Fitch Assigns Zalagh Holdings B
(The following statement was released by the rating agency) LONDON/PARIS, October 13 (Fitch) Fitch Ratings has assigned Morocco based soft commodity trader canada goose clearance and animal feed and poultry producer Zalagh Holdings (Zalagh) a National Long Term Rating of ‘B+(mar)’. The Outlook is Stable. The rating reflects Zalagh’s leading position as a domestic commodity trader fully integrated in the animal feed industry and partially integrated in the meat production and processing industry. The rating is supported by the potential for sector growth and modernisation in Morocco, where meat consumption is low compared with international standards. However the rating is constrained by the business exposure to a single geographic market, dependence on local regulation and some vulnerability to raw materials’ price fluctuations despite Zalagh’s ability to lock in profit margins in its core segments of trading and animal feed business units, which represented 78% of reported EBITDA for 2013. We also recognise the entry of the IFC as minority shareholder in October 2013, and the related improvements in corporate governance compared with pre 2013 levels. With a forecast Readily Marketable Inventories (RMI) adjusted FFO gross leverage of 6.9x for 2014 canada goose outlet store locations (albeit expected to reduce over time), the capital structure is aggressive, reflecting Zalagh’s heavy planned investments in 2014 2016 in value added activities. The ratings are further constrained by the debt repayment commitments at Greenlight Holding SA, an entity controlled by the Chaouni family, who control 82% of Zalagh Holdings. KEY RATING DRIVERS Solid local market position despite competition: Zalagh has a strong position in the agri business in Morocco, and is unique in that it is fully integrated across the entire industry value chain. The group has relatively significant storage capacities spread throughout the country, allowing it to secure 22% of national imports of commodities. Competition is more acute canada goose replica in slaughtering and meat processing compared with commodity trading and animal feed; but its key competitors are not backward integrated into procurement and, hence are more exposed to raw materials and feed price volatility and sharp supply/demand imbalances in the poultry sector than Zalagh. This is, however, not sufficient to offset the small size of Zalagh in absolute terms relative to larger international peers. Positive market dynamics: The poultry market in Morocco has grown significantly over the last decade. This is a positive factor as meat producers (either internally within the group or externally) remain Zalagh’s prime client base. Yet poultry consumption Canada Goose Parka per capita remains low compared with other developing countries. However Fitch expects the supply/demand balance to remain unpredictable as production Canada Goose sale remains largely unorganised in Morocco. Also, any potential benefit from market growth is subject to local regulation changes in Canada Goose Online favour Canada Goose online of integrated poultry producers, which are yet to be tested. Improved profitability and scope for further margin enhancement: Zalagh had an EBITDAR/Gross Profit ratio (RMI adjusted) of 56% in 2013. This level of profitability is considered strong for the rating and higher than traditional commodity traders. It is supported by Zalagh’s bias towards animal feed and other value added categories. However, this measure is exposed to fluctuations based on capacity utilisation and the ability of management to maintain margins (that is, pricing power). In this regard we consider management’s plan to improve production efficiencies canada goose clearance sale and achieve additional cost savings and economies of scale as sensible. Given the group’s restructuring efforts aimed at more harmonised operations and functions Canada Goose Coats On Sale and our conservative forecasts of the impact of these efforts, we factor an RMI adjusted EBITDA margin increasing above 7% by 2016 (2013: 6.6%). High Capex expected; No significant deleveraging before 2016: We expect additional top line canada goose outlet toronto factory growth and profitability enhancement from expansion capex, particularly if regulation moves rapidly in favour of Zalagh. We note that such profitability enhancement should allow the group to start deleveraging from 2015. In our forecasts we assume Zalagh will receive around MAD180m cash VAT refund (butoir TVA) from the government next year, broadly matching next year’s capex funding needs. If this money is not received or is delayed and capex is debt funded we estimate an RMI adjusted FFO gross leverage of 6.2x (instead of 5.4x in our rating case). Such leverage remains commensurate