GCR Ratings (GCR) has affirmed the national scale long-term and short-term issuer ratings of AA+(NG) and A1+(NG) for Dangote Industries Limited (DIL), reflecting strong earnings prospects from the group’s new petrochemical refinery.
Concurrently, GCR has affirmed the AA+(NG) national scale long-term issue ratings for Dangote Industries Funding Plc’s Series 1 Tranche A and Tranche B Bonds, as well as Series 2 Senior Unsecured Bonds. The outlook on these ratings has been revised from Stable to Evolving.
PLATFORM TIMES gathered that the affirmation comes on the back of anticipated significant earnings growth with the recent start of operations at DIL’s new refinery, which commenced in February 2024.
This facility, touted as the largest refinery in Africa and Europe, is expected to significantly bolster the group’s earnings through the production of diesel, naphtha, heavy fuel oil, and aviation fuel.
The refinery’s debut in European markets is projected to enhance export sales potential, adding to the already strong performance of DIL’s diverse business operations.
Despite the positive outlook, the ratings are tempered by challenges related to currency devaluation, which has negatively impacted the group’s profitability and financial position due to substantial foreign debt exposure.
It was further gathered that the group’s business profile benefits from the refinery’s operational scale and the diversified nature of its business ventures, though it remains vulnerable to volatile energy costs and reliance on imports for essential inputs like gypsum, raw sugar, and crude oil.
In the financial year ending December 31, 2023, DIL reported a 30% increase in revenue, surpassing forecasts.
However, the company experienced a significant foreign exchange loss of N3 trillion (US$3.3 billion) and high finance costs amounting to N544 billion, leading to a compression in the EBITDA margin to 31.4%.
The EBITDA margin decline, from a five-year average of 33.4%, is attributed to surging energy costs and imported inflation affecting inputs. Revenue is anticipated to double to N6 trillion in 2024 and rise further by 60% in 2025, driven by additional income streams from the refinery.
The EBITDA margin is expected to decrease to 22%-27% in the coming years due to the lower profitability of refining operations, though absolute earnings are projected to increase significantly.
The group’s gross debt surged by N1.6 trillion to N5.4 trillion in 2023, with a substantial portion tied to foreign currency loans.
This debt increase contributed to a deterioration in interest coverage to 1.8x and net debt to EBITDA weakening to 4.1x. Operating cash flow (OCF) improved to 21.1% due to significant working capital releases.
Future projections indicate that debt levels will remain high, though interest coverage and OCF to debt ratios are expected to improve, with net debt to EBITDA moderating below 2.5x.
Refinancing risk remains a concern due to high short-term debt maturities, although 75% of foreign debt comprises shareholder loans, which are subordinated to external creditors and deferred until the refinery achieves financial viability.
Liquidity is a positive factor but will become increasingly sensitive to outflows related to shareholder loan repayments and working capital pressures over the next 12-18 months
DIL plans to repay at least 25% of outstanding shareholder loans and maturing external loans in 2024 and 2025, alongside substantial capital spending and dividend payments.
Liquidity is expected to be supported by a cash holding of N1.5 trillion and operating cash flows projected at N1.3 trillion in 2024 and N1.7 trillion in 2025.
The group is renegotiating external loans for better terms to enhance liquidity flexibility.
The liquidity coverage ratio is estimated at 1.7x for the 12-month period and 1.6x for the 24-month period through December 2025.
The positive peer comparison for DIL underscores the refinery’s importance to Nigeria’s economy, although the extent of support under this rating component has been reduced.
A rating upgrade could occur if the refinery achieves substantial operational scale, significantly boosting earnings and managing debt levels effectively.
Conversely, a downgrade may result from a rise in debt, significant earnings shortfalls, or liquidity and covenant breaches.
GCR’s credit rating process was independent, based solely on the merits of the rated entity, and no other business activities influenced the ratings.
PLATFORM TIMES also learnt that the rating has been disclosed to DIL, which participated in the rating process through various forms of communication.
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