Announcements Financial Institutions Rating Alerts

GCR Assigns Long and Short-term National Scale Issuer Ratings of A-(NG)/A2(NG) Respectively to SFS Capital Nigeria Limited; Outlook Stable.

Lagos, 31 March 2021 – GCR Ratings (“GCR”) has assigned SFS Capital Nigeria Limited national scale long and short-term issuer ratings of A-(NG) and A2(NG) respectively; with a Stable Outlook.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

SFS Capital Nigeria Limited

Long Term issuer

National

A-(NG)

Stable

Short Term issuer

National

A2(NG)

GCR has withdrawn the *(mq) rating as a business decision, without review.  MQ ratings are not credit ratings, therefore they do not measure the relative ability of an entity to meet its financial obligations.  Conversely. GCR’s issuer credit ratings are forward-looking opinions on the relative creditworthiness of a specific financial obligation, or a class of financial obligations issued by an entity.

Rating Rationale

The national scale issuer ratings assigned to SFS Capital Nigeria Limited (“SFS Capital” or “the manager”) reflect its moderate liquidity profile and earnings base, and its competitive edge in managing Real Estate Investment Trust (“REIT”). However, these strengths are partly offset by the manager’s relatively moderate market share.

SFS Capital is a mid-tier player within Nigerian asset management space, with a total Asset Under Management (“AUM”) of N80.5bn and an estimated market share of 3.7% as at FY20. As at 31 December 2020, SFS Capital had under its management three mutual funds, two REITs and discretionary and non-discretionary funds, offered to a diverse client base (made up of retail, high net worth individuals, corporate and institutional investors). While concentration by investors is considered low, with the twenty largest retail investors constituting about 7% of total AUM at FY20, geographic diversification is viewed to be limited, as all revenue is derived from the local market. Going forward, SFS Capital expects to increase its client base, through additional mutual fund planned for launch in 2021.

Earnings is considered moderate and has remained largely stable over the review period. Expectedly, the company’s earnings are mainly driven by asset management income, comprising commission received on managed funds. While net income has displayed a consistent upward trend over the review period, with EBITDA margin at a stable 39.6% at FY20, it remained relatively low compared to peers’ average of about 50%. Furthermore, cost to income ratio has remained elevated over the review period, registering at 60.4% in FY20, compared to peers’ average of about 38%. GCR expects earnings performance to gradually improve in future, given the manager’s expansion strategy.

Leverage and cash flow assessment is considered a positive rating factor for SFS Capital due to its net ungeared position, which is in line with the industry norms. We expect this trend to be sustained going forward given the nature of operations of asset managers, as well as the conservative management of capital level.

The manager’s liquidity is viewed to be at an intermediate level, having liquidity sources consistently covering the anticipated uses by more than 1x over the review period. At FY20, the coverage stood at 1.65x, underpinned by good cash flow generation, moderately strong balance sheet liquidity and limited liability risk. This good liquidity position is expected to be sustained over the next 12-18 months on the back of the sizeable quantum of liquid assets.

Outlook Statement

The Stable Outlook indicates GCR’s expectations that SFS Capital will continue to maintain a conservative balance sheet, with minimal risk exposure, which should support liquidity over the next 12-18 months. We believe the current macroeconomic dynamics, characterised by low interest environment and limited viable alternative investment options, would aid the successful launch of the mutual fund. Thus, stimulate AUM growth and earnings performance.

Rating Triggers

A significant and sustained improvement in asset attraction and retention capacity, as well as improvement earnings could lead to a positive rating action. Conversely, a downward movement in the rating could result from a material reduction in AUM, cash generating capacity and weakened financial profile.

Analytical Contacts

Primary analyst

Adeyinka Olowofela

Senior Analyst, Financial Institutions Analyst

Lagos, NG

yinka@GCRratings.com

+234 1 904 9462

     

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Asset Managers, November 2019 (appendix to the Criteria for Financial Services Companies, May 2019)

GCR Ratings Scale, Symbols & Definitions, May 2019

GCR Country Risk Scores, February 2021

GCR Financial Institutions Sector Risk Score, February 2021

Ratings History

SFS Capital Nigeria Limited

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term issuer

Initial/last

National

A-(NG)

Stable

March 2021

Short Term issuer

National

A2(NG)

Risk Score Summary

Rating Components & Factors

Risk scores

 

Operating environment

5.75

Country risk score

3.75

Sector risk score

2.00

   

Business profile

(2.00)

Competitive position

(2.00)

Management and governance

0.00

   

Financial profile

3.25

Cash flow and Leverage

2.00

Earnings vs. Risk

1.25

Liquidity

0.00

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total Score

7.00

Glossary

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Credit Rating

An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.

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.

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. 

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings were 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to SFS Capital Nigeria Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

SFS Capital Nigeria Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from SFS Capital Nigeria Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2020
  • Three years of comparative audited numbers
  • Other related documents.

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