GCR Affirms Mecure Industries Rating with Stable Outlook
GCR Ratings has affirmed Mecure Industries Limited’s national scale long term and short term Issuer ratings of BBB+ (NG) and A2 (NG) respectively. In a rating note, the emerging market rating firms said concurrently it affirmed the long term Issue rating of BBB+(NG)(EL) assigned to Mecure Industries Funding SPV Plc.’s N3 billion Series 1 Senior Secured Bond. The Outlook on the ratings is Stable.
Mecure’s stable outlook reflects GCR’s view that the company will successfully achieve its expansion plans and maintain a defensive market share. This should remain supportive of a solid earnings trajectory into 2023, resulting in firmer leverage and liquidity assessments, despite high debt, according to the rating note.
Explaining the rating, GCR said the affirmed ratings balance Mecure Industries Limited’s solid earnings trajectory and improvement in leverage metrics against rising short-term debt. The company funding profile has been affected by heightened refinancing risk and has constrained the liquidity assessment, according to the rating note.
Despite this, .Mecure’s earnings remain a positive rating factor, underpinned by the sound revenue progression over the cycle, translating to a five-year cumulative average growth rate of 16.5% in 2021, GCR said.
This was attributed to a combination of higher traded volumes and price increases. Notably, in 2021, Mecure introduced five new products in the higher-margin nutraceuticals and multivitamins segments, while also expanding its distribution footprints to other parts of the country, it noted.
Looking ahead, GCR said it expects the ongoing capacity expansion and anticipated price increases to support stronger revenue growth of 30% in 2022 from 18.8% in 2021 with slower, but still strong growth of around 12% for 2023. GCR expects the EBITDA margin to remain firm and trend slightly above the historical average of 24% for 2022-23, on the back of favourable product mix and cost controls.
The rating firm said the slight increase in the leverage score follows the recent improvement in earnings, which supported stronger earnings-based leverage metrics despite a rise in gross debt to N13.8bn in the first half of 2022 compared with N10.9 billion reported in 2021 and N9.9 billion in 2020.
Accordingly, GCR stated that the company’s net debt to earnings before interest tax depreciation and amortization (EBITDA) moderated to 1.9x in the first half of 2022, from 2.2x in 21 and 2.4x in 2020. Although the Company is in the process of raising an additional N4 billion in Commercial Papers for working capital and refinancing, GCR expects gross debt to reduce to about N12 billion in 2022 following scheduled repayments.
This, combined with the expected better earnings, should see the EBITDA leverage metric reduce further to a more conservative range of 1.5x-1.7x in 2022, the rating note explained. It said given the anticipated earnings growth and higher utilisation of the more favourably priced commercial papers compared to commercial bank loans, GCR expects the EBITDA coverage of net interest to improve to the 4x-5x range in 2022-23 compared with a period average of 2.9x, albeit still low.
GCR negatively notes that working capital pressures were temporarily elevated in June 2022, due to higher inventory holdings to meet planned production in the second half of 2022 and an increase in trade receivables. However, GCR analysts’ projected a more modest absorption for the full year, adding that these balances typically unwind in the second half.
Combined with higher expected cash generation and lower debt, GCR analysts believe that this should support stronger operating cash flow coverage of debt above 60% by 2023. This notwithstanding, GCR has made a slight negative adjustment to the capital structure reflecting the elevated short term debt -about 60% of debt in June 2022.
The liquidity assessment is slightly negative, primarily reflecting the recent spike in short term working capital funding and the ongoing capital expenditure commitments. Specifically, GCR notes with concern the increasing utilisation of commercial papers, which has heightened refinancing risks given the inherently shorter tenor and less certainty of refinancing.
However, GCR noted that this is somewhat mitigated by the availability of sizable unutilized committed short term facilities renewable annually, and the perceived flexibility with capital expenditure rollout.
Mecure Industries Funding SPV Plc was incorporated as a special purpose vehicle with the sole object of raising debt capital through bond issuances for the purpose of lending to Mecure acting as the Sponsor. READ: MeCure Lists Commercial Papers Series on FMDQ Exchange
The rating accorded to Mecure SPV Series 1 Secured Bond is obtained by applying a notching-up approach, starting from the long-term Issuer rating of the Sponsor. # GCR Affirms Mecure Industries Rating with Stable Outlook
