Fitch Affirms Dangote Industries at ‘AA(nga)’ With Stable Outlook
With an outlook accorded as stable, Fitch Ratings has affirmed Dangote Industries Limited’s (DIL) National Long-Term Rating and its senior unsecured notes issued by Dangote Industries Funding Plc at ‘AA (nga)’.
The rating reflects DIL’s strong business profile, supported by its profitable main operating companies including Dangote Cement Plc and Dangote Sugar Refinery Plc, with entrenched market positions across Africa, and strategic importance to the economy.
The rating note said the stable outlook reflects an expectation that DIL will be able to deleverage and improve the overall financial profile by ramping up production and generating material cash flows from its fertiliser and refinery businesses.
In addition, Fitch Rating said it expects that further diversified revenue streams will improve earnings stability. Fitch expects the oil refining project to be commissioned by October 2023 with minimal cost overruns.
The rating agency said the majority of the refined products will be exported, despite the high dependence of the domestic market on imported refined fuel.
It noted that the majority of the refinery’s 450,000 barrels per day crude oil requirement will be sourced through related party Nigerian National Petroleum Corporation (NNPC) and other international suppliers.
An inability to source sufficient levels of crude domestically would dampen production capacity, the rating note said.
According to Fitch, Dangote’s fertiliser business operates a natural gas based granulated urea fertiliser manufacturing plant which started operations in 2021 for Line 1 and in 2022 for Line 2.
Despite having long-term contracts with local suppliers, gas pressure and supply interruption led to low utilisation rates of 32% in 2022, with the expectation of gradual improvement to 72% by 2025 and a urea production capacity of 2,000 thousand tonnes (kt).
Sale of urea will be mostly geared towards exports to Africa, North America and Latin America (LatAm) targeting 75% of production, with the balance to be sold locally, according to Fitch.
The global rating firm said it expects the company’s earnings before interest tax depreciation and amortisation (EBITDA) margins from cement to slightly drop to 44% in 2023 from 49% previously, partially due to rising commodity prices.
With a combined cement production capacity of 51,600 kt from its factories across seven African countries, Dangote focused on a continued export strategy, with 1.58 million tonnes (mt) of cement and clinker exported to African markets.
Nigeria is the largest contributor with a production volume of 17,786 KTPA in 2022, according to the rating note. Despite a 5% dip in 2022 sales volumes, mainly in its Nigerian operations, Fitch expects strong sales momentum for 2023, supported by growth of the pan-African operations.
Cement is the sole major contributor to consolidated EBITDA at an estimated 72% and 77% for 2022 and 2023, respectively. Also, 17% was generated from the fertiliser business in 2022, with the remaining 11% attributed to the food business.
“Once the oil refining business is commissioned, we expect a significant contribution from oil, averaging 35% of EBITDA in 2024”, Fitch said.
Analysts expect continued free cash outflow reflecting the significant capital expenditure on projects such as urea plants and oil refineries having been made in 2020 and 2021.
Fitch believes the company’s capital expenditure (capex) intensity ratio would decrease to low single digits from 27% in 2022 over the forecast period.
It said negative free cash flow is likely to persist until 2024, primarily due to working capital outflow to fund the purchase of crude oil. The rating note expects DIL’s EBITDA gross leverage to further improve to 3.3x in 2023 from a high 7.2x in 2020.
Dangote’s strong EBITDA generation helped improve its financial profile and reduce leverage. Financial flexibility remains weak in the wake of high interest rates and large FX exposures and ongoing free cash outflow.
The company has significant related-party transactions. The structure is further complicated by the NNPC’s 20% stake in Dangote Oil Refining business and the reliance on NNPC for the supply of gas and crude oil to Dangote’s subsidiaries.
The company also has significant person risk with Aliko Dangote the CEO and dominant shareholder. The group has N1.9 trillion of prior-ranking obligations in the debt structure, raised on a secured basis at DIL and Dangote Cement levels.
As of the third quarter of 2022, secured debt was N2.1 trillion, representing 64% of total debt. The company has outstanding shareholder loans of USD 2.2 billion as of Q3-2022 from Greenview received to finance working capital. The loans are subordinated in nature, with no fixed-term maturity, and below market interest rates. #Fitch Affirms Dangote Industries at ‘AA(nga)’ With Stable Outlook
