June 14, 2021/GCR Ratings

GCR Ratings (“GCR”) has affirmed the national scale long and short-term Issuer ratings of BBB+_(NG) and A2_(NG) respectively, assigned to Fidson Healthcare Plc, with the Outlook revised to Positive.

Rating Rationale

Supporting the ratings, Fidson Healthcare Plc (“Fidson” or “the Company”) maintains a strong competitive position in the Nigerian pharmaceutical industry supported by a well-diversified products portfolio with significant market shares in several key product categories, wide distribution footprints, and relationships with reputable vendors. These have supported sound earnings trajectory through the cycle and underpinned sustained moderation in the leverage metrics. However, the ratings are constrained by weak liquidity coverage and further expected increases in debt.

Earnings constitute a key ratings strength, with strong revenue growth over the review period (FY20: 30%). Having reported a further annualised 38% increase in 1Q FY21, GCR expects robust growth to be achieved for the full year, given the anticipated commencement of various scheduled manufacturing contracts and the generally higher weighting of sales to the second half of the year. Combined with planned capacity expansion and the pipeline of additional products, GCR believes that the sound progression will be sustained over the medium term.

The EBITDA margin has remained sound between 19% and 22% over the review period, in line with industry average. While there was a deeper cut in 2018 due to imported inflation on Active Pharmaceutical Ingredients and high logistics costs, earnings have subsequently been ramped up through better cost oversight. Looking ahead, we expect that earning margins will remain within the historical range, as cost pressures will be partly passed on to the end consumers.

Continued working capital pressure remains a constraint to the ratings. The need to increase inventory to support expanding business volumes while mitigating against stock-out due to supply chain disruptions, has resulted in operating cash outflows, which have been funded by rising short term debt. GCR believes that cash absorptions will persist in line with the anticipated top line growth, but some respite may derive from anticipated lower interest payments and more robust cash generation. Accordingly, we expect interest coverage to strengthen to the 4x to 5.5x range, albeit still deemed weak; while operating cash flow coverage of debt should improve marginally to a low range of around 20% to 30% (relative to the single digit or negative level reported in recent years). However, should further earnings pressure manifest beyond expectation, this could negatively impact the current ratings.

This notwithstanding, the leverage profile is balanced by moderate levels of net debt to EBITDA, averaging 200% over the review period (190% in FY20). Despite the expectation for the continued increase in gross debt (from N11.1bn at FY20 to N14.2bn at FY21), we believe that the metric could reduce even further to around 100% to 130% if earnings targets are met. Given the relatively moderate debt level, we expect that even if earnings target misses by 10%-15%, gearing will still likely remain at conservative levels. GCR takes cognisance of the financial flexibility indicated by Fidson’s access to diverse funding sources including concessional debt (52% of total), local commercial banks and the capital market. Foreign currency exposure is also minimal with less than 30% of debt denominated in USD. Furthermore, the Company plans to issue new bonds to refinance existing obligations.

Fidson’s liquidity is its weakest ratings factor. This is attributable to the high short term debt and capex required within the next 12 months, with available cash resources and committed facilities from commercial banks barely covering liquidity uses. The Company is also highly exposed to the more volatile commercial paper market. However, GCR takes cognisance of the fact that, historically, Fidson has successfully issued (and fully redeemed) bonds and now plans to utilise part of the proposed bond proceeds to refinance the maturing obligations. Furthermore, should the bond issuance fail, we believe that Fidson could leverage its strong banking relationships to meet liquidity needs. The short-term facilities are secured by an all-asset debenture on the fixed assets of the Company.

Outlook Statement

The Positive Outlook reflects GCR’s expectation of a likelihood for strong earnings growth over the medium term. Revenue appears well placed to post solid growth over the medium term, while there are some opportunities for margin enhancement through economies of scale and cost containment. Such earnings growth should support improved debt service coverage, even if gross debt increases.

Rating Triggers

Positive rating action could emanate if Fidson attains or exceeds earnings targets. This would support firmer cash flows and reduce its reliance on short term debt funding, as well as support stronger debt service coverage. A meaningful extension of the debt maturity profile would also help ease liquidity concerns.

The ratings could be downgraded if 1) debt spike substantially even if due to expansion 2) the Company is unable to refinance its short-term debt or the portion of short term debt rises further 3) there are material cost overruns that impact the attainment of earnings targets and increase the recourse to working capital funding.