GCR Upgrades Lekki Gardens Estate Issuer Ratings
GCR Ratings has upgraded Lekki Gardens Estate Limited’s national scale long-term and short-term Issuer ratings to BBB+ (NG) and A2 (NG) respectively, the company said in a statement.
Concurrently, the rating agency accorded a national scale long term issue rating of A(NG)(EL) to the company’s N3.5 billion Senior Secured Fixed Rate Bond Issue with a stable outlook.
The ratings reflect Lekki Gardens Estate Limited’s strong competitive position within the Nigerian real estate sector, evidenced by its strong track record of project delivery, which has supported rising earnings, stable cash flows, and moderate gearing metrics, GCR said.
Lekki Gardens Estate, one of the leading real estate development companies in Nigeria, with a relatively strong track record, having delivered over 10,000 projects, across the residential, commercial, and retail property segments.
GCR said the Company’s good cost management has enabled pricing flexibility and thus a strong reputation amongst potential customers, strengthening its competitive position.
Furthermore, the rating agency noted the entrenched relationships with major industry players have enabled it to secure a substantial project pipeline.
“Although the uncertainties within the operating environment have increased downside risk for the sector, the longer-term prospects of the residential property market and LGE’s strong presence across key markets should continue to support its competitive positioning”, it added.
According to the report, GCR stated that the company’s management and governance factors are currently considered to be neutral to the ratings.
Despite the COVID-19 crisis and the attendant impact on the already challenging operating climate in Nigeria, the Company remained resilient, with revenue increasing by 6.7% to N20.9 billion in 2020, underpinned by rising off-take and sale volumes.
Its earnings before interest tax, depreciation and amortisation (EBITDA) margin remained firmer and well above peers at 10%, supported by the delivery of higher-margin projects and cost rigour.
As of the first half of 2021, Lekki Gardens Estates has achieved a 29% annualised growth in revenue, with an EBITDA margin registering at 18%, the report said.
GCR expects the latent housing demand to continue to drive growth prospects, but the deferral of key discretionary spending, such as home purchases will likely impact demand and pricing.
Furthermore, it explained that rising inflationary pressures will impact construction costs (largely cement prices), will continue to constrain earnings margins to around 10x-14x over the rating horizon.
Operations have historically been funded by customer deposits from the presale of units, which represent more than 90% of funding sources.
GCR noted that while this has reduced the need for debt through to the third quarter of 2020, the rising capital expenditure needed for business expansion has necessitated debt funding.
Accordingly, it said Lekki Garden Estates obtained N3 billion loan facility from Providus Bank Limited towards the end of 2020 and raised N3.5 billion through senior secured bond issuance in March 2021.
Following part repayment, the rating agency said the company’s gross debt declined to N3.8 billion as of the first half of 2021.
The Company is planning to raise additional debt before year-end 2021 through the capital market to finance its expansion strategy, GCR remarked.
Notwithstanding the new amount to be raised, GCR expects the Lekki Gardens Estates to continue to demonstrate moderate financial flexibility, with net debt to EBITDA expected to remain below 1x over the outlook period.
However, the ratio of operating cash flow of debt is expected to remain below the low level of 30% due to higher debt, while net interest coverage will remain around 5x.
The company’s uses versus sources liquidity coverage are estimated to register at 1.4x over the next 18-month period, predicated on strong cash holdings of around N6.8 billion and the expected increase in cash flows, which will be utilised for short-term debt redemption and to finance timely project delivery.
“Any new debt raised will also be directed to project development”, the report added.
GCR also takes cognisance of the established relationships with domestic financial institutions and the improved access to the debt capital market. The N3.5 billion senior secured bonds are secured by mortgaged properties.
“The bonds constitute direct, unconditional, senior and secured obligations of Lekki Gardens Estate and shall at all times rank pari passu and without any preference or priority among themselves.
“The coupon rate on the bonds is 12%, with a tenor of three years, and expected maturity in 2024. The rating of the bonds follows the receipt of final and executed transaction documents and is derived by applying a notching up approach, starting from the long term unsecured corporate rating of the Company”.
Based on GCR’s computation, the stressed estimated recovery rate is 76%. As such, a two-notch uplift is deemed appropriate based on GCR’s criteria for rating secured bonds.
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The Stable Outlook reflects GCR’s view that Lekki Gardens Estates will sustain its strong earning progression while maintaining a modest funding profile. This will help mitigate the increased risks within the Nigerian operating environment.