with the assigned rating. FX mismatch in animal feed: Zalagh is considered a price taker in the international commodity markets that trade in US dollars, although it is largely price setter in animal feed domestically given its leading positions. The ability to lock in a desired margin upon feed mill producers placing their orders and low turnover ratio (average 38 days of sales in 2012 and13) are strong mitigating factors, if maintained. Transactional FX mismatch is expected to grow as Zalagh expands its feed operations domestically, but this is 2018 canada goose outlet mitigated by its proven pass through mechanisms, relatively buy canada goose jacket cheap stable track record of low volatility in MAD/USD exchange rate and the fact that most debt is borrowed in domestic currency. Moderately high liquidity risk: Zalagh has adequate liquidity in its core commodity trading canada goose coats on sale and animal feed businesses. However, liquidity is considered somewhat weaker at the consolidated level, dragged canada goose black friday sale by its downstream activities. Overall, the company’s Fitch defined unrestricted cash balance of MAD18m, estimated liquid inventories canada goose store and receivables (RMI) of MAD361m and undrawn revolving credit facilities (RCF) of MAD909m are just sufficient to cover short term debt of MAD1,347m as of end December buy canada goose jacket 2013. Excluding external cheap Canada Goose sources of liquidity, Zalagh’s “internal” liquidity as defined in Fitch’s Commodity Processing and Trading Companies Sector Credit Factor compendium (unrestricted cash+RMI+A/R divided by total current liabilities) is rather weak, hovering between 0.5x and 0.6x. Fitch expects free cash flow (FCF) to remain negative in 2014 my website due to high capex and liquidity to remain stretched. However, capex of MAD74m in 2014 and a similar amount in 2015 are scalable, introducing some flexibility in FCF. The rating also reflects Zalagh’s limited financial flexibility; however Zalagh may be contemplating accessing the domestic bond market to diversify its funding canada goose coats sources Canada Goose Jackets https://www.canadagooseoutletshop.co.uk/ and finance growth capex, which would help support its rating. Dividends, debt at Greenlight restrict financial flexibility: Debt borrowed at Greenlight Holding to acquire Zalagh’s own shares as part of the 2011 buyout canada goose creates, in our view, some pressure on Zalagh to upstream cash by way of dividends to service such indebtedness, even though such debt does not feature any cross default with Zalagh’s own indebtedness. This is balanced by the Chaouni family shareholders’ commitment to allocate their own share of dividends received, if necessary, to accelerate Greenlight’s debt repayment. As such we expect RMI adjusted FFO fixed charge cover (adjusted for the share of dividends paid by Zalagh used to service debt at Greenlight) of 1.4x for 2014 to rise to canada goose deals 1.7x in 2015 in line with the assigned rating. New shareholder IFC; Improved corporate governance: The rating factors in the support from IFC (a member of the World Bank) as a recent new shareholder in Zalagh. The rating also reflects its strengthened senior management canadian goose jacket team following the September 2011 buyout, the reinforced business functions, including IT, and executive sub committees put in place together with the appointment of two independent directors Canada Goose Outlet to the board. In addition management controls have been tightened. Zalagh’s limited disclosure is considered a weakness relative to listed companies, although it is in line with its privately held status. RATING SENSITIVITIES Positive: We see the probability of an upgrade as low in the foreseeable future given the small scale of the business relative to international Fitch rated peers and the execution risk to grow the business while enhancing profitability. However, future developments that could lead to a positive rating action include: FFO adjusted leverage below 6x (RMI adjusted FFO leverage below 5x) on a sustainable basis RMI adjusted FFO fixed charge cover (including dividends to cover Greenlight’s debt service) sustainably above 1.8x Strong profitability measured by operating EBITDAR/ gross profit (above 60%) on a consistent basis, or EBITDA margin exceeding 8%, suggesting stronger operating leverage from the majority of wholly owned operations and enhanced pricing power Evidence of positive FCF supported by a conservative business expansion or, if negative, funded largely by additional equity. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short Term Ratings and Parent and Subsidiary Linkage here National Scale Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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