Lagos, 04 December 2018 — Global Credit Ratings has upgraded the national scale ratings assigned to Fidson Healthcare Plc (“Fidson” or “the Company”) to BBB+(NG) and A2(NG) in the long term and short term respectively. Concurrently, the rating of the N2bn Bond Issue was upgraded to A+(NG); with the outlook accorded as Stable. The ratings are valid until June 2019.
Global Credit Rating Company Limited (“GCR”) has accorded the above credit ratings to Fidson based on the following key criteria:
Fidson has maintained its status as a leading manufacturer in the Nigerian pharmaceutical sector, with its range of products enjoying widespread acceptance in the market. The Company’s operations are underpinned by a sound marketing and distribution network, as well as strong relationships with international suppliers and government agencies.
The Company evidences a well-diversified revenue base across a wide range of product categories, which has been supported by the ongoing capacity expansion, and the stability in its supply chain (undergirded by the relative stability of the Naira coupled with the government’s import incentives to the industry). This has translated into strong growth in earnings (by 84% in FY17), with plans to expand further by 19% in the long term.
Although, production costs remain elevated due to structural deficiencies in the economy; with energy and other factory overheads contributing to higher sales cost, the gross margin remained sound and was in line with budget. Similarly, despite the increase in selling and distribution costs (as Fidson deepens market penetration), both EBITDA and operating margins widened in FY17, underpinned by price increases and economies of scale, factors supportive of further margin enhancement going forward.
The Company reported a substantial working capital absorption in FY17 (FY14-16: releases), due to significant cash settlement of outstanding selling and institutional promotion expenses, and higher inventory balances (in line with increase in business activity). Management is budgeting that a substantial working capital release will support strong operating cash inflows in FY18 and cover 86% of debt.
Greater volumes have necessitated increased short term debt, with gross debt climbing to N6.3bn as at 1H FY18 (FY17: N4.6bn), above the N4.5bn average over the review period. Notwithstanding the increase at 1H FY18 and substantial funding requirement being projected, Fidson plans to further deleverage through an equity issuance (already underway) and the sale of its old factory (which according to management, is imminent).
Gearing metrics improved to a much lower level at FY17, with net gearing at 56% in FY17 and net debt to EBITDA registering at 137% (FY16: 279%), whilst net interest coverage strengthened to 2.9x (FY16: 1.9x). Although, the metrics deteriorated somewhat at 1H FY18, the proposed reduction in debt and projected growth in earnings should result in stronger credit metrics going forward, and be supportive of ratings uplift.
The rating uplift of the N2bn Bond reflects the perfection of the security packages on Fidson’s assets. Global Credit Rating Company Limited’s (“GCR”) calculations suggest that, based on the most recent asset valuation, bondholders can expect ‘Excellent’ recovery prospects in an event of default.
An upward rating movement is contingent on the attainment of earnings targets over the medium term, which would see key gearing and credit protection metrics strengthen. However, adverse regulatory changes, coupled with any fresh foreign exchange pressure may constrain operations and impact on earnings and debt serviceability, and thus place pressure on the ratings.
NATIONAL SCALE RATINGS HISTORY
Long term: BBB(NG) (January 2014)
Short term: A3(NG) (January 2014)
N2bn Bond: BBB(NG) (June 2016)
Rating outlook: Stable
Last rating (July 2017)
Long term: BBB(NG)
Short term: A3(NG)
N2bn Bond: BBB(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018;
Global Structurally Enhanced Corporate Bonds Rating Criteria, updated November 2017;
Fidson Healthcare Plc Rating Reports (2014-17);
Glossary of Terms/Ratios (February 2018).
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.
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; d) the ratings are valid until June 2019.
Fidson participated in the rating process via face-to-face meetings, teleconferences and other written correspondences. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Fidson with no contestation of the ratings.
The information received from Fidson Healthcare Plc and other reliable third parties to accord the credit rating included;
– 2017 audited annual financial statements, and four years of comparative audited annual financial statements;
– Unaudited management accounts to June 2018;
– Revised forecasts for 2018-22;
– Industry comparative data and a breakdown of facilities available and related counterparties;
– Trustees Bond performance report as at 23 May 2018;
– Second Supplemental Mortgage Trust Deed;
– Information specific to the rated entity and/or industry.
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.