Kenya Corporate Analysis | Public Credit Rating Centum Investment Company Plc Kenya Corporate Analysis July 2018 Summary rating rationale • Centum is a leading Kenyan investment company, with clear operating structures and well-defined investment strategy. The ratings take cognisance of Centum’s sectoral diversification across its investments, which have supported consistently robust growth over the review period. NAV registered at KES48.7bn at FY18, having increased at a CAGR of 20.8% from FY14 to FY18. • Much of the value creation has largely been driven by the growth and real estate portfolios, with two more large property ventures expected to contribute strongly to realised and fair value profits over the next few years. Nevertheless, the projects’ prospects are closely related to the performance in the property market, which is under some pressure. The investments in power are set to substantially change the composition of the portfolio in the medium term, while projects in the education and healthcare will further add to the diversity of earnings. • Centum has reported much stronger annuity income since FY16, supported by dividend inflows from the FMCG businesses. Thus, while the interest cost has increased over the review period, annuity income coverage of interest and operating expenses has been maintained around 1.4x, which is considered adequate given the earnings achieved through assets sales and the availability of substantial funding facilities. • Development risk is inherent to the business model. However, the company’s demonstrated ability to generate substantial returns and cash flows from disposals (which form a critical component of Centum’s earnings), combined with the ability to maintain a firm development pipeline over the review period supports the current ratings. • At the holding company level, Centum’s gross debt was flat at KES14.8bn at FY18 (FY17: KES14.7bn). Accordingly, gearing metrics remained conservative and well within bond covenant levels. Net debt to equity registered at 28.3% (FY16: 27.2%), whilst net debt to investment assets was 22.3% (FY17: 20.8%). The long debt maturity profile is positively noted, with only 13% of total debt due in FY19. • Centum’s strong access to capital markets, evidenced by oversubscribed recent bond issuances, as well as long-standing relationships with commercial banks and other financial institutions are also considered in support of the ratings. • The company is well positioned to benefit from the current strong growth in Kenya and the broader East Africa region, as its investments are largely targeted at servicing the growing middle class. Nevertheless, it does face a more challenging outlook in most of its operating environments. • Global Credit Ratings has withdrawn the rating accorded to Centum Investment Company Plc’s Commercial Paper, as there is currently no Commercial Paper in issue. Factors that could trigger a rating action may include Positive change: Continued strong profitability, both from annuity type income and asset sales. Gaining critical mass in other targeted sectors would be positively viewed, as it would lessen dependence on new property developments. Negative change: Protracted weak performance due to a deterioration in the business and socio-economic environment would have a negative ratings impact. Adverse developments in any of the subsidiaries/associates could be managed, but Centum’s ability to service its debt could be strained by simultaneous problems. Rating class Rating scale Rating* Rating outlook Expiry date Long term National AKE) Positive July 2019 Short term National A1(KE) Financial data:* (USD’m Comparative) 31/03/17 31/03/18 KES/USD (avg.) 102.2 103.3 KES/USD (close) 103.1 100.9 Total assets 597.2 654.7 Total investment 446.5 478.1 Total debt 142.2 147.0 Total capital 434.6 482,3 Cash & equiv. 23.7 10.7 Total income 42.1 34.2 EBITDA 31.7 34.1 NPAT 15.4 10.1 Market cap. ** KES24.0bn/USD239m Market share n.a * Company financial statements. ** As at 12/07/2018 @ KES100.3/USD. Rating history: Initial rating (July 2012) Long term: A-(KE) Short term: A1-(KE) Rating outlook: Stable Commercial Paper: n.a Last rating (July 2017) Long term: A(KE) Short term: A1(KE) Rating outlook: Stable Commercial Paper: A1(KE) Related methodologies/research: Global Master Criteria for Rating Corporate Entities, updated February 2018 Centum Investment Company Limited (“Centum” or “the company”) Issuer rating reports, 2012-17 GCR contacts: Primary Analyst: Eyal Shevel Sector Head: Corporate Ratings [email protected]Committee Chairperson: Sheri Morgan Senior Analyst: Corporate Ratings [email protected]Analyst location: Johannesburg, ZA Tel: +27 11 784 – 1771 Website: http://globalratings.net *As the bonds issued by Centum represents a senior unsecured obligation, these bear the same ratings as those of the Group. GCR’s ratings exclude the equity-linked component of the bond, which is subject to market forces.
12
Embed
Centum Investment Company Plc · company’s demonstrated ability to generate substantial returns and cash flows from disposals (which form a critical component of Centum’s earnings),
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Kenya Corporate Analysis | Public Credit Rating
Centum Investment Company Plc
Kenya Corporate Analysis July 2018
Summary rating rationale
• Centum is a leading Kenyan investment company, with clear operating
structures and well-defined investment strategy. The ratings take cognisance
of Centum’s sectoral diversification across its investments, which have
supported consistently robust growth over the review period. NAV
registered at KES48.7bn at FY18, having increased at a CAGR of 20.8%
from FY14 to FY18.
• Much of the value creation has largely been driven by the growth and real
estate portfolios, with two more large property ventures expected to
contribute strongly to realised and fair value profits over the next few years.
Nevertheless, the projects’ prospects are closely related to the performance
in the property market, which is under some pressure. The investments in
power are set to substantially change the composition of the portfolio in the
medium term, while projects in the education and healthcare will further add
to the diversity of earnings.
• Centum has reported much stronger annuity income since FY16, supported
by dividend inflows from the FMCG businesses. Thus, while the interest
cost has increased over the review period, annuity income coverage of
interest and operating expenses has been maintained around 1.4x, which is
considered adequate given the earnings achieved through assets sales and
the availability of substantial funding facilities.
