Announcements Corporate Rating Alerts

GCR upgrades National Scale Issuer Rating on AECI Limited to A+(ZA) on increasing business diversification. Outlook Stable

Rating Action                                                

Johannesburg, 26 June 2019 – GCR Ratings (“GCR”) has upgraded the Long term national scale Issuer rating assigned to AECI 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
AECI Limited Issuer Long Term National A+(ZA) Stable Outlook
Issuer Short Term National A1(ZA)

Rating Rationale

The rating upgrade on AECI Limited (“AECI”, “the group”) reflects its strong market position, where it is at least among the leaders in certain core markets, and increasing business diversification. This is further supported by strong cash flow generation and modest forward-looking leverage levels.

AECI is a leading manufacturer and supplier of mining explosives and chemicals in Africa. Specifically, its mining explosives business is one of the five largest global suppliers of commercial explosives. The group’s business profile also benefits from the increasing end-market and geographic diversification of revenues as it continues with its acquisition strategy to enhance its chemicals franchise. GCR does, however, note the group’s relative concentration of sales generated by its Mining Solutions businesses and high exposure to African markets (84% of revenues including South Africa). Positively, long standing client relationships and price competitiveness have helped to stem volume erosion in very challenging years.

GCR favourably considers the group’s resilient operational performance and strong cash flow generation capabilities. AECI’s continued focus on its cost optimisation program has allowed it to largely defend its EBITDA margin against volatile volumes and raw material input cost pressure, which has seen EBITDA margins maintained around 11% to 13% over the review period. Growth in revenues and earnings of late have been partly uplifted by recent acquisitions, which GCR expects to make increasing contributions as efficiencies take effect. Nevertheless, GCR estimates that margins are likely to show little progress over the next year as weak trends in some sectors persist, combined with anticipated restructuring costs at certain businesses.

AECI has demonstrated a credible track record of maintaining a moderate leverage profile. The group’s robust balance sheet has helped to accommodate sizeable growth capex amid difficult trading conditions. R4.1bn was cumulatively added to gross debt in FY18, resulting in weaker net debt to EBITDA of 163% from 19% in FY17, whilst operating cash flow to total debt dipped to 35% (FY17: 69%) and interest coverage (EBITDA/net interest) reduced to 7.2x (FY17: 13.x). These metrics, however, remain well within debt covenants, while GCR expects that sustained strong cash flows should facilitate gradual deleveraging going forward.

GCR considers AECI’s liquidity to be strong. This is supported by sizable cash reserves and low debt maturities, resulting in a liquidity sources-to-uses ratio of 2x through to FY20. However, GCR’s view is somewhat tempered by a large debt maturity in FY21 and the risk of cash outflows related to additional large acquisitions as per the growth strategy.

Outlook Statement

The Outlook is Stable. GCR expects future earnings and cash flow generation to benefit from incremental contributions from recent acquisitions and a continuous focus on operating efficiencies despite volatility in its end markets. This in parallel with a return to normalised levels of capex should see leverage metrics improve and liquidity remain strong.    

Rating Triggers

GCR could increase the ratings if AECI demonstrates a sustained uplift in EBITDA margins leading to a material improvement in earnings. Further, meaningful expansion in developed market operations and/or sector diversity could also support improved ratings. The ratings could be lowered if a severe deterioration in operating performance and/or increase in debt leverage leads to a sustained weakening in credit metrics.

Analytical Contacts

Primary analyst Sheri Morgan Senior credit analyst
Johannesburg, ZA morgan@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

AECI Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National A(ZA) Stable July 2015
Last National A(ZA) Stable May 2018
Issuer Short Term Initial National A1(ZA) July 2015
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 2.00
Competitive position 2.00
Management and governance 0.00
   
Financial profile 2.00
Earnings performance 0.00
Leverage and capital structure 1.00
Liquidity 1.00
   
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.
Benefits Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract.
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.
Conditions Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.
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.
Coverage The scope of the protection provided under a contract of insurance.
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.
Mandate Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.
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.
Offset A right (Right of Offset) to set liabilities against assets in any dispute over claims.
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.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
Reserves A portion of funds allocated for an eventuality.
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.
Upgrade The rating has been raised on its specific scale
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