GCR Confirms Dangote Ratings, Highlights Earnings and Liquidity

Dangote Cement PLC Quotes Additional Series Of Commercial Paper On FMDQ Exchange

Dangote Industries Limited (DIL) has been given the national scale long-term and short-term Issuer ratings of AA+ (NG) and A1+ (NG), respectively by GCR ratings.

According to the rating note that was published, the group’s gross debt position is anticipated to be N3.9 trillion, which is high given that there are plans to issue more debt in 2023.

The national scale long-term Issue rating of AA+ (NG) given to Dangote Industries Funding Plc’s N10.5 billion Series 1 Tranche A, N177.1 billion Tranche B Bond, and N112.4 billion Series 2 Senior Unsecured Bond was also confirmed by GCR in a rating note.

According to GCR’s comment posted on its website, the outlook for the ratings is seen as stable. The rating statement stated that Dangote Industries Limited’s affirmation reflects both its systemic significance as the largest Nigerian conglomerate with a reasonably diversified business portfolio and its position as the refinery project under construction.

The high debt level, recent cash flow compression, and substantial foreign debt exposure are offset by the strengths, according to the ratings. The group’s businesses in cement, sugar, and fertilizer are industry leaders.

The cement sub-group, which has activities in 10 countries but is still heavily focused on the Nigerian market, contributes to approximately 70% of the group’s earnings.

DIL stated “Once the refinery starts operating, we anticipate that the group’s earnings and business fundamentals will be more heavily skewed toward oil refining.”

It continued saying, “Although there have been delays in starting the refining process, the management plans to start the plant in phases beginning in June 2023, with a minimum production capacity of 400,000 bpd (about 60% of the total installed capacity), with the first phase giving priority to the production of diesel.”

“The second phase, which would contain a wider variety of refined petroleum products, is slated to begin in the fourth quarter of 2023,” it added.

According to GCR’s comment, the ongoing strength of the sales and earnings margins is the basis for the positive earnings evaluation.

In the third quarter of 2022, the company’s revenue increased by an annualized 24.9% to N1.7 trillion. According to GCR, higher trading volumes in the sugar and fertilizer subsidiaries, as well as price rises across a variety of product lines, caused the outcome to exceed its forecasted growth of 14%.

We predict that the strong top line growth in 9M would continue throughout the entire 2022. However, we have taken a cautious approach to revenue growth for 2023, assuming additional delays in the start of refining activity.

Therefore, “we project a volumes-led revenue growth of 20% for the existing businesses in 2023 and 80% for the additional revenue from the refinery in 2024, assuming about 40% uptime and 50% capacity utilization.”

Although it slightly decreased during the time frame, the EBITDA margin remained high and was higher than the 35% average over the previous five years.

“We anticipate the margin trend to be maintained in 2023, but given the refinery’s earnings margin, it may decline to around 30% in 2024.” According to the rating note, the biggest rating limitation is still the group leverage and capital structure because of the high debt level and currency risk.

According to the company, due to the N112 billion Series 2 bond issued in December 2022, Dangote Industries Limited’s gross debt, which includes shareholder loans, climbed to N3.5 trillion as of September 2022 and is expected to reach N3.7 trillion for the entire year 2022.

Despite this, the rating note stated that net debt to EBITDA decreased from a high of 4.9x in 2020 to 3.2x as of September 2022, supported by reported strong earnings.

Although the group plans to raise additional debt, GCR stated that although gross debt could increase to N3.9 trillion in 2023, the rating agency anticipates net debt to EBITDA to decrease to around 2.6x in 2023 and below 2x in 2024. It supported the estimate by relying on the anticipated high earnings.

We also take note of the shareholder loan, which amounts to N916 billion (26% of the aggregate debt), and whose installments are being postponed until the refinery can support itself financially.

According to the rating note, net debt to EBITDA, exclusive of shareholder loans, would register at roughly 2x in the first nine months of 2022 and 1.5x in 2023.

The group operating cash flow has been restricted to 25% since 2020, which has been attributed to working capital constraints brought on by a few one-time non-operating items.

While the pressures may subside in 2023, DIL continue to estimate a cautious operational cash flow to debt ratio of 19%. We view the strong exposure to foreign exchange on its debt adversely, but we anticipate that this will change in 2024 once the refinery is fully operational and the loans have been significantly repaid.

With sources versus uses coverage predicted at 1.9x for the 12-month period ending December 31, 2023, and 1.3x for the 24-month period ending December 20, 2024, according to GCR, DIL’s liquidity is deemed sufficient.

This is partly supported by the enormous cash position of N802 billion as of September 2022 and the anticipated strong net operating cash flow of N780 billion in 2023, which should be more than enough to cover the scheduled necessary repayment of external debt, capital expenditures, and dividend payments.

Due to the repayment flexibility, GCR has excluded the shareholder loans payable. Due to the refinery project’s economic importance to Nigeria, GCR has given DIL positive consideration for peer comparison.

Given the systemic significance of the underlying project, the federal government continues to provide support, including a 20% investment in the refinery and priority access to foreign money.

Series 1 and Series 2 Senior Unsecured Bonds issued by Dangote Industries Funding Plc, the special purpose company that sponsors DIL, have raised a total of N300 billion. #GCR Affirms Dangote Ratings, Cites Robust Earnings.

Series 1 and Series 2 Senior Unsecured Bonds of its sponsored special purpose vehicle, Dangote Industries Funding Plc, have generated a total of N300 billion for DIL.


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