Lagos Nigeria, 30 September 2020 — Global Credit Ratings has upgraded the national scale long and short-term Issuer ratings assigned to Lafarge Africa Plc to AA-(NG) and A1+(NG) respectively, from A+(NG)/A1(NG) previously. Concurrently, the issue rating assigned to the senior unsecured Series 2 Bonds has been upgraded to AA-(NG, from A+(NG) previously. The outlook on the ratings is Stable. The ratings are valid until August 2021.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Lafarge Africa Plc (“LAP” or “the Group”) based on the following key criteria:
Lafarge Africa Plc is a major cement producer in Africa, and a subsidiary of LafargeHolcim (“LH”), a global leader in cement production. During 2019, the Group underwent a Rights Issue and corporate restructuring, and divested its stake in Lafarge South Africa Holdings (Pty) Limited (“LSAH”). LAP now has a production capacity of 10.5mmtpa, and one wholly-owned subsidiary, AshakaCem Plc.
The positive rating movement reflects the significantly improved credit risk profile, achieved on the back of the capital injection and operational rationalisation. Proceeds from the sale of LAP’s stake in LSAH and the Rights Issue were used to reduce external debt to N64bn at FY19, from N301.5bn previously. Accordingly, net debt to EBITDA is being managed at very conservative levels and is expected to trend below 50% over the outlook period, as the Group shifts its focus from expansionary capex to capacity optimisation. Other key rating supports include technical and financial support from LH and the Group’s wide coverage.
LAP’s extensive restructuring and cost rationalisation have counterbalanced the impact of currency devaluation in recent years, supporting EBITDA margins in the 30%-40% range, from 10%-20% previously. While the Group is expected to lose some margin amidst lower productivity in the short-term, the earnings base is expected to remain relatively resilient going forward.
Interest coverage has similarly reset to double digits and is expected to trend comfortably above 10x despite potential downside risk of currency-driven pressures on the domestic cost of funding. Operating cash flow coverage of total debt (including lease liabilities) is also expected to remain strong, trending above 75% ahead of the next capital upcycle. This should facilitates future expansion from internal sources.
Although the remaining debt is mostly short-dated, LAP is expected to continue to present a robust liquidity, on the back of strong retained cash flows, moderate dividend pay-out ratios, facility headroom from strong domestic and international funding counterparties, and strong access to capital markets.
Growth in the cement industry is expected to be constrained by reduced construction activity over the rating horizon, due to the recessionary climate and the impact of lower productivity on the Federal Government’s fiscal position. This notwithstanding, GCR expects LAP to achieve strong revenue and earnings progression on the back of a stronger national footprint.
As the Series 2 Bonds are senior unsecured obligations of LAP (the Issuer), the Bonds bear the same rating as the Issuer, and any change to the rating assigned to the Issuer will directly affect the Bonds rating.
A further rating upgrade is dependent on an improvement in market share and earnings profile, while maintaining a strong credit protection metrics over the medium term. Conversely, the ratings would be sensitive to protracted economic recovery and sluggish construction activity that continued to constrain pricing flexibility, with negative impacts on cash generation and the stability of leverage metrics.
NATIONAL SCALE RATINGS HISTORY
|Issuer – Long term||A(NG)||July 2010||Stable|
|Issuer – Short term||A1(NG)||July 2010||Stable|
|Series 2 Bonds||AA-(NG)||April 2016||Stable|
|Issuer – Long term||A+(NG)||October 2019||Stable|
|Issuer – Short term||A1(NG)||October 2019||Stable|
|Series 2 Bonds||A+(NG)||October 2019||Stable|
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Lafarge Africa Plc rating reports, 2010-19
Glossary of Terms/Ratios, February 2018
RATING LIMITATIONS AND DISCLAIMERS
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 rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings are valid till August 2021.
Lafarge Africa Plc 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 Lafarge Africa Plc.
The information received from Lafarge Africa Plc and other reliable third parties to accord the credit rating included:
– the 2019 audited annual financial statements and audited comparative results for the preceding four years,
– unaudited management accounts to 30 June 2020,
– a completed rating questionnaire containing additional information on Lafarge Africa Plc,
– breakdown of facilities available and related counterparties
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.