GCR Affirms Dangote Cement AA+ Rating
GCR Ratings (GCR) has affirmed the national scale long-term and short-term Issuer ratings of AA+(NG) and A1+(NG) respectively accorded to Dangote Cement Plc (DCP). The top-notch ratings surface as Dangote Plc announced the successful completion of its share buyback tranche,
Concurrently, GCR has affirmed the national scale long-term Issue rating of AA+ (NG) accorded to each of Dangote Cement Plc’s existing Senior Unsecured Bond Issues with an outlook on the ratings accorded as stable.
The rating affirmation reflects DCP’s sustained market leadership in Nigeria as well as increased penetration into other African markets which continues to support a strong financial profile, the rating note said.
However, GCR said the cement company’s ratings remain constrained by the relatively weaker credit profile of its parent company, Dangote Industries Limited.
The rating note explained that the cement company’s competitive position assessment remains its biggest ratings driver given its large production capacity which spans ten countries in Africa.
It said Dangote Cement Plc remains Nigeria’s leading cement producer by installed capacity of 29.3mtpa and actual sales. GCR said besides the advantage of size, DCP benefits from geographical diversification of its operations which improves earnings and risk diversity.
However, the earnings benefit from diversification has yet to be fully realised since Nigeria still accounts for over 80% of earnings despite increased investments in other African markets, GCR said in its latest update.
“We note that several markets where DCP operate are inherently riskier and yield relatively low margins than Nigeria. Nevertheless, the company’s strategic focus on promoting self-sufficiency in cement production within West and Central Africa could yield better competitive advantages across Africa over the medium-to-long term”.
The rating note said during the review period, Dangote Cement earnings were slightly pressured by lower volumes due to gas supply disruptions in Nigeria, as well as supply chain issues and plant down-times in the Pan African operations.
Nevertheless, the cement company’s revenues increased by 17% to N1.62 trillion or USD2.1 billion in the financial year ended 31 December 2022 on the back of price increases.
It also confirmed that the cement company raised prices due to inflationary pressures and currency devaluation witnessed across its markets, which resulted in a loss of volumes.
“We however do not believe that the increase in prices adequately compensated for the loss of volumes if earnings are adjusted for inflation”, GCR Ratings said in the report.
The rating firm noted that pressure was more apparent on the company’s earnings before; interest tax depreciation and amortisation (EBITDA) margin which shrank to 43% in 2022 from 49% in 2021.
The ratings said the decline in volumes continued in Q1 2023 due to operating challenges in Nigeria arising from cash crunch and the general elections that occurred during the period; however, Pan-African operations appear to be on track to deliver a stronger performance in 2023.
Overall, DCP’s earnings remain a key rating strength, however, persistent inflationary pressures as well as Naira devaluation will likely constrain performance over the next 6-18 months.
The Rating agency said although DCP’s credit protection metrics remain adequate, its assessment has weakened since the last review owing to increased working capital pressures as well as rising interest rates.
In 2022, Dangote Cement’s gross debt jumped to N735 billion from N588.2 billion following the issuance of N116 billion Series 2 (Tranche A-C) Senior Unsecured Bonds to finance ongoing expansion projects and working capital.
The company’s strong earnings somewhat cushioned the impact of higher debt on credit health as Net debt-to-EBITDA stayed under 1.0x, according to the rating note.
However, analysts said operating cash flow of the cement company declined by 36% due to increased working capital absorptions, leading to weaker coverage of 48.4% from 94.4% in 2021.
GCR ratings said although interest cover held steady at 18x in 2022, it fell to 15x in Q1 2023.
“We project further weakening of leverage metrics over the next 18 months on the back of sustained working capital pressures, impact of Naira devaluation on foreign currency loan book and high interest rates”.
DCP’s liquidity assessment continues to be constrained by high short-term debt, working capital pressures and dividend payments. However, liquidity coverage is supported by modest near-term capex plans, available committed funding lines as well as good access to the Nigerian capital market.
“A liquidity cover of around 1.0x is estimated over the 21-month period to December 2024. However, this assessment could worsen if cash is used to fund DCP’s recently approved share buy-back programme”, GCR said in the rating note. #GCR Affirms Dangote Cement AA+ Rating
