Moody’s Assigns First Time Ratings to Dangote Sugar Refinery
Moody’s has assigned a first-time Caa1 corporate family rating (CFR), and Baa3.ng national scale rating (NSR) corporate family rating to Dangote Sugar Refinery Plc (DSR) the largest Sub-Saharan African sugar producer and refiner based in Nigeria.
The rating note showed that Moody’s accorded the company’s outlook stable, saying the company’s ratings reflect its operational exposure to Nigeria’s macroeconomic environment with all its operations, cash flows and assets located in the country.
According to Moody’s, the DSR rating is constrained by Nigeria’s foreign currency ceiling rating but reflects the company’s strong credit profile and positive sugar industry fundamentals.
It also takes into consideration the strong, larger and more diversified parent and main shareholder, Dangote Industries Limited.
DSR’s ratings factor in the company’s robust financial profile, which factors low Moody’s adjusted leverage measured by Moody’s adjusted debt/EBITDA below 1.5x in 2024 and 2025 including debt raised to fund the Backward Integration Plan (BIP) projects and excluding letters of credit, adequate operating margins around 20% on average for the last five years.
It sees DSR’s market positioning as Nigeria’s largest manufacturer and seller of refined sugar as an advantage. Conversely, the rating reflects DSR’s exposure to Nigeria, a country that has high social, political, economic and regulatory risks.
It also considers the company’s exposure to commodity price risk volatility through raw material imports of sugar due to foreign currency exchange risks already captured in Nigeria’s foreign currency ceiling.
There is also a high reliance on letters of credit of NGN338 billion as of 30 June 2023 which is around 3x the Moody’s adjusted EBITDA of NGN98 billion for the last 12 months to June 2023), which are interest-bearing and used for hard currency working capital financing.
Nigeria is a net sugar importer country resulting in FX outflows through purchases of raw material which represents a burden to the Federal Government’s weakening finances. To reduce FX outflows from the sugar industry, Nigeria has implemented the Nigerian Sugar Master Plan (NSMP).
The NSMP aims to create a self-sufficient sugar industry to produce refined sugar from locally grown sugar cane in Nigeria and reduce its reliance on raw material imports through investments in Backward Integration Plan (BIP) projects by existing raw sugar importers.
DSR has committed to invest in the success of the NSMP through the enhancement of its existing refinery operations in Numan as well as developing a new greenfield site at Nasarawa.
As a result, DSR’s growth and performance over the next decade are largely tied to the implementation and success of the BIP projects.
Nevertheless, raw material concentration in one country will be a constraint for the company, especially with the volatility in agriculture commodities prices and event risks.
Moody’s anticipates the June 2023 large Naira depreciation to have negative credit implications in the 12 months. As a raw material importer for its Apapa refinery, DSR’s costs of sugar imports in Naira will increase following the Naira weakening.
DSR has reported that the USD to Naira exchange weakened to 756 Naira per USD as at 30 June 2023 compared to 461 Naira per USD as of 31 December 2022.
As a result of higher import costs and a lag to pass through the increasing cost base, Moody’s anticipates margin pressures during the second half of 2023.
However, in historical periods of currency weakening or increasing import raw sugar prices the company has been able to pass through increasing raw material costs to its customers over time and Moody’s expects that adjusted operating profit margins will reverse towards 15%-20% in the next 12-18 months.
Moody’s considers DSR’s liquidity profile to be adequate, underpinned by a large cash balance of NGN158 billion as of 30 June 2023 and strong operating cash flows of NGN73 billion for the last 12 months to June 2023.
Available internal sources are sufficient to cover all basic liquidity needs, including sizeable dividends and maintenance capital spending, within the next 12-18 months. However, the company will rely on external liquidity to finance its capital-intensive BIP projects. Although currently there are no available committed bank facilities,
Moody’s understands that DSR will raise all necessary funds for the BIP projects in time, taking into account its low leverage and a leading market position. The company has already received commitments from financial institutions in Africa to support its BIP projects.
The ratings agency also recognizes that DSR has a limited track record of accessing the local funding market however its low leverage, strategic corporate status in Nigeria and the strength of its main shareholder represent an advantage.
The stable outlook is in line with the stable outlook of the Government of Nigeria reflecting DSR’s close credit links to the Government of Nigeria and operational exposure to the country’s political, legal, fiscal and regulatory environment. Naira Devaluation Deepens Economic Crisis in Nigeria