Friday, July 7, 2017 06.25 AM / Moody's Investors Service Middle East
Moody's Investors Service has assigned a first-time Ba3 corporate family rating (CFR), Ba3-PD probability of default rating and Aaa.ng national scale rating (NSR) corporate family rating to Dangote Cement Plc (DCP), a Nigeria-based cement producer. The outlook on the ratings is stable.
"Dangote Cement Plc's Ba3 corporate family rating, one-notch above the Government of Nigeria's rating, reflects the company's strong standalone credit profile and track record of demonstrated financial support from a larger and more diversified parent, Dangote Industries Limited," says Douglas Rowlings, Vice President and lead analyst for Dangote Cement Plc at Moody's.
The ratings factor in the diversification of the company's revenue streams as DCP's new cement production plants are commissioned in Africa with Pan-African volumes expected to reach 40% of total sales volumes by 2020.
— ASSIGNMENT OF A Ba3 CFR, Ba3-PD PROBABILITY OF DEFAULT RATING AND Aaa.ng NSR—
DCP's Ba3 CFR and Ba3-PD probability of default rating reflect DCP's strong financial profile, which factors (1) high operating margins trending above 50%; (2) low leverage as measured by debt/EBITDA trending below 1.0x over the next 18 months; (3) high interest coverage as measured by EBIT/interest expense trending above 8x over the next 18 months; (4) conservative funding policies with debt funding matched to the currency of cash flow generation and prudent financial policies which will ensure sustenance of strong credit metrics through operating and project build cycles; and (5) the additional parent level financial strength afforded by being part of a broader diversified group of companies under the Dangote Industries Limited (DIL) umbrella.
The ratings also factor in (1) the relatively small scale level of cement production when compared to global peers along with production of 23.6 million tonnes (mt) for the Financial Year Ended (FYE) 31 December 2016; and (2) a concentration of production in Nigeria, representing around 68% of revenues for the FYE 2016.
DCP's ratings are further predicated upon (1) a continuing growing cement market share of 65% in Nigeria as Africa's most populous country and its largest economy where GDP is expected to reset to growth levels of around 2.5% in 2017 despite the ensuing low oil price environment; (2) protected domestic production in the various African markets in which it operates, given on-going restrictions on imports; and (3) competitive advantage brought about by an intention to always be the lowest cost cement producer in the markets where it operates, with a differentiated offering in Nigeria through access to low cost coal as an energy resource and a comprehensive fleet network.
Under Moody's forecasts DCP's liquidity profile is sufficient to meet the company's cash needs over the next 12 months. Moody's estimates that funds from operations generation of NGN493 billion ($1.5 billion) for the next 12 months and an unrestricted cash balance of NGN136 billion ($419 million) as of 31 March 2017 are sufficient to cover maintenance capex of NGN11 billion ($34 million), planned expansion capex of NGN235 billion ($724 million) and dividends of NGN145 billion ($447 million). Uncommitted expansion capex will require external funding.
This will be supported by DCP's four committed trade finance facilities for a total amount of NGN130 billion ($401 million) to be used to cover import payments via issuance of letters of credit.
Additionally, DCP's liquidity benefits from proven ongoing support from DIL. Although Moody's does not expect that DCP would require liquidity support from DIL, the rating agency expects that this would be forthcoming if ever needed.
RATIONALE FOR THE STABLE OUTLOOK
The stable ratings outlook reflects Moody's expectation that DCP will continue to maximize output from existing plants outside Nigeria, while continuing to observe conservative financial policies. At the same time, the stable outlook assumes the ability to refinance maturing debt predominantly due to DIL, during 2017 through a Nigerian naira denominated bond issuance.
WHAT COULD CHANGE THE RATING UP/DOWN
A downgrade of DCP's rating would result if there was a move away from its conservative financial policies most notably its matching of the currency of its underlying cash flow generation to that of its debt commitments. Downward pressure on the ratings could also arise should
(1) liquidity become pressured;
(2) adjusted debt to EBITDA trend above 4x;
(3) adjusted EBIT to interest expense trend below 2.5x; or
(4) operating margins fall below 20% on a sustained basis.
Any downward momentum on the Federal Government of Nigeria's rating could also exert pressure on DCP's ratings.
Upward pressure on the ratings is constrained by the Government of Nigeria's local currency issuer rating of B1 as Moody's considers a strong interlinkage with DCP's ratings due to the high revenue contribution from its domestic operations which contains the company to be rated one rating level above the sovereign.
The principal methodology used in these ratings was Building Materials Industry published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings".
While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time.
Headquartered in Lagos, Nigeria, Dangote Cement Plc is Africa's largest cement producer. The company operates three fully integrated cement plants with combined capacity of 29.25 Mtpa and more than 65% share of the market in Nigeria, Africa's largest economy and population. DCP has expanded its production base over the past three years with new plants in several African countries adding capacity of 16 Mtpa, bringing total production capacity to almost 46Mtpa. This will increase further to 49 Mtpa by the end of 2019.
For the last twelve month ended 31 March 2016, DCP reported revenues of NGN683 billion ($2.5 billion) and an EBITDA of NGN291 billion ($1.1 billion), as adjusted by Moody's. DCP has the largest market capitalisation on the Nigerian Stock Exchange at NGN 3.4 trillion ($10.6 billion as at 4 July 2017) and is majority owned by Dangote Industries Limited (DIL).
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.