel and electricity costs continue to weigh on margins, operating profit was reported at a review period high of KShs435m (F11: KShs409m). For the 7 months to July 2013 revenue increased to KShs2.8bn but continued cost pressures saw operating profit decrease by an annualised 23%. However, all profitability have been consumed by onerous interest charges, with negligible net profits (or losses) reported from F10 to F12, as well as a net loss before tax for the 7 months to July 2013.
Very high working capital absorptions (to fund expansion) have placed significant liquidity strain on Kaluworks. With little increase in trade creditors or retained earnings in recent years, all trade funding has come from short term debt. Combined with substantial capital spend, this has seen debt rise from KShs1bn at FYE08 ton KShs4.6bn at FYE12. As a result, net gearing rose to 287% and net debt to EBITDA to 776% at FYE12, levels well above those characteristic of investment grade companies. In addition, the very low interest coverage remains a key concern.
To alleviate some of the funding pressure, Kaluworks is considering converting a larger portion of debt into US$ facilities to generate savings from the lower interest and converting the private notes into a long term facility. However, both options have drawbacks and will not address the ultimate funding constraint, being excessively geared. In this regard, Kaluworks has begun to look for a potential private equity partner or another outside investor who can inject fresh capital into the business, but none has been identified yet.
An investment by an outside partner or an equity injection by shareholders is considered critical, to alleviate the current funding constraint. Any upward rating movements will be dependent on gearing ratios declining substantially and an increase in interest coverage above the 2x level. Stronger earnings, to the extent they improve credit protection metrics will be positive. Conversely, if not adequately addressed the high level of debt will continue to place significant liquidity pressure on Kaluworks, and severely restrict operational ability. This would likely lead to further rating downgrades. Weaker earnings or further delays in capex could also place additional strain on credit protection metrics and debt serviceability.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Sep/2012)|
|Long term: BB+(KE); Short term: B(KE)|
|Last rating (Sep/2012)|
|Long term: BB+(KE); Short term: B(KE)|
|Sector Head: Corporates|
|+27 11 784 1771|
|Sector Head: Financial Institution Ratings|
|+27 11 784 1771|
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Kaluworks 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.
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