GCR Upgrades Axxela Limited Rating with Stable Outlook
GCR Ratings has upgraded the long-term Issuer rating of Axxela Limited to A-(NG) and affirmed the short-term Issuer at A2 (NG), adding that the rating outlook is stable. The emerging market ratings agencies said in a statement this week.
It explained that the rating upgrade of Axxela Limited is underpinned by its established market position, which has enabled the Group to report strong earnings and cash flows, thereby supporting comfortable credit protection metrics, despite the ongoing expansion.
Axxela’s ratings are supported by its mid-to-strong competitive position in the Nigerian natural gas distribution market, with its expanding footprint and flexible product offering spanning natural gas and compressed natural gas, it added.
GCR said the Group enjoys long term distribution franchises in Lagos and Port Harcourt granted by Nigerian Gas Marketing Company and Rivers State Government respectively.
Also supportive of the competitive position is the long-term agreements with suppliers and customers including its license to supply gas to African countries through the West African Gas Pipeline.
However, Axxela’s over dependence on NGMC for gas supply remains a concern, GCR hinted. It said Axxela generates most of its revenue in Nigeria, where all the group’s operations infrastructure is situated.
Nevertheless, there are growing sales in other West African countries such as Togo, which will provide some diversification benefits going forward, albeit that the additional risks of operating in these countries will need to be factored into the rating.
Revenue has grown at an average annual growth of 27.5% over the five-year period to 2020, supported by rising sales volumes on the back of long-term distribution agreements and expanding clientele.
GCR explained that despite the production and supply chain disruption occasioned by the COVID-19 pandemic, Axxela still reported a 10% increase in revenue in FY20, as over 80% of its customers are in the essential business category.
Strong revenue growth is projected to continue over the forecast period given the expected uptick in economic activity as evidenced at 8-month of FY21, supported by expected higher gas sales to the expanding customer base, as well as further capacity expansion.
Notwithstanding cost pressures due to business expansion and inflation, the EBITDA margin has remained firm and stable at around 19% over the last 32 months, this has translated to a consistently sound bottom line over this period.
GCR expects the group earnings before interest tax depreciation and amortisation (EBITDA) margin to improve slightly to about 20% in FY21-22 on the back of economies of scale and ongoing cost containment initiatives.
Leverage and capital structure are considered neutral to the ratings, the report noted.
Notwithstanding ongoing working capital absorptions, the group robust cash generation has allowed Axxela to maintain net debt at around N30 billion, GCR said.
Combined with firmer earnings, the rating firm stated that Axxela’s net debt to EBITDA reduced to 187% at FY19 and FY20 from 225.8% in FY18 and further to an annualised 166% at 8-month of FY21.
While GCR forecasts that gross debt could spike to around N70bn over the medium term due to debt funded expansion, net debt to EBITDA will likely trend within the 200% – 250% range as earnings are ramped up.
Similarly, having improved to 5x in FY20 from 4.6x FY19, GCR analysts expect net interest coverage to be sustained at the intermediate range of 5x-6x over the medium term.
Conversely, operating cash flow coverage of debt is highly volatile due to intermittent working capital pressures and high-interest payments.
Cognisance is also taken of the significant foreign currency exposure, albeit the presence of a non-deliverable forward contract should continue to mitigate the forex risk.
Axxela’s liquidity assessment is considered moderate, with liquidity sources expected to cover its uses by 1.25x to 2x over the next 16 months.
This is based on the anticipated improvement in operating cash flow, combined with N9.1bn in cash holdings and a N5 billion revolving credit facility.
Nevertheless, the assessment is constrained by aggressive capex spend to support future earnings targets. Refinancing risk is minimal over the next 16 months, but there are large debt redemptions in FY23.
The stable outlook, according to GCR, reflects an opinion that Axxela will continue to generate robust earnings and cash flow, which will continue to support comfortable gearing metrics, a strong capital structure and adequate liquidity, even if the substantial capex continues.#GCR Upgrades Axxela Limited Rating with Stable Outlook
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