Fitch Rates Dangote Industries’ Corporate Governance Weak
Dangote Industries Limited has been rated weak in Fitch Ratings’ corporate governance assessment, saying the group structure is complex with a large amount of related-party transactions which has a negative effect on operational and financial transparency
In its latest rating on the company, Fitch said the company’s structure is further complicated by the Nigerian National Petroleum Corporation’s 20% stake in the refinery project.
“We also view the dominance of Aliko Dangote, as Chief Executive Officer and the main shareholder, in operations as an additional risk”, Fitch said in its recent report.
The global rating agency assigned Dangote Industries Limited’s senior unsecured notes – issued by DIL’s SPV, Dangote Industries Funding Plc – a final National Rating of ‘AA (nga)’. Also, the global rating firm affirmed DIL’s National Long-Term Rating of ‘AA (nga)’ with a stable outlook.
The notes are issued under Dangote Industries’ existing national bond programme of NN300 billion, comprising tranches A and B amounting to N10.47 billion and N177.12 billion with seven- and 10-year maturities, respectively, according to the rating note.
The bond raise tranches were issued on the Nigerian local bond market with semi-annual coupons of 12.75% for tranche A and 13.5% for B, according to Fitch. Amidst a prolonged delay in operationalizing the ongoing refinery, Dangote Industries has been in the market to raise funds to finance the completion of the project.
The proceeds of the bonds raise are being used to part-finance the completion of DIL’s refinery and petrochemical plants, according to the rating note. Fitch said Dangote Oil Refining Company Limited and Dangote Fertiliser Limited which are subsidiaries of Dangote Industries Limited are co-obligors under the bond programme.
“Dangote Industries Limited is a diversified conglomerate in Nigeria with a leading share in the cement business and a future key operator in the petrochemical industry through its fertiliser and oil refinery business.
“Its strategy is to gradually establish a downstream industry in Nigeria and be the largest urea producer in Nigeria. It also aims to make Nigeria a net exporter of refined petroleum products and petrochemicals by 2026”, the rating note said.
Key Rating Drivers
Fitch explained that Dangote Industries Limited’s business model, profitability and leverage metrics are commensurate with an ‘AA (nga)’ rating category. It noted that the company generates a majority of its revenue from the domestic market and borrows in both naira from local banks and in US dollars from international markets.
Stretching further, it sees Dangote Cement Plc as the overall cash cow, with a significant contribution to the group performance; supported by large-scale operations in Nigeria and pan-Africa.
In its report, Fitch Rating explained that in 2020, Dangote Cement’s earnings before interest tax depreciation and amortization (EBITDA) contribution to Dangote Industries printed at 93%.
The rating agency forecast the high level contribution to the group earnings to remain high until 2022 when contributions from the fertiliser business increase. It noted that the cement business recorded a significant recovery in sales volume due to increases in prices and demand across Dangote Cement’s main markets.
The cement company’s revenues expanded by 34% in the financial year 2021 on account of growth in Nigeria and pan-Africa, despite volatility in the landing cost of cement and clinker.
EBITDA in 2021 increased 9% to $1 billion or 24% in local currency. Additionally, the company’s export strategy is expected to ramp up, which could lead to sizeable volume sales.
Dangote Industries Limited’s urea plant was commissioned in 2021 following delays, with a 25% utilisation rate of line 1 in 2021 and 0% in line 2 with both lines becoming fully operational as of May 2022.
The report stated that gas compressor issues and, as a result, low pressure of gas supplied to the plant were the main factors behind the delay, along with a delay in obtaining regulatory approvals.
However, it is noted that Gas pressure has recovered in 2022, and management has conservatively assumed utilisation rates for the respective lines to increase to 55% and 50% in 2022, 65% in 2023 and 82% by 2025.
Fitch said Dangote Refinery is on track to be completed by 2023 and requires an additional $1.1 billion capital expenditure in 2022, partly funded by the newly issued bonds.
“Once operational, we expect this project to contribute around $1 billion to EBITDA annually when ramped up from 2024”.
However, the rating note stressed that should refinery completion costs overrun or market conditions in the cement or urea sector deteriorate materially, Fitch analysts do not believe that Dangote Industries’ existing creditors would have further lending capacity.
“We believe that further asset sales, either in cement or stakes in the projects, would be the more likely options to fund the refinery”, the firm added. Dangote Industries has become a highly geared company with significant debt capital on its balance sheet amidst heavy spending on the refinery project that has taken a toll on the group.
“We estimate funds from operations gross leverage to have been high for 2021 at above 7x, up from 4.7x in 2019, due to continuing capital expenditure for the refinery plant”. READ: Dangote Industries Revenue to Hit N6trn in 2023 – GCR Ratings
On another side, Fitch said the rating agency expects Dangote Industries to start deleveraging meaningfully from 2023.
“Dangote Industries has a complex group structure with a large amount of related-party transactions, with a negative effect on operational and financial transparency.
“The group structure is further complicated by the Nigerian National Petroleum Corporation’s 20% stake in the refinery project. We also view the dominance of Aliko Dangote, as CEO and the main shareholder, in operations as an additional risk”, the rating note reads. #Fitch Rates Dangote Industries’ Corporate Governance Weak
