Moody’s Downgrades Dangote Cement Rating to B1

By Modupe Gbadeyanka

The corporate family rating (CFR) of Dangote Cement Plc has been downgraded by Moody’s Investors Service to B1 from Ba3.

A statement issued by Moody’s said Dangote Cement’s probability of default rating was downgraded to B1-PD from Ba3-PD, but said the firm’s national scale rating (NSR) remains unaffected at Aaa.ng with outlook on the ratings still stable.

Explaining the reason it downgraded the cement producer’s ratings, Moody’s said it was as a result of the downgrade of Nigeria’s rating to B2 from B1.

“We have downgraded Dangote Cement because it is not totally immune from Nigeria’s continuing economic challenges which the country’s government has been slow in responding to,” stated Douglas Rowlings, Vice President, Senior Analyst and lead analyst for Dangote Cement Plc at Moody’s.

“But Dangote Cement’s rating is one notch above the Nigerian sovereign’s to reflect its resilient and strong credit profile and management’s continuing success in navigating Nigeria’s tough operating environment,” added Mr Rowlings.

Dangote Cement’s B1 CFR, one notch above the Government of Nigeria’s B2 rating considers the company’s stronger intrinsic credit quality balanced against the meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level.

The CFR also reflects the track record of demonstrated financial support from a larger and more diversified parent, Dangote Industries Limited (DIL).

This affords additional parent level financial strength by being part of a broader diversified group of companies under the DIL umbrella, the rating agency said.

Dangote Cement has a very strong credit profile, and would likely be rated higher without its linkage with Nigeria, in part because of its leverage which registered 1.3x gross debt/EBITDA for the last 12 months ended September 30, 2017, Moody’s said in a statement issued on November 10, 2017.

This is significantly low relative to global peers, even those rated investment grade. The strong standalone profile also incorporates high operating margins trending above 50%; high interest coverage as measured by EBIT/interest expense trending above 8x over the next 18 months; and 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, it added.

The statement noted that Dangote’s sales and margins continue to benefit from the ongoing activity in the Nigerian economy.

Nevertheless Dangote remains at this stage strongly linked to Nigeria and its economy, with 89 percent of its EBITDA anchored in the country for the 9 months ended September 30, 2017.

Its investments in new plant capacity in other sub Saharan countries will provide more diversification in future but it will take several years before there is a meaningful diversification of revenue, profits and cashflows away from the Nigerian economy. Pan-African volumes expected to reach 40% of total sales volumes by 2020.

The ratings also factor in 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 a concentration of production in Nigeria, representing around 68% of revenues for the FYE 2016.

DCP’s ratings are further predicated upon 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; protected domestic production in the various African markets in which it operates, given on-going restrictions on imports; and 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, the statement further said.

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 N641 billion ($1.8 billion) for the next 12 months and an unrestricted cash balance of N130 billion ($361 million) as of September 30, 2017 are sufficient to cover maintenance capex of N11 billion ($31 million), planned expansion capex of N198 billion ($550 million) and dividends of N254 billion ($705 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 N130 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.

It stated that 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 through a Nigerian naira denominated bond issuance.

Moody’s said 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 liquidity become pressured; adjusted debt to EBITDA trend above 4x; adjusted EBIT to interest expense trend below 2.5x; or 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.

Similarly, the introduction of special taxes, levies or other punitive measures in respect of profits or cashflow by the government of Nigeria could put downward pressure on the ratings and/or outlook.

Upward pressure on the ratings is constrained by the Government of Nigeria’s local currency issuer rating of B2 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.