GCR Affirms Fidson Healthcare BBB(NG) Rating

By Modupe Gbadeyanka

Global Credit Ratings (GCR) has affirmed the national scale Issuer ratings assigned to Fidson Healthcare Plc of BBB(NG) and A3(NG) in the long term and short term respectively; with the outlook accorded as Stable.

Concurrently, GCR has assigned a national scale long term rating of BBB(NG) to the N2 billion Secured Fixed Rate Bond. The ratings are valid until June 2018.

Explaining reasons for the ratings, GCR said Fidson remains one of the key players in the Nigerian pharmaceutical sector, with an estimated market share of 6%. The business is enhanced by a strong marketing base and good distribution network, as well as strong relationships and synergies with various local and international suppliers, which should guarantee a sustainable supply of raw materials and consumables.

The company experienced significant rise in production costs in 2016, on the back of pressure on the procurement process, due to several factors, including the devaluation of the Naira and protracted foreign exchange shortages. In addition, there was production downtime between March and May 2016, as equipment from the old factories was relocated to the newly completed Biotech plant, it said.

Overall, revenue fell by 6.8 percent to N7.7 billion in FY16. Given the relative stability in foreign currency supply since February 2017 and the government support for locally produced medicines, Fidson reported a 79 percent annualised increase in revenue to N3.4 billion in 1Q 2017, indicating relatively sound performance against the FY17 budget, a statement by the rating agency said.

GCR noted that although the gross margin remained unchanged at 53 percent in FY16, rising energy costs, as well as elevated selling and distribution expenses continue to impact EBITDA and operating margins.

Input costs are expected to remain high in the current year, but economies of scale should see margins improve.

Net interest coverage weakened to 1.9x (FY15: 2.2x) in FY16, but improved to 2.1x in 1Q FY17, supported by stronger earnings.

It said the resilience of the margin going forward is contingent upon earnings stability and will continued to be monitored closely by GCR.

“Note is taken of Fidson’s long standing banking relationships, which have allowed for a steady source of funding and favourable terms in the challenging operating environment.

“Gross debt reduced to N4.4 billion at FY16 (FY15: N4.6 billion) as Fidson settled certain maturing term facilities.

“Accordingly, gross and net gearing were reduced to 68 percent and 62 percent respectively (FY15: 74 percent; 72 percent),” the statement said.

However, gross and net debt to EBITDA rose to 302 percent and 279 percent at FY16, due to the curtailed profitability during the year.

The debt profile has improved, with long term debt accounting for 55% of the interest-bearing obligations at FY16 (FY15: 60 percent). While Fidson is planning to raise additional debt and/or equity funding to support production capacity, the expected increase in production volumes from the new facilities should see gearing metrics decline by FY17.

Apart from FY13, Fidson reported working capital releases in all the years under review. The significant release recorded in FY16 was largely driven by trade receivables, which followed rigorous credit control measures and increased recovery efforts.

Bureaucratic delays on the part of the Lands Registry and other government agencies have prolonged the security perfection process for the N2 billion fixed rate bond.

Accordingly, GCR will only consider any additional rating uplift provided by the security package once the security is perfected in full.

Upward rating movement is presently limited by the tough operating environment which has resulted in curtailed performance.

However, upward pressure would arise from the attainment of targets over the medium term, and in particular, a significant reduction in debt. Negative rating action could emanate from sustained decline in earnings profile, which could lead to lower than anticipated debt service metrics and deterioration in all other credit protection metrics.