Johannesburg, 07 Oct 2013 — Global Credit Ratings has today upgraded the long term national scale and affirmed the short term national scale Issuer ratings of Sundry Foods Limited to BBB(NG) and A3(NG) respectively; with the outlook accorded as Stable. The rating(s) are valid until 9/2014.
Global Credit Ratings has accorded the above credit rating(s) on Sundry Foods Limited based on the following key criteria:
Sundry Foods Limited has established itself as a leading Quick Service Restaurant (“QSR”) brand in Port Harcourt, with a growing presence in other cities. While the Company is a small player in the Nigerian industry in terms restaurant count, its profitability ratios compare favourably with more established brands. However, the investment by UK based private equity fund, Silk Invest Limited (“SIL”) through N420m in preference shares, has provided Sundry Foods with a strong shareholder to drive business development and support corporate governance (through board representation), as well as providing the necessary financial backing for other funding facilities. This has facilitated the opening of 5 restaurants, with 4 more in the pipeline.
Robust revenue growth has been evidenced over the review period, in line with expansion, with revenue increasing 24% to N1.5bn in F12. While the cost of opening new stores (including professional expenses) has led to some margin compression, EBITDA has more than doubled since F09, to N317m in F12. Going forward, earnings margins are expected to improve as restaurants reach maturity and scale economies are achieved. Despite the strong growth, the working capital absorption remained low in F12. While further absorptions are likely as a consequence of expansion, these are expected to remain moderate, as debtors are negligible and inventory very short dated. Thus, budgets indicate that cash generation should adequately cover working capital requirements.
Debt rose significantly to a high of N901.5m at FYE12, to fund expansion, net gearing at 147% and net debt to EBITDA at 240%. However, if the N420m in preference share Issue is stripped out of debt and included in equity (as it has no maturity date or interest obligations), net gearing and net debt to EBITDA would be much lower at 37% and 108% respectively. With no further borrowings expected in the medium term, gearing metrics are budgeted to reduce going forward as earnings derive from new restaurants and debt is repaid.
The successful roll-out of stores would see the group gain the necessary scale to compete more aggressively in the QSR industry. Combined with increasing revenues and improved operational efficiencies, this could lead to a rating upgrade in the medium term. Were Sundry Foods to taper off their aggressive expansion and focus on bringing existing restaurants to maturity, this would also lower the group’s risk profile. Conversely, a rise in debt levels above what has been budgeted could transpire in a rating downgrade, even if used for store expansions. Underperformance from new stores would likely result in weaker earnings, increasing financial strain and negatively affecting credit protection metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Oct/2010)|
|Long term: BBB-(NG); Short term: A3(NG)|
|Last rating (Sep/2012)|
|Long term: BBB-(NG); Short term: A3(NG)|
|Outlook: Positive outlook|
|+234 1 462 2545|
|Sector Head: Corporates|
|+27 11 784 1771|
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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.
Sundry Foods 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 credit rating/s has been disclosed to Sundry Foods Limited with no contestation of the rating.
The information received from Sundry Foods Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.