Johannesburg, 20 December 2017 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to The SIFCA Group of A(CI) and A1(CI) in the long and short term respectively; with the outlook accorded as Stable. The Issuer ratings expire on 30 November 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to The SIFCA Group (“SIFCA”) based on the following key criteria:
The ratings take cognisance of SIFCA’s position as an established producer of rubber, oilseeds and sugar, underpinned by a network of vertically integrated businesses in Ivory Coast, Ghana, Nigeria, Liberia and France, leveraging off strategic partnerships with global brands that provide technical and financial support, as well as a captive market for some of the group’s products.
SIFCA is inherently exposed to the cyclicality of agriculture and global commodity prices. Nevertheless, operations have evolved rapidly to develop capabilities along the entire value chain, and now include beneficiation and higher-yielding, down-stream processing, to reduce the group’s exposure to commodity price variability. Since FY12, the group has acquired bolt-on operations, entered into joint arrangements and expanded processing capacity, to go along with ongoing plantation rehabilitation and expansion.
A protracted commodity price downcycle previously informed the Negative Outlook placed on the ratings, particularly as it led to constrained free cash flows and net losses in FY14-15. In this regard, GCR notes the tentative but largely sustained recovery in world prices, underpinned by indications of a strengthening global economy.
Accordingly, and despite a decline in productivity in FY16 as a result of adverse weather conditions, group revenue increased 6% to XOF455.4bn, on the back of higher palm oil and rubber prices. The average palm oil price increased by 21% during 2016, while rubber prices increased by an average of 20% YoY, and sugar by 37%. Global prices have since moderated from the highs reported in 1Q 2017, albeit that they continue to trend above the 2015 averages. 3Q FY17 revenue evidenced an annualised 16% growth from FY16, underpinned by increased productivity at higher prices.
Having dropped to a new low of 4.1% on pressure from commodity prices and internal inefficiencies, the operating profit margin picked up to 5.4% in FY16 (five-year average: 8.5%), and further to 11.8% in 3Q FY17. Strong operating leverage saw EBIT increase by 42% to XOF24.8bn in FY16, and by an annualised 150% in 3Q FY17. GCR has taken particular note of the efficiency enhancement initiatives implemented from FY15, which include the near complete rollout of an enterprise resource planning (“ERP”) system, and measures to sustain higher levels of factory productivity.
Debt declined to XOF176.5bn at FY16 from a five-year high of XOF207.8bn in FY15, as the group optimised the working capital cycle and completed certain capex milestones, alleviating funding pressure. Accordingly, net gearing and net debt to EBITDA improved to 49% and 210% respectively (FY15: 57%; 388%), and further to 38% and 108% respectively at 3Q FY17. While the planned capex of c.EUR200m over the next five years will be largely debt funded, SIFCA intends to roll out the projects sequentially, settling debt for each phase before the next commences to keep gearing close to FY16/17 levels.
Downstream consumer demand is expected to strengthen in West Africa, underpinned by a growing population, political stability and rising per capita disposable income levels, amidst sound economic growth. While this is positively noted, cognisance is taken of the adverse impact of ageing plantations on productivity in the short term, and the uncertain impact of mooted regulatory changes to increase government oversight of the palm and rubber industries.
Looking ahead, an upgrade would likely only be considered in the medium-long term, based on a sound earnings trajectory, supported by sustainable recovery in commodity prices and the bedding down of ongoing capex, achieved in conjunction with conservative gearing levels. Conversely, unduly elevated debt and gearing outside of management guidance, even to fund ongoing capex, would be negatively viewed. Material losses and/or persistently weak performance due to exogenous pressures or unexpected internal challenges could also warrant a downgrade.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2006)||Last rating (November 2016)|
|Long term: A-(CI)||Long term: A(CI)|
|Short term: A2(CI)||Short term: A1(CI)|
|Rating outlook: Stable||Rating outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Credit Analyst||Sector Head: Corporate and Public Sector Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
SIFCA Group rating reports, 2006-16
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATES GLOSSARY
|Commodity||Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|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.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|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.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or “’Evolving’ (the rating symbol may be raised or lowered).|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate. Also an agricultural term describing output in terms of quantity of a crop.|
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, security or financial instrument.
The SIFCA Group 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 The SIFCA Group with no contestation of the ratings.
The information received from The SIFCA Group and other reliable third parties to accord the credit rating included:
- the 2016 annual report for SIFCA group;
- four years’ comparative audited numbers;
- The SIFCA Group’s 2018 budgets; and
- Management account extracts for The SIFCA Group for the nine months to September 2017.
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.