What Moody’s Change ratings for DANGCEM means for investors bullished on Alike Dangote

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These rating actions follow Moody’s sovereign outlook change, on 4 December, of the Government of Nigeria’s ratings to negative from stable and affirmation of the B2 long-term foreign-currency and local-currency issuer ratings.

Moody’s has subsequently affirmed the B2 corporate family rating (CFR) and changed the outlook to negative from stable on the following companies:

Moody’s has also affirmed the B1 CFR of Dangote Cement Plc (DCP) and changed the rating outlook to negative from stable. At the same time Dangote cement plc national scale rating was downgraded to Aa2.ng from Aaa.ng to factor a weaker Government of Nigeria rating.

Change of Outlook to Negative from Stable

The negative outlook on these corporates is driven by the Nigerian sovereign outlook change to negative from stable.

Moody’s believes that the credit quality of these companies is inevitably tied to the economic and political developments in Nigeria, with earnings and cash flows generated in Nigeria.

The soft Nigerian economic growth has translated into limited expansionary activity in the wider consumer and business environments, leading to deteriorating corporate earnings and weak consumer spending.

The rating agency expects low real GDP growth in Nigeria of 2.5% for 2020.

Ratings Rationale

Dangote Cement Plc
The affirmation of the B1 CFR and downgrade of the national scale rating to Aa2.ng considers the company’s strong intrinsic credit quality balanced against the meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level.

Dangote Cement Plc has a very strong credit profile, however, as Africa’s largest cement producer, it has material production concentration to Nigeria which generates around 69% of revenues.

The B1 CFR is one notch above the sovereign rating because of the company’s strong credit metrics including debt/EBITDA of 1.0x, the track record of demonstrated financial support from a larger and more diversified parent, Dangote Industries Limited (DIL), and funding in local currency.

The cement industry is energy intensive and the mining and manufacturing process for cement production consumes large amounts of coal, electricity and water.

Dangote’s production meets domestic emission standards and has implemented measures to increase energy efficiency.

In terms of corporate governance, the company is 85.1% owned by Dangote Industries Limited, which is owned by its founder and chairman, Aliko Dangote.

This does present key man risk in Moody’s view given that Mr. Dangote continues to play a pivotal part in the fortunes of the company.

Dangote Cement Plc

Given the negative outlook on the Nigerian sovereign and strong linkages to the Nigerian economy, an upgrade is unlikely in the near-term. The outlook could be changed to stable if the Government of Nigeria’s rating outlook is changed to stable.

Upward pressure on the ratings is constrained by the Government of Nigeria’s local currency issuer rating of B2 as we consider a strong interlinkage with DCP’s ratings due to the high revenue contribution from its domestic operations which constrains the company to be rated one rating level above the sovereign.

The ratings are likely to be downgraded in the case of a downgrade of the Government of Nigeria’s rating. A downgrade could also occur if:

The government of Nigeria introduces special taxes, levies or other punitive measures in respect of Dangote’s profits or cashflow.

Operating margins falls below 20% on a sustained basis.

Adjusted debt to EBITDA trends above 4x or adjusted EBIT to interest expense trends below 2.5x.

Liquidity becomes pressured.

Dangote Cement Plc moves away from it conservative financial policies, most notably matching of the currency of its underlying cash flow generation to that of debt commitments.

List Of Affected Ratings
..Issuer: Dangote Cement Plc
Affirmations:
….Long-term Corporate Family Rating, affirmed B1
….Probability of Default Rating, affirmed B1-PD
Downgrades:
….NSR long-term Corporate Family Rating, downgraded to Aa2.ng from Aaa.ng
Outlook Action:
….Outlook, changed to Negative from Stable
..Issuer: IHS Netherlands Holdco B.V.
Affirmations:
….Long-term Corporate Family Rating, affirmed B2
….Probability of Default Rating, affirmed B2-PD
….BACKED Senior Unsecured Regular Bond/Debenture, affirmed B2
Outlook Action:
Affirmations:
….Long-term Corporate Family Rating, affirmed B2

….Probability of Default Rating, affirmed B2-PD

….Senior Unsecured Regular Bond/Debenture, affirmed B2
Outlook Action:

….Outlook, changed to Negative from Stable

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