GCR affirms ARM Cement's ratings, outlook Stable

Global Credit Ratings (GCR) has today affirmed the national scale ratings assigned to ARM Cement Ltd of A(KE) and A1(KE) in the long term and short term respectively. The outlook is Stable.

GCR said the Kenyan cement producer's well-entrenched position in the East African cement industry has been augmented by an aggressive roll-out of capacity in the past five years. With the completion of the Tanga plant in Tanzania later this year, ARM will secure clinker sufficiency in FY14/FY15, which is considered a major competitive advantage, the rating's agency added.

It also noted that ongoing capacity building has seen ARM’s top line increase at a compounded annual growth rate of 29 per cent over a five-year review period, bringing turnover to a high of KES14.2bn in FY13 (FY12: KES11.4bn). The prohibitive cost of clinker imports and pricing pressures in Kenya have, however, seen the operating margin trend down to a five-year low of 16 per cent in FY13 (F12: 20%; budget: 22%).

Stronger medium term margins are envisaged despite rising competitive pressures, to be underpinned by the completion of the Tanga integrated facility, earmarked for October 2014, (which will reduce imported cost inflation and enhance productive efficiency), GCR stated.

Debt uptake
The capex roll-out ha elevated operational and investment risk, and has seen debt more than treble to KES16.3bn at FYE13 (US$189m). As such, net gearing and net debt to EBITDA peaked at 186 per cent and 497 per cent, against targets of 143% and 263% respectively. Nevertheless, net interest cover reached a high of 4x in F13 (F12: 2.8x), while operating cash flows remained sound,.

ARM recently announced plans to raise US$300m for new projects, which would sharply increase debt and impair its credit risk profile unless it coincides with debt conversion, the redemption of maturing obligations and/or fresh capital injections. "Some comfort in this regard is drawn from the cash flow projections provided to GCR that reflect that an additional US$55m will be raised in the next three years, with a total of just over US$150m paid down or converted to equity," the report stated.

Responding to the GCR rating report, ARM deputy managing director Surendra Bhatia said the company is “looking at one long-term bond to replace all existing debts, but now we are looking at different structures.”

Rising competitive pressures
While long term industry prospects are positive, GCR takes not of rising competitive pressures as new entrants target East Africa. In addition to operational challenges stemming from capital constraints, inflationary pressures, high transportation costs and inadequate power supply, the region is phasing in new levies on cement, which will further erode producers’ competitiveness.