GCR Assigns First-time Issuer Ratings to Hyde Energy Limited
GCR Ratings has assigned national-scale long-term and short-term issuer ratings of BB+(NG) and B(NG) respectively to Hyde Energy Limited, a company involves in the bulk trading of refined petroleum products and gas, with the outlook accorded as stable.
According to the rating agency, the initial ratings accorded to the company reflect its position as a mid-sized oil and gas downstream operator, its sound earnings growth trajectory, and well-managed liquidity and capital structure.
However, the strengths are balanced against the weak board and the low interest coverage, the rating note added. GCR said over the past 10 years, the company has built the requisite distribution capacity and relationships with suppliers and reputable customers, underpinning sound earnings progression over the review period.
It also said the company’s business profile is enhanced by the synergy derived from its access to adequate storage facilities via its associate company, Hyde Tanks and Terminals FZE (HTT).
Via a brownfield acquisition, Hyde Energy is in the process of upscaling its storage and refiling capacity for liquified natural gas (LPG) and its lubricants blending capacity, GCR wrote in the ratings report.
The rating revealed that over the next two years, Hyde Limited plans to expand its retail footprint across key Nigerian cities and procure additional trucks to support the anticipated growth.
“We expect the foregoing to further entrench the Hyde Energy brand in the mid-tier refined petroleum products market, albeit it will remain much smaller in the broader oil and gas downstream sector”.
On the downside, GCR sees the company’s management and governance as a constraint to the rating due to the limited independent oversight over management and board decisions.
The rating note reads that Hyde Energy’s board comprises only three members, including the Chairman who is also the CEO and majority shareholder, but the company is in the process of hiring a new CEO and splitting the roles.
This is partly reflected in the shareholding structure of HTT, and the intercompany product supply transactions between the two parties, GCR explained.
However, GCR notes that the transactions are structured so that Hyde Energy retains control of the assets and cash throughout the transaction process, with HTT essentially acting as an intermediary.
“Although Hyde Energy has reported strong revenue progression over the review period and steadily improved its earnings margins to exceed the industry average, the absolute quantum of earnings remains relatively small.
“Nevertheless, we expect the ongoing investments in margin-enhancing product lines – such as LPG and lubes- and the anticipated volumes growth to support stronger absolute earnings, with EBITDA margin sustained in the 4x-4.5x range”.
The rating noted stated that Hyde’s leverage and capital structure assessments are slightly negative to the ratings, because of the spike in expensive short-term debt to support working capital, resulting in negative operating cash flow (OCF) in most of the years.
Of greater concern, according to GCR, is the company’s net interest coverage which has been weak in all periods under review and registered at just 1.6x at 31 March 2023.
However, GCR analysts said they have taken cognisance of the cash generation during times when inventory is released.
The rating note stated that this was evidenced during the financial 2023, as Hyde Energy sold off the majority of its inventory and its cash balance increased materially.
As a result, the company was net ungeared at year-end 2023 as in most years, from an elevated 7x net debt to EBITDA position at financial 2022.
“We have also positively considered the favourable capital structure, underpinned by the proactive management of refinancing risk through a back-to-back debt arrangement which ensures adequate cash holding for debt repayment and operational requirements”.
Hyde Energy also has access to trading facilities to the value of N200 billion, well in excess of its requirements, GCR said in its report, added that liquidity is a positive rating factor.
The company’s substantial cash holding as of 31 March 2023 and committed facilities are sufficient to meet short-term debt repayment, according to the rating note.
“We have also factored in a portion of the company’s non-committed credit facilities with over seven local commercial banks, which are being used to meet unforeseen working capital requirements.
“Notwithstanding this, the liquidity assessment is constrained by our expectation for a modest operating cash flow due to the expected swings in working capital in line with the anticipated business growth and the expected high interest payments in financial 2024 and 2025.
“While we have also considered the liquidity risk that could arise from the large receivables due from HTT, Hyde Energy secures its cash flow by fully domiciling HTT’s sales proceeds in its own bank accounts, thus mitigating the risk of a default from HTT”, GCR Ratings stated.
Outlook statement
The stable outlook reflects our expectation that Hyde Energy would sustain the current business growth trajectory while maintaining stable profit margins. In addition, GCR expects favourable funding structure, and access to liquid facilities to be maintained. #GCR Assigns First-time Issuer Ratings to Hyde Energy Limited
