THUR, 11 AUG, 2022-theGBJournal| Fitch Ratings has assigned Dangote Industries Limited’s, (DIL) senior unsecured notes, issued by DIL’s SPV, Dangote Industries Funding Plc, a final National Rating of ‘AA(nga)’, and also affirmed its National Long-Term Rating of ‘AA(nga)’ with Stable Outlook.
The notes are issued under DIL’s existing national bond programme of N300 billion, comprising tranche A and B amounting to N10.47 billion and N177.12 billion with seven, and 10-year maturities, respectively. The tranches were issued on the Nigerian local bond market with semi-annual coupons of 12.75% (A) and 13.5% (B).
The bonds’ final terms are in line with Fitch’s base-case assumptions. The proceeds are being used to part-finance the completion of DIL’s refinery and petrochemical plants. Dangote Oil Refining Company Limited (DORC) and Dangote Fertiliser Limited (DFL), DIL’s subsidiaries, are co-obligors under the bond programme.
DIL, rated on Fitch’s Nigerian National Rating scale, is a diversified conglomerate in Nigeria with a leading share in the cement business and a future key operator in the petrochemical industry through its fertiliser and oil refinery business.
Its strategy is to gradually establish a downstream industry in Nigeria and be the largest urea producer in Nigeria. It also aims to make Nigeria a net exporter of refined petroleum products and petrochemicals by 2026.
Dangote Cement (DCP) is a significant contributor to DIL’s consolidated profile. The company is supported by large-scale operations in Nigeria and pan-Africa.
‘’In 2020, DCP’s EBITDA contribution to DIL stood at 93%, which we forecast to remain high until 2022 when contributions from the fertiliser business increase,’’ Fitch said.
DIL cement business recorded significant recovery in sales volume due to increases in prices and demand across DCP’s main markets. Revenues rose 34% yoy in 2021 on growth in Nigeria and pan-Africa, despite volatility in landing cost of cement and clinker.
EBITDA in 2021 increased 9% to USD1 billion (24% in local currency). Additionally, the company’s export strategy is expected to ramp up, which could lead to sizeable volume sales.
DIL’s urea plant was commissioned in 2021 following delays, with a 25% utilisation rate of line 1 in 2021 and 0% in line 2. Both lines were fully operational as of May 2022. Gas compressor issues and, as a result, low pressure of gas supplied to the plant were the main factors behind the delay, along with a delay in obtaining regulatory approvals. Gas pressure has recovered in 2022, and management have conservatively assumed utilisation rates for the respective lines to increase to 55% and 50% in 2022, 65% in 2023 and 82% by 2025.
DIL’s refinery project is also on track to be completed by 2023, and requires an additional USD1.1 billion capex in 2022 to be partly funded by the newly issued bonds.
‘’Considering the importance of the refinery’s cash flow contribution to the company’s deleveraging capacity, the timely completion of the project is a key driver of our rating, and only limited delays or cost overruns may be tolerated within the current rating,’’ Fitch noted.
The refinery project is expected to sustain strong margins and yield solid cash generation, adding diversification to DIL’s profile and allowing rapid deleveraging. Once operational, we expect this project to contribute around USD1 billion to EBITDA annually when ramped up from 2024.
Key Assumptions
– Cement business to average USD1.1 billion p.a. in EBITDA contribution in 2022-2025
– Urea plant line 1 to gradually ramp up to an average 60% capacity utilisation in 2022-2023 and to around 80% by 2025, from 25% in 2021. Line 2 to start production in April 2022 to around 80% capacity rate by 2025 from 50% in 2022
– Fitch urea price deck assumptions: FOB Black Sea USD500/tonne in 2022; USD300/tonne in 2023; and USD250/tonne in 2024-2025
– Urea plant’s 66% EBITDA margin in 2022-2025, increasing consolidated EBITDA margin to 39% in 2022 from 37% in 2021
– Oil refinery to start production in 2H23. Fitch conservatively assumes a six-month delay in production ramp-up versus management expectations, with an average gross refining margin of USD10/barrel
– Capex at USD1.38 billion in 2022
– No dividend payments until 2024 when net consolidated leverage is below 1.5x. Dividend pay-out to equal 90% of net income in 2024
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