GCR Positions Dangote Cement on Highest Rating Scale
GCR, an emerging market focus ratings agency, has affirmed Dangote Cement Plc its highest rating scale with a stable outlook anchored on a strong liquidity position, earnings strength and competitive position in Africa, the firm said in a new release today.
According to GCR, it affirmed Dangote Cement Plc.’s national scale long-term and short-term Issuer ratings of AAA (NG) and A1+ (NG) respectively, with the outlook accorded as stable.
Concurrently, the emerging market ratings agency also affirmed the national scale long-term Issue rating of AAA (NG) each accorded to the existing N100 billion Series 1 Senior Unsecured Bonds and N50 billion Series 1 (Tranche A-C) Senior Unsecured Bonds, with a stable outlook.
“The ratings reflect Dangote Cement competitive position as one of Africa’s leading integrated cement manufacturers, evidenced by very strong earnings, robust cash flows and solid gearing metrics”, it said.
The Ratings explained that Dangote Cement ability to penetrate new markets with large-scale, modern and energy-efficient factories give it a strong competitive edge in the African market.
Nevertheless, it said the company profile is constrained by the very high concentration to the Nigerian market, accounting for about 88% of group earnings before interest tax, depreciation and amortisation (EBITDA) and 65% of capacity at end-March 2021.
In recent periods, the ratings noted that the company has increased focus on its export strategy within West and Central Africa, which should support the advancement of its competitive positioning across the African continent, albeit marginally offset by the higher risks in many of the countries it is targeting.
“Dangote Cement market dominance has translated into very strong earnings and cash flows, with the EBITDA margin registering around 47% over the last five years, well above the industry average”, it said.
GCR explained further that based on the first quarter (Q1) of the financial year 2021 (FY21) management results, the company’s margin registered around 53%, an improvement when compared with 46% in FY20, supported by improved cement volume sales across its key markets, and its cost control efforts with cheaper fuel mix and lower power costs.
“Inflationary pressure and foreign currency shortages, particularly in Nigeria, are expected to continue to weigh adversely on production costs and operating expenses, but Dangote Cement’s strong financial profile serves to moderate the impact of external shocks,” GCR added.
GCR Ratings also noted that the current headroom to ramp up production volumes based on existing capacity across other markets should drive strong earnings growth over the medium term while sustaining strong margins.
In the Q1FY21, the company’s gross debt declined to N426 billion following part repayment of the existing obligations. GCR said this saw annualised net debt to EBITDA registered at a low 0.4x, against 0.7x recorded at FY20, which is an indication of strong credit protection.
Similarly, the Ratings added that EBITDA coverage of net interest was high at 16x in Q1 FY21, from an average of 11x between FY16 and FY20.
In May 2021, Dangote successfully raised N50 billion from the debt capital market in Series 1 Senior Unsecured Bond Issue under its N300 billion Bond Issuance Programme.
“Notwithstanding the additional amounts raised under the Programme, GCR expects the Group to continue to demonstrate strong financial flexibility, with net debt to EBITDA -including operating leases- expected to range between 40%-55% over the outlook period, and net interest cover projected between 10x and 15x.”
GCR said the Group’s robust operating cash flow is a key mitigant against concerns of higher debt. In this regard, operating cash flow coverage of debt registered at 166% in 1Q FY21 and should remain strong over the rating horizon.
In addition, the ratings said Dangote Cement liquidity assessment is underpinned by the expectation that cash flows will remain strong, along with N146 million in cash and N153 million in unutilised committed funding lines.
“Nevertheless, the assessment is somewhat constrained by the very high level of short-term debt, as well as the historically high dividend payout ratios. The uses vs. sources liquidity coverage is estimated at 1.3x over the next 12 months”, GCR highlighted.
It said Dangote Cement’s N50 billion Series 1 Senior Unsecured Bond is split into N3.64 billion Tranche A, N10.45 billion Tranche B and N35.91 billion Tranche C, with varying interest rates and maturities in 2024, 2026 and 2028, respectively.
Being senior unsecured debt of the company, GCR said the existing N100 billion Series 1 Bond and the additional N50 billion Series 1 Tranche A-C Bonds rank pari passu with all other senior unsecured creditors.
“As such, the Bonds will bear the same national scale long term rating as that accorded to DCP. Accordingly, any change in DCP’s long term Issuer rating would impact the Bond rating”.
In was noted in the statement that Dangote Cement stable outlook reflects GCR’s view of the company’s robust earnings and strong cash flows, which serves to moderate the impact of external shocks and limit recourse to additional debt.
Rating Triggers
“A rating upgrade is not possible as DCP’s long-term and short-term ratings are the highest possible ratings on GCR’s rating scale. However, downward ratings pressure could arise from protracted earnings pressure or greater competition emerging from major international cement manufacturers.
“The aggressive dividend policy could result in materially higher than anticipated leverage and adversely impact GCR’s view of liquidity”, it explained.
GCR Positions Dangote Cement on Highest Rating Scale
