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Omnia Credit rating of A-(ZA) affirmed with positive outlook



Global Credit Ratings has today affirmed the national scale ratings assigned to Omnia Holdings Limited of A-(ZA) and A1-(ZA) in the long and short term respectively; with the outlook retained as Positive.

RATING RATIONALE

Global Credit Ratings accorded the above credit ratings to Omnia Holdings Limited (“Omnia”) based on the following key criteria:

Omnia’s established position as a leading regional producer and supplier of fertilisers, mining explosives and industrial chemicals is underpinned by its substantial manufacturing capacity. This has been enhanced by a second, technologically advanced nitric acid plant, which is currently operating at around 75% capacity utilisation. Top line growth has been supported by burgeoning external demand for both fertilisers and explosives, against the backdrop of a weak Rand. This saw revenues rise by 21% to a new high of R16.3bn in F14. In view of constrained domestic economic activity, the growing regional footprint is expected to support volume growth until local demand (particularly from mining and manufacturing) rebounds.

Despite an unfavourable ammonia to urea ratio and disruptions to both the mining and agriculture businesses during the year, the operating margin was largely stable at 9.2% in F14 (F13: 9.4%), on the back of pass through pricing and continued cost rigour. Looking ahead, firmer margins are expected to be derived from further stability that should see a ramp up in production, and enhanced efficiencies. Operations are nonetheless susceptible to volatile commodity prices, whose impact is exacerbated by exchange rate fluctuations. While the geographic expansion is positively viewed, note is taken of the investment and capital risk associated therewith.

Robust cash generation has been underlined by the strong earnings achieved in recent years. Coupled with modest working capital absorptions, this saw operating cash flow rise by 22% to a new high of R1.3bn in F14. It is, however, noted that intra-year working capital pressures (which tend to peak at the interim) have been exacerbated by continued depreciation of the Rand. Although Omnia retains sufficient funding facilities from a number of banks, management plans to focus on tightening working capital management to minimise interim liquidity pressures. With R3.7bn in capex funded internally, debt has been low over the 5-year review period, declining to R673m at FYE14 (FYE13: R834m). Accordingly, gross gearing reduced to 13% (FYE13: 19%), while gross debt to EBITDA registered at a 5-year low of 38% (F13: 56%). Net interest cover remained robust, albeit moderating to 13.2x (F13: 15.3x).

Upward rating pressure could derive from continued scale enhancement, supporting sound earnings growth and cash flows in the medium term, despite the challenging operating environment. In addition, well-paced expansion into the rest of Africa and the successful bedding down of new capacity, while maintaining moderate gearing levels, would be positively viewed. However, substantial commodity price and/or currency volatility would significantly elevate short term debt to fund working capital, thus increasing liquidity pressure and gearing metrics materially, placing downward pressure on the ratings.