By Modupe Gbadeyanka
A Nigeria-based credit rating agency, Global Credit Ratings (GCR), has noted that the free cash flow of Ardova Plc (formerly Forte Oil) is “expected to remain relatively sound in the short term.”
In a statement on Monday, it said since the 2019 financial year, there has been a significant improvement in the energy company’s “cash flow coverage of external debt” due to the deleveraging and realisation of petroleum subsidy receivables.
In the statement, GCR said it has affirmed the long term and short term national scale ratings assigned to Ardova at A-(NG) and A1(NG) respectively and then concurrently affirmed its issue rating of A-(NG) with a stable outlook.
GCR noted that the company maintains a leading position in the Nigerian downstream oil industry, underpinned by the continued expansion of its national retail market share, a strong asset base and control of key facets of the value chain; factors which continue to support the ratings.
According to the rating firm, since the divestment of its subsidiaries in 2018, the revenue has grown strongly as a result of robust fuel volumes traded.
“GCR, however, notes the limited product diversification, with other segments outside of fuels (specifically Premium Motor Spirit) still negligible.
“GCR expects some contraction in the top line in FY20 due to the impact of COVID-19 on the broader economy, although the volume constriction is expected to be relatively short-lived, due to the essential nature of petroleum products,” the statement said.
“Industry margins continue to contract, due to the tight price regulation of the dominant product, which together with the variability of profits through the cycle, constrains our view of the earnings profile.
“Margin pressure could be exacerbated by price volatility upstream as rising global demand translates to stronger oil prices.
“That said, the ability to directly import refined products potentially provides Ardova headroom for margin enhancement.
“GCR will continue to assess the Company’s ability to enhance cost efficiency and improve the earnings contribution of higher-margin product offerings,” it added.
It stated that following N16 billion debt repayments, mostly from the proceeds of the divestment of its other businesses, the company’s gross debt reduced to N5.3 billion in FY19 from N18.3 billion previously, with a relatively even mix of short- and long-term maturities.
Consequently, gross and net debt to EBITDA strengthened to 118.4 per cent and 87.8 per cent respectively in FY19 from 398.7 per cent and 387.5 per cent in FY18.
“Ardova attained a net ungeared position in 1Q FY20 on the back of high unutilised cash holding, indicating sufficient headroom to take in new debt if required.
“The series 1 bond will mature in December FY21, with GCR expecting that internal cash will be sufficient to meet maturing obligations,” the statement said.
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