GCR Accords IntBrew Stable Outlook with ‘A’ Ratings
A Moody’s Investors Services affiliate, GCR Ratings, has affirmed the national scale long-term and short-term Issuer ratings of A(NG) and A1(NG) respectively, assigned to International Breweries (IntBrew) Plc, with the outlook accorded as stable.
According to Moody’s affiliate, the ratings of International Breweries Plc balance its strong market position and ongoing parental support, against persistent operating losses and high gearing.
During the financial year 2021, the company consolidated its position as one of the leading local brewers, following the merger with AB InBev in 2017. The rating note reads that the higher production capacity has been complemented by product innovations, resulting in deeper market penetration and volume growth.
Accordingly, its market share has progressively increased to over 25%, GCR Rating said.
However, given the Company’s current strategy of expanding its footprint in the value segment, it has limited pricing flexibility amid higher input costs.
The Rating firm said IBPLC’s ability to sustain or further increase the recent gains and diversify its product portfolio towards more margin enhancing products would be positively considered.
GCR said it takes cognisance of the steady revenue growth over the review period, which peaked at N182.3 billion in 2021 from N136.8 billion in 2020, driven by higher traded volumes.
However, the rating note spotted that the earnings profile remains constrained by persistent operating losses, due to a combination of the high depreciation charges (related to returnable packaging materials) and imported inflation input costs driven by the continuous devaluation of the Naira.
Although the high depreciation is an industry-wide norm, IBPLC’s limited pricing flexibility to offset this is negatively viewed, the rating note added.
On the positive side, GCR Rating said the Company has generated robust operating cash flows over the review period, implying that the net losses have been driven by non-cash fair value adjustments.
Now, GCR anticipates that cash flows will be temporarily impacted by high working capital pressures in the financial year 2022 due to the repayment of outstanding supplier obligations.
The leverage and capital structure remain a negative rating factor, GCR stated.
It explained that in the financial year 2021, the brewer’s gross debt increased to N185 billion from N112 billion in the comparable period in 2020 due to an additional working capital loan of N60.2 billion from Access Bank.
Accordingly, net debt to earnings before interest tax depreciation and amortisation (EBITDA) weakened to 3.9x from 3.7x in 2020, but GCR expects this to moderate to the 2.0x – 2.3x range in the current year, on the back of planned debt repayments.
Similarly, it is noted that operating cash flow coverage of debt was impacted by the higher debt, narrowing the coverage to 29.3% in 2021 from 44.5% in 2020 and is expected to reduce further below 20% in 2022 as working capital pressures persist.
Conversely, net interest coverage is expected to remain strong in the 15x-20x range, underpinned by earnings growth and planned lower borrowings, GCR ratings added.
Moody’s affiliate has also positively considered the improved debt maturity profile of the Company, following the refinancing of the Citi bank facility in 2021.
It said the liquidity profile is a positive rating factor, underpinned by sources versus uses liquidity coverage estimated at above 2x over a 12-month period to 2022.
“This is predicated on the substantial undrawn revolving committed facilities from commercial banks, about N60bn in cash holdings and call deposits of N73 billion.
“This will be sufficient to meet the imminent debt redemption of N64 billion. No investment commitments or dividend payments are anticipated over the outlook period”.
GCR said it has also factored strong group support into the ratings of IBPLC, demonstrated by ongoing operational, technical, and financial support.
In this regard, the rating firm believes the Company is well integrated into the broader AB InBev group, with key management seconded to it, to support operational improvements.
More importantly, AB InBev provided additional funds of N124 billion or USD341 million to take up additional shares in the rights issue programme concluded in 2020 and fully guarantees a significant proportion of IB Plc.’s existing debt obligation (excluding leases) with its bank lenders.
The rating said the stable outlook reflects its view that IBPLC will sustain the recent improvement in market share, thus generating sound earnings and cash flows. Gearing metrics are also anticipated to moderate on planned debt repayments, it added.
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