Announcements Corporate Rating Alerts

GCR Revises National Scale Issuer Rating on African Oxygen Limited to A+(ZA) on Criteria Change. Outlook Stable

Rating Action                                                

Johannesburg, 04 July 2019 – GCR Ratings (“GCR”) has revised the Long term national scale Issuer rating assigned to African Oxygen Limited to A+(ZA) and affirmed the Short term rating at A1(ZA); with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
African Oxygen Limited Issuer Long Term National A+(ZA) Stable Outlook
  Issuer Short Term National A1(ZA)

Rating Rationale

The ratings on African Oxygen Limited (“Afrox” or “the company”) reflect its very strong financial profile underpinned by a net ungeared capital position and strong cashflow generation. This is further supported by a leading competitive position in key domestic markets, albeit counterbalanced by limited business line and geographic diversification.

Afrox’s rating is underpinned by a very strong financial profile. In this regard, the company has maintained a net ungeared position over the three years to FY18, with debt remaining flat at around R1bn. As no significant capital projects expected in the short term, GCR expects the company to maintain this ungeared position over the rating horizon. Debt serviceability also remains very strong, with the company generating net interest income during FY18 on the back of the sizeable cash holdings. Thus, the company has sufficient room to double its current debt before any of the existing debt facility covenants are threatened. Afrox’s strong liquidity position is supported by the sizeable cash reserves and a stable base of recurring operating cash flows, which should be sufficient to meet the limited capex requirements and debt maturities. Thus, GCR expects the sources of liquidity to cover uses by around 2 times over next two years.

Rigorous cost controls and a focus on value chain efficiencies have supported a general margin improvement over the review period, with the EBITDA margin increasing from 14% in FY14 to 21% in FY18 (FY17: 23%). GCR expects that the ongoing efficiency-enhancement initiatives will help sustain margins around the 17-20% level over the medium term, albeit that overall profitability is dependent on a return to sustained volume and revenue growth. Cash generation remains robust, averaging 85% of EBITDA over the review period which, coupled with tight working capital controls, resulted in strong operating cash flows. No material working capital requirements are expected over the ratings horizon, which is supportive of sound free cash flows.

The ratings take cognisance of Afrox’s entrenched position as a leading regional supplier of gases and welding products in sub-Saharan Africa, underpinned by an extensive distribution network. Afrox has also leveraged off the operational and technical support from its international parent, Linde PLC, one of the largest global industrial gas groups, to provide innovative solutions. While the limited geographical footprint somewhat curtails the company’s business profile, note is taken of the broad end-market industry diversification, which has allowed the company to defend volumes and revenue amidst a general weakening of the key domestic mining and manufacturing sectors. Going forward, GCR expects volume growth to be driven by gradual expansion into regional markets, increased demand for LPG as an alternative to traditional energy sources, as well as increased volumes from the healthcare gases business.  

Outlook Statement

The Stable Outlook reflects GCR’s expectation that revenue will evidence only moderate growth over the rating horizon. As no major capex is foreseen, the company is also expected to largely remain net ungeared over the medium term.

Rating Triggers

GCR does not expect an increase in the rating over the medium term, as the positive factors are already considered in the current rating. However strong growth and business diversification, whilst maintaining moderate gearing could see the rating rise over the long term. Conversely, the ratings could be lowered if a severe deterioration in operating performance and/or increase in debt which leads to a sustained weakening in credit metrics.

Analytical Contacts

Primary analyst Tavonga Muchemedzi Credit analyst
Johannesburg, ZA tavongam@GCRratings.com +27 11 784 1771
     
Committee chair Eyal Shevel Sector head: Corporate and Public Sector
Johannesburg, ZA shevel@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 Country Risk Scores, June 2019
GCR Corporate Sector Risk Scores, June 2019

Ratings History

Afican Oxygen Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National A+(ZA) Stable Sep. 2001
  Last National A(ZA) Stable May 2018
Issuer Short Term Initial National A1(ZA) Sep. 2001
  Last National A1(ZA) May 2018

RISK SCORE SUMMARY

Risk score 15.00
   
Operating environment 11.00
Country risk score 7.00
Sector risk score 4.00
   
Business profile 0.50
Competitive position 0.50
Management and governance 0.00
   
Financial profile 3.50
Earnings performance 0.00
Leverage and capital structure 2.00
Liquidity 1.50
   
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
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 An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
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.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
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 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. 
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.


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