GCR Affirms Dangote Ratings, Cites Robust Earnings, Liquidity
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 Industries Limited (DIL).
The rating note released stated that the group’s gross debt position is relatively high, estimated to hit N3.9 trillion amidst a plan to raise additional debt in 2023.
In a rating note, GCR also affirmed the national scale long-term Issue rating of AA+ (NG) accorded to each of Dangote Industries Funding Plc N10.5 billion Series 1 Tranche A and N177.1 billion Tranche B Bond and N112.4 billion Series 2 Senior Unsecured Bond.
The outlook on the ratings is accorded as stable, GCR said in the note published on its website. The rating note said the affirmation of Dangote Industries Limited reflects its position as the largest Nigerian conglomerate with relatively diversified business lines, and the systemic importance of the refinery project underway.
The strengths are balanced against the high debt level, recent compression of cash flow and the high foreign debt exposure, the ratings said. The group’s cement, sugar and fertiliser businesses are leaders in their respective sectors.
The cement sub-group accounts for over 70% of group earnings and has operations in 10 countries though still concentrated in the Nigerian market.
“We expect the group’s earnings and business fundamentals to be more weighted towards oil refining once the refinery commences operation.
“While there have been delays in commencing refining, the management anticipates kick-starting the plant in phases from June 2023, with a minimum production capacity of 400,000bpd (c.60% of total installed capacity), prioritising the production of diesel during the first phase.
“The second phase is scheduled for the fourth quarter of 2023 and would include a broader range of refined petroleum products”. GCR said in its note that the positive earnings assessment is on the back of sustained robust revenue and earnings margins.
The company’s revenue grew by an annualised 24.9% to N1.7 trillion in the third quarter of 2022. GCR said the outturn was higher than its forecast growth of 14%, driven by price increases across various product lines, and higher traded volumes in the sugar and fertiliser subsidiaries.
“We estimate that the solid top line growth in 9M would be sustained for the full year 2022. However, we have adopted a conservative stance regarding the revenue progression for 2023, assuming further delays in the commencement of refining activity.
“Thus, we project a volumes-led revenue growth of 20% in 2023 for the existing businesses and 80% in 2024 with additional revenue from the refinery, assuming about 40% uptime and 50% capacity utilisation”.
The EBITDA margin compressed slightly during the period but remained strong, registering above the 5-year period average of 35%.
“We expect the margin trend to be sustained in 2023 but could decline to around 30% in 2024, weighed down by the refinery’s earnings margin”. The rating note reads that the group leverage and capital structure remain the major rating constraint due to the high debt level and the foreign currency exposure.
Dangote Industries Limited’s gross debt, including shareholder loans, increased to N3.5 trillion as of September 2022 and is estimated at N3.7 trillion for the full year 2022 on account of the N112 billion Series 2 bond issued in December 2022, it said.
Notwithstanding this, the rating note said net debt to EBITDA improved to 3.2x as of September 2022 underpinned by reported sound earnings, compared to the high of 4.9x in 2020.
GCR said although gross debt could climb further to N3.9 trillion in 2023 as the group plans to raise additional debt, the rating firm expects net debt to EBITDA to improve to around 2.6x in 2023 and below 2x in 2024. It anchored the estimate on the back of the expected strong earnings.
“We also take cognisance of shareholder loan of N916 billion, translating to 26% of gross debt, for which payments are being deferred until the refinery becomes financially viable.”
Excluding the shareholder loans, net debt to EBITDA would register at around 2x in 9 months of 2022 and 1.5x in 2023, according to the rating note.
Meanwhile, it noted that the group operating cash flow has been constrained below 25% since 2020 attributable to working capital pressures related to some one-off non-operating items.
“While the pressures could ease off in 2023, we maintain a conservative expectation of operating cash flow to debt of 19%. We negatively view the high foreign currency exposure on its debt but expect this to reduce in 2024 once the refinery becomes fully operational and loans are materially paid down”.
GCR said that DIL’s liquidity is considered adequate, with sources versus uses coverage estimated at 1.9x for the 12-month period to 31 December 2023 and 1.3x for the 24-month period to December 2024.
This is largely supported by the huge cash holding of N802 billion as of September 2022 and the expected robust net operating cash flow of about N780 billion in 2023 which should sufficiently meet the scheduled mandatory external debt repayment, capital spending and dividend payments.
“We have excluded the shareholder loans payable because of the flexibility on repayment. We have given a positive consideration to DIL for peer comparison on the back of the economic importance of the refinery project to Nigeria.
“This view is supported by ongoing federal government support, including a 20% investment in the refinery and priority of access to foreign currency given the systemic importance of the underlying project”.
DIL has raised a cumulative N300 billion in Series 1 and Series 2 Senior Unsecured Bonds issued by its sponsored special purpose vehicle, Dangote Industries Funding Plc. #GCR Affirms Dangote Ratings, Cites Robust Earnings, Liquidity
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