GCR Maintains Stable Outlook on Lafarge Africa as Rating Improves
GCR Ratings has upgraded Lafarge Africa Plc.’s national scale long-term Issuer rating to AA (NG), from AA-(NG) previously, according to a rating note with an outlook maintained as stable.
The short-term Issuer rating of A1+ (NG) was affirmed, saying the ratings reflect Nigeria-based Lafarge Africa Plc sustained improvement in its financial profile over the review period.
According to GCR Ratings, Lafarge’s leverage profile which is its key rating driver has been supported by robust operating cash flows as well as modest debt levels.
It also said Lafarge’s competitive position within the Nigerian cement industry is a positive ratings factor, supported by its sizeable installed production capacity of 10.5mtpa, relatively diversified product portfolio as well as product innovation.
“Lafarge benefits from technical support and product branding from its parent company, Holcim Group, a global leader in cement production”.
Beyond installed capacity, GCR Ratings said the group is committed to unlocking idle capacity which a common challenge facing the industry to gain market share and maximise available economies of scale.
“So far, the debottlenecking exercise has unlocked about 0.7mtpa in two years, bringing capacity utilisation to nearly 60%”, it said.
Over the medium term, according to GCR, the Group aims to unlock additional capacity, to achieve higher capacity utilisation -targeted at around 70-80%- and strengthen its competitive positioning.
GCR views management’s current strategic direction as generally consistent with overall group objectives and credit worthiness.
However, the emerging market rating agency said it will closely monitor governance factors at the holding company (Holcim Group) level in view of the recent conviction of former parent (Lafarge) for crimes related to terrorism financing.
The Group’s earning profile is a modest ratings driver characterised by sustained revenue growth, moderate pricing flexibility, relatively stable margins as well as some degree of earnings diversification.
According to the rating note, GCR said between financial year 2018 and 2021, revenue grew by an annual average of 10.40%, with the strongest growth (of 27.11%) achieved in 2021.
Although Lafarge’s debottlenecking exercise and route-to-market strategies have contributed to revenue growth during the review period, favourable price adjustments played a major role especially in 2021, GCR said in the rating note.
The company’s earnings before interest tax, depreciation and amortization (EBITDA margin on the other hand has remained fairly stable at around 30% versus 32.10% in 2021 over the period as production costs have tended to rise in tandem with revenue.
GCR said it expects an average annual revenue growth of 15% over the near-to-medium term on the back of capacity optimisation, higher prices, and product diversification, while the EBITDA margin should average 31%, supported by various energy and logistics efficiency initiatives undertaken by the Group.
Lafarge’s leverage profile and capital structure provide strong ratings support. The Group has maintained a modest debt level since 2019, it printed at N26.9 billion in the first half of 2022, as well as sizeable cash holdings, which has resulted in a net ungeared position over the last two years. READ:Lafarge Cash Position Improves despite Poor Volume Growth
Also, operating cashflow coverage of gross debt has remained above 250% over the same period, while interest coverage reached 27x. in 2021 from 2x in 2018, it said.
GCR expects the net ungeared position to be maintained in the near-to-medium term as capex is expected to be funded from operational cash flows, while focus remains on optimising existing production capacity.
In addition, working capital pressures are not expected to materially impact operating cashflows (which should continue to cover at least 100% of the gross debt), while interest coverage should remain above 15x over the medium term, the rating note stated.
Outlook Statement
The stable outlook reflects GCR’s expectation that over the near term, Lafarge will continue to drive financial performance -particularly earnings and cashflows- without a material deterioration in the Group’s leverage profile.
This should be supported by favourable pricing, additional (unlocked) volumes from unutilised capacity, as well as cost optimisation initiatives. However, weak governance at Holcim Group may impact the ratings adversely in the near term, GCR stated.
