GCR upgrades African Oxygen Limited’s rating to A(ZA); Outlook Stable

11 May 2018 In Rating Notifications

GCR upgrades African Oxygen Limited’s rating to A(ZA); Outlook Stable

Johannesburg, 11 May 2018 — Global Credit Ratings has today upgraded the national scale Issuer ratings assigned to African Oxygen Limited to A(ZA) and A1(ZA) in the long term and short term respectively, with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Oxygen Limited (“Afrox”) based on the following key criteria:

The upgraded ratings reflect the successful restructuring undertaken by Afrox over the past few years. As a result, earnings margins improved substantially in FY16 and FY17, with operating profit rising from a low R481m in FY14 to R883m in FY17. The EBITDA margin is expected to be sustained above 20% going forward (compared to 14.5% in FY13).

Cash generation remained robust over the review period which, coupled with tight working capital controls, resulted in strong operating cash flows. Capital expenditure was maintained at relatively low levels, which has allowed the group to accumulate R1.3bn in cash (FY13: R380m). As no material funding pressure is projected from the capex trajectory in the short term (due to the lacklustre economy), GCR expects the strong cash position to be maintained.

Interest-bearing debt has remained largely flat at R1bn over the review period, underpinned by a longstanding syndicated loan facility. Whilst Afrox reports a net ungeared position, gross gearing improved to 26% and gross debt to EBITDA to 87% (FY16: 28%; 93%), review period lows. Gross and net interest cover were higher at 8.2x and 58.9x (FY16: 8.0x; 20.9x).

The weak domestic economic environment, particularly in the mining and industrial sectors, remains a constraint on revenue growth. However, an internal focus on efficiencies and customer service has seen Afrox secure a number of large contracts, regaining some of the market share that had been ceded in recent years. Moreover, diversification of the product offering and the targeting of new business segments has positioned Afrox strongly to secure new business. Nevertheless, despite an extensive export footprint in Africa, South Africa still accounts for 87% of group revenues, and will continue to underpin the group’s growth trajectory over the ratings horizon. Robust earnings growth is thus dependent on a sustained improvement in the commodity cycle.

The ratings also take cognisance of Afrox’s entrenched position as a leading regional supplier of gases and welding products in sub-Saharan Africa, underpinned by an extensive distribution network. Afrox is also able to leverage off the operational and technical support from its international parent, Linde AG, one of the largest global industrial gas groups.

Looking ahead, positive rating movement is dependent on sustained improvement in margins, combined with sustainable volume growth. This should lead to strong cash flows and profitability, which would further strengthen Afrox’s credit protection factors. Conversely, downward rating pressure could arise from material volume erosion, thus impacting profitability levels and/or a weakening in credit metrics.

 

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (September 2001)    
Long term: A+(ZA);

Short term: A1(ZA)

   
Outlook: Stable    
     
Last rating (May 2017)    

Long term: A-(ZA)

Short term: A1-(ZA)

   
Outlook: Positive    

 

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Eyal Shevel   Tavonga Muchemedzi
Sector Head: Corporate Ratings   Junior Analyst: Corporate Ratings
(011) 784-1771   (011) 784-1771
.(JavaScript must be enabled to view this email address)   .(JavaScript must be enabled to view this email address)
     
Committee Chairperson    
Sheri Morgan    
Senior Analyst : Corporate Ratings    
(011) 784-1771    
.(JavaScript must be enabled to view this email address)    

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2018

Afrox Issuer rating reports, 2001-2017

 

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:  HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Capital The sum of money that is invested to generate proceeds.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Commodity Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Exercise To exercise an option is to use the right of the holder to buy or sell the underlying asset on which the option is based at the strike price.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.
Long-Term Rating A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.
Operating Margin Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.
Short-Term Rating A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
Turnover The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.
Working Capital Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.

 

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

African Oxygen Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to African Oxygen Limited with no contestation of the ratings.

The information received from African Oxygen Limited and other reliable third parties to accord the credit ratings included;

  • Audited financial results for the year ending 31 December 2017 (plus four years of comparative data)
  • Analyst presentations 2017
  • Public financial information on Linde Group

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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