Announcements Corporate Rating Alerts

GCR downgrades the National Scale Issuer Rating on ASL Limited to B+(KE) due to high gearing; Outlook Stable.

Rating Action

Johannesburg, 10 December 2019 – GCR Ratings (“GCR”) has downgraded the long term and short term National Scale Issuer ratings on ASL Limited to B+(KE) and B(KE) in the long term and short term respectively from BBB+(KE) and A2(KE); with a Stable Outlook.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

ASL Limited

Issuer Long Term

National

B+(KE)

Stable Outlook

Issuer Short Term

National

B(KE)

On May 22, 2019 GCR announced that it had released a new rating framework and sectoral criteria. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the ASL Limited (“ASL”) rating review under the new Criteria for Rating Corporate Entities. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the ratings reviewed in line with the new methodology.

Rating Rationale

The rating action reflects the deterioration in ASL’s gearing metrics, as assessed under GCR’s recently released Criteria for Rating Corporate Entities, somewhat offset by the company’s strong competitive position.

ASL’s debt increased to KES4.3bn at FY19, on the back of additional loans provided by Shareholders to finance the company’s Capex requirements. This saw the credit protection metrics weakening, with net debt to EBITDA above 5x in FY19, but 4.1x when excluding shareholder loans, while sizeable working capital absorptions have driven the very low operating cash flow coverage of debt. Despite a recovery in earnings during FY19, rising finance costs have kept the EBITDA coverage of net interest under 2x, which could be further exacerbated by the recent abolishment of the cap on interest rates in Kenya. Although the bolt-on acquisition of Juma and Ramco Hardwares is expected to enhance earnings and some facilities will continue to be amortised, GCR expects gearing to remain elevated over the rating horizon, even after adjusting for the subordination of shareholder loans. In this regard, the net debt to EBITDA is expected to remain within the 4x to 5x range, while the EBITDA coverage of interest is expected to be under 3x.

GCR is of the view that the ASL’s liquidity assessment is constrained by the short debt maturity profile and high working capital needs of the company. The lack of large unutilised facilities is a ratings weakness, but long established funding relationships with a number of highly rated domestic financial institutions somewhat mitigates the refinancing risk inherent in the short debt maturity profile.

The ratings take cognisance of ASL’s entrenched position as a leading domestic supplier of building and hardware products, underpinned by a network of vertically integrated businesses, and a wide network of dealers and distributors. The ASL leverages off strategic partnerships with global hardware manufacturers and enjoys exclusive distributorship rights on some leading brands. Note is taken of the broad range of the product offering, cutting across different customer segments and pricing points, which supports relative stability in revenue and anchors the company’s competitive position. As part of Ramco, ASL is also able to exploit the operational synergies across the group’s supply chain as well as cost savings from a range of shared services.

ASL’s market position has translated into sound earnings performance, which somewhat offsets the weak financial profile. In this regard the EBITDA margin has been maintained at around the 10% level over the past five years, indicating the relative flexibility of the cost structure. Earnings are expected to improve further from FY20 on the back of full-year contributions from the acquired Juma and Ramco Hardware stores and continued volume growth in the Chemicals manufacturing division. The rollout of a new ERP system across the group is expected to boost operational efficiencies which, coupled with ongoing operational cost containment efforts, should support the EBITDA margins between the 10-13% range over the rating horizon.

Outlook Statement

The Stable Outlook reflects GCR’s expectations that ASL’s earnings will improve over the rating horizon from the consolidation of Juma and Ramco Hardwares to stabilize the gearing, while the terming out of some facilities will offset some concerns regarding the weak liquidity.

Rating Triggers

GCR considers a positive rating action to be unlikely until there is a significant reduction in debt and terming out of debt maturity profile. In this regard, GCR would expect net debt to EBITDA to improve to below 3.5x and interest coverage above 3x, achieved together with much improved cash flow coverage of debt. Conversely, any earnings and cash flow underperformance relative to expectations or further increases in gearing could result in further downgrades to the ratings.

Analytical Contacts

Primary analyst

Tavonga Muchemedzi

Analyst: Corporate Ratings

Johannesburg, ZA

tavongam@GCRratings.com

+27 11 784 1771

     

Secondary analyst

Eyal Shevel

Sector Head: Corporate Ratings

Johannesburg, ZA

shevel@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Sector Head: Financial Institutions

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Corporate Companies, May 2019

GCR Ratings Scale, Symbols & Definitions, May 2019

GCR Country Risk Score report, published June 2019

GCR’s Kenya Corporate Sector Risk Score reports/Market Alerts, published September 2019

Ratings history

ASL Limited

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Issuer Long Term

Initial

National

BBB+(KE)

Stable

May 2017

Issuer Short Term

National

A2(KE))

 

Issuer Long Term

Last

National

BBB+(KE)

Stable

May 2018

Issuer Short Term

National

A2(KE)

 

Risk Score Summary

Risk score

5.50

 

 

Operating environment

7.50

Country risk score

4.50

Sector risk score

3.00

 

 

Business profile

0.50

Competitive Position

1.00

Management and governance

-0.50

 

 

Financial profile

-2.50

Earnings performance

1.00

Leverage and Capital Structure

-2.50

Liquidity

-1.00

 

 

Comparative profile

0.00

Group Support

0.00

Peer analysis

0.00

Glossary

Credit Rating

An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial Instruments, using an established and defined ranking system of rating categories.

Country Risk

The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.

Covenant

A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.

Debt Service Ratio

A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows over a period to the sum of interest and principal payments over the same timeframe.

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.

Downgrade

The rating has been lowered on its specific scale.

Facility

The grant of availability of money at some future date in return for a fee.

Gearing

Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds, EBITDA or operating income.

Hedge

A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.

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.

Interest

Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.

Issuer Ratings

See GCR Rating Scales, Symbols and Definitions.

Issuer

The party indebted or the person making repayments for its borrowings.

Leverage

With regard to 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. 

Margin

A term whose meaning depends on the context. In the widest sense, it means the difference between two values.

Rating Horizon

The rating outlook period.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Shareholder

An individual, entity or financial institution that holds shares or stock in an organisation or company.

Short Term

Current; ordinarily less than one year.

Upgrade

The rating has been raised on its specific scale.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings 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 validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The credit ratings have been disclosed to ASL Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

ASL 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 information received from ASL Limited and other reliable third parties to accord the credit ratings included:

  • the 2018 audited annual financial statements (plus four years of audited comparative numbers);
  • management accounts for 1H FY19
  • a breakdown of debt facilities available and related counterparties at 30 April 2019
  • Cash flow projections for FY20 and FY21

 

Although the group does not maintain unutilised facilities to meet debt redemptions, GCR is of the view that long established funding relationships with a number of highly rated domestic financial institutions somewhat mitigates the refinancing risk inherent in the group’s growth phase.



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