• Development risk is inherent to the business model. However, the
company’s demonstrated ability to generate substantial returns and cash
flows from disposals (which form a critical component of Centum’s
earnings), combined with the ability to maintain a firm development pipeline
over the review period supports the current ratings.
• At the holding company level, Centum’s gross debt was flat at KES14.8bn
at FY18 (FY17: KES14.7bn). Accordingly, gearing metrics remained
conservative and well within bond covenant levels. Net debt to equity
registered at 28.3% (FY16: 27.2%), whilst net debt to investment assets was
22.3% (FY17: 20.8%). The long debt maturity profile is positively noted,
with only 13% of total debt due in FY19.
• Centum’s strong access to capital markets, evidenced by oversubscribed
recent bond issuances, as well as long-standing relationships with
commercial banks and other financial institutions are also considered in
support of the ratings.
• The company is well positioned to benefit from the current strong growth in
Kenya and the broader East Africa region, as its investments are largely
targeted at servicing the growing middle class. Nevertheless, it does face a
more challenging outlook in most of its operating environments.
• Global Credit Ratings has withdrawn the rating accorded to Centum
Investment Company Plc’s Commercial Paper, as there is currently no
Commercial Paper in issue.
Factors that could trigger a rating action may include
Positive change: Continued strong profitability, both from annuity type
income and asset sales. Gaining critical mass in other targeted sectors would
be positively viewed, as it would lessen dependence on new property
developments.
Negative change: Protracted weak performance due to a deterioration in the
business and socio-economic environment would have a negative ratings
impact. Adverse developments in any of the subsidiaries/associates could be
managed, but Centum’s ability to service its debt could be strained by
simultaneous problems.
Rating class Rating scale Rating* Rating outlook Expiry date
Ratios Efficiency: Expenses : recurring income (%) 23.4 61.8 26.2 24.6 24.6 Expenses : average total investments (%) 2.4 3.2 2.3 2.0 1.9 Profitability: Annuity income growth (%) 290.5 (23.7) 139.0 (3.5) 5.0 Total income growth (%) 3.9 238.5 (35.5) (1.0) (17.9) Effective tax rate (%) 4.4 5.4 4.4 10.2 n.a Coverage: Ordinary dividend cover n.a n.a n.a n.a n.a Interest coverage (Total income) 4.3 9.0 2.9 2.5 2.0 Interest coverage (Annuity income) 4.0 1.9 2.3 1.9 2.0 Annuity income : opertaing and finance costs 2.1 0.9 1.4 1.3 1.4 Liquidity: Cash : short term debt (x) 0.1 n.a n.a 0.3 0.6 Marketable securities : short term debt (x) 0.7 n.a n.a 0.3 0.6 Capitalisation: Equity : Total assets (%) 79.9 77.3 76.3 72.8 73.7 Total debt : Total investments (%) 19.3 20.1 22.2 24.9 24.1 Net debt : Total investments (%) 18.7 10.3 13.9 20.8 22.3 Total debt : equity (%) 23.9 23.7 26.6 32.7 30.5 Net debt : equity (%) 23.2 12.2 16.7 27.2 28.3
Kenya Corporate Analysis | Public Credit Rating Page 9
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR'S CORPORATE GLOSSARY
Balance Sheet Also known as Statement of Financial Position. A statement of a company's assets and liabilities provided for the benefit of
shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been
financed. Bond A long term debt instrument issued by either a company, institution or the government to raise funds. 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. Consortium A group of companies that combine some or all of their resources to undertake a joint project.
Corporate Governance Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed,
and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
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.
Economic Indicators Statistical data about country's economy, such as unemployment figures, the Consumer Price Index (CPI), Gross Domestic Product
(GDP), money supply and housing statistics. This data gives information about the future direction of output and demand in an economy.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining
profit. Exchange Rate The value of one country's currency expressed in terms of another.
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. Fair Value The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.
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.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by
the interest rate, the amount borrowed or principal and the duration of the loan.
Interest Cover Interest cover is a measure of a company's interest payments relative to its profits. It is calculated by dividing a company's operating
profit by its interest payments for a given period.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
Joint Venture A project or other business activity in which two persons or companies partner together to conduct the project. Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or
sold quickly and in large volumes without substantially affecting the market price.
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.
Mandate Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct
the lead manager of a bond issue to proceed on the terms agreed.
Net Asset Value The value of an entity's assets less its liabilities. It is a reflection of the company’s underlying value and is usually quoted on a per
share basis.
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. Revaluation Formal upward or downward adjustment to assets such as property or plant and equipment.
Rights Issue One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to
current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.
Risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk
including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic
risk, political risk, settlement risk and translation risk.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity's
operating philosophy. Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.
Tranche Used to mean an allocation or instalment of a larger loan facility. Tranches of the same debt programme may differ from each other
because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way. Unrealised Gain The profit or loss that would be made if a position were to be liquidated.
Kenya Corporate Analysis | Public Credit Rating Page 10
This page has intentionally been left blank
Kenya Corporate Analysis | Public Credit Rating Page 11
This page has intentionally been left blank
Kenya Corporate Analysis | Public Credit Rating Page 12
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.
Centum Investment Company Plc 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 Centum Investment Company Plc with no contestation of the rating. The information received from Centum Investment Company Plc and other reliable third parties to accord the credit ratings included;
• 2018 audited annual financial statements and four years prior comparative financial statements;
• Details of funding facilities; and
• FY18 Investor briefings The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision