August 8, 2023/Fitch Ratings
Fitch Ratings has affirmed Dangote Industries Limited’s (DIL) National Long-Term Rating at ‘AA (nga)’ with a Stable Outlook. Fitch has also affirmed the senior unsecured notes issued by Dangote Industries Funding Plc at ‘AA (nga)’.
The rating reflects DIL’s strong business profile, supported by its profitable main operating companies including Dangote Cement Plc and Dangote Sugar Refinery Plc, with entrenched market positions across Africa, and strategic importance to the economy.
The Stable Outlook reflects our expectation that DIL will be able to deleverage and improve the overall financial profile by ramping up production and generating material cash flows from its fertiliser and refinery businesses. In addition, we expect that further diversified revenue streams will improve earnings stability.
Key Rating Drivers
Oil Refinery at Critical Stage: Fitch expects the oil refining project to be commissioned by October 2023 with minimal cost overruns. Fitch understands that the majority of the refined products will be exported, despite the high dependence of the domestic market on imported refined fuel. The majority of the refinery’s 450,000 barrels per day crude oil requirement will be sourced through related party Nigerian National Petroleum Corporation (NNPC) and other international suppliers. An inability to source sufficient levels of crude domestically would dampen production capacity.
Gradual Increase in Urea Production: Dangote’s fertiliser business operates a natural gas based granulated urea fertiliser manufacturing plants. Operations started in 2021 for Line 1 and in 2022 for Line 2. Despite having long-term contracts with local suppliers, gas pressure and supply interruption led to low utilisation rates of 32% in 2022, with the expectation of gradual improvement to 72% by 2025 and a urea production capacity of 2,000 thousand tonnes (kt). Sale of urea will be mostly geared towards exports to Africa, North America and LatAm, targeting 75% of production, with the balance to be sold locally.
Established Cement Operations: Fitch expects EBITDA margins from cement to slightly drop to 44% in 2023 from 49% previously, partially due to rising commodity prices. The company is focused on a continued export strategy, with 1.58 million tonnes (mt) of cement and clinker exported to African markets. The company has a combined cement production capacity of 51,600 kt from its factories across seven African countries. Nigeria is the largest contributor with a production volume of 17,786 KTPA in 2022. Despite a 5% dip in 2022 sales volumes, mainly in its Nigerian operations, we expect strong sales momentum for 2023, supported by growth of the pan-African operations.
EBITDA Mix Improving: Cement is the sole major contributor to consolidated EBITDA at an estimated 72% and 77% for 2022 and 2023, respectively. Additionally, 17% was generated from the fertiliser business in 2022, with the remaining 11% attributed to the food business. Once the oil refining business is commissioned, we expect a significant contribution from oil, averaging 35% of EBITDA in 2024.
Capex Pressure Easing, Negative FCF: Fitch expects continued free cash outflow reflecting the significant capital expenditure on projects such as urea plants and oil refineries having been made in 2020 and 2021. Fitch believes the capex intensity ratio will decrease to low single digits from 27% in 2022 over the forecast period. Negative free cash flow (FCF) is likely to persist until 2024, primarily due to working capital outflow to fund the purchase of crude oil.
Improving Financial Profile: Fitch expects DIL’s EBITDA gross leverage to further improve to 3.3x in 2023 from a high 7.2x in 2020. The company’s strong EBITDA generation helped improve its financial profile and reduce leverage. Financial flexibility remains weak in the wake of high interest rates and large FX exposures and ongoing free cash outflow.
Complex Group Structure: The company has significant related-party transactions. The structure is further complicated by the NNPC’s 20% stake in Dangote Oil Refining business and the reliance on NNPC for the supply of gas and crude oil to Dangote’s subsidiaries. The company also has significant person risk with Aliko Dangote the CEO and dominant shareholder.
Significant Prior-ranking Debt: The group has NGN1.9 trillion of prior-ranking obligations in the debt structure, raised on a secured basis at DIL and Dangote Cement levels. As of 3Q22, secured debt was NGN2.1 trillion, representing 64% of total debt. The senior unsecured notes issued in 2022 and 2023 of NGN300 billion are rated at the same level as DIL’s IDR under Fitch’s Recovery Rating Criteria. The company has outstanding shareholder loans of USD2.2 billion as at 3Q22 from Greenview received to finance working capital. The loans are subordinated in nature, with no fixed-term maturity and below market interest rates.
PSL Considerations: Greenview is DIL’s majority owner. Fitch applies its parent and subsidiary linkage to assess the strength of linkage between DIL and its parents. Overall, the links are strong supported by explicit guarantees from Greenview to DIL and a record of support via shareholder loans. Operational ties are moderate, given the conglomerate nature of the group. We assess the strategic incentives as high as DIL has operational control over the fertiliser and oil refining businesses and is the financing vehicle of the group. As a result, we equalise DIL’s rating with our credit assessment of Greenview.
Derivation Summary
DIL is a diversified conglomerate with a leading market share in building materials in Nigeria and a potential large player in the fertiliser and oil refinery markets in Nigeria and regionally. We apply the generic navigator to DIL’s consolidated profile. We also compared DIL’s business profile with its sector peers at a business segment level.
DIL’s business profile is broadly comparable with diversified conglomerate peers in LatAm, Votorantim SA (VSA, BBB-/Stable) and Alfa S.A.B. de C.V. (Alfa, BBB-/Stable). Both conglomerates have geographical and product diversification across industries such as building materials/cement, petrochemicals, oil & gas and mining (in the case of VSA). DIL’s business profile is weaker than VSA and Alfa due to meaningful diversification in LatAm and stable cash flow generation from consumer goods, compared with high exposure to cyclical commodity prices for DIL’s cement. DIL’s financial structure is weaker than peers but improving as construction of capital-intensive refinery facilities is at the final stages.
Key Assumptions
Fitch’s Key Assumptions Within Our Rating Case for the Issuer
– Cement business remains the largest contributor averaging NGN2.4 trillion EBITDA in 2023-2026;
– Urea plant line 1 and line 2 to gradually ramp up from 32% capacity utilisation in 2022 to 73% in 2026;
– Fitch urea price deck assumptions: urea FOB Black Sea USD300/tonne in 2023; USD270/tonne in 2024; USD270/tonne in 2025-2026;
– Urea plant’s EBITDA margin averaging 65% in 2023-2026;
– Group’s consolidated EBITDA margin decreasing from 45% in 2022 to 25.8% in 2023 due to initiation of refinery operations;
– Oil refinery to start production in October 2023 with an average gross refining margin of USD10/barrel but gradually decrease and reach USD8/barrel in 2026;
– Lower capex, primarily for maintenance, averaging NGN0.2 trillion in 2023-2026 after completion of refinery facilities in October 2023.
– No dividend payments to shareholder until 2025.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
– Improvement in DIL’s operational and financial profiles, leading to gross debt/ EBITDA below 4.0x
– Sustainable positive FCF generation
– Sufficient liquidity with sustained liquidity score above 1x
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
– Sustained deterioration in operational performance across DIL’s businesses, leading to gross debt/EBITDA consistently above 5x
– Further weakening of liquidity position
– Delayed commissioning of the refinery project by more than a year coupled with significant capex overrun
– Sustained negative FCF generation after commissioning of the refinery
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Liquidity and Debt Structure
Tight Liquidity: DIL’s liquidity score is at 1.1x with estimated total external group debt of NGN3.5 trillion for 2023. DIL had no availability under revolving credit facilities as of September 2022 but refinancing risk is relieved by its proven access to the local banking liquidity and domestic capital market in the past years. DIL has no significant maturities until 2026. Once the oil refinery starts generating meaningful levels of cash flow from 2024, FCF will improve. We expect FCF to remain negative due to large working capital requirements until 2025.
Issuer Profile
DIL 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 businesses. 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.
ESG Considerations
DIL has an ESG Relevance Score of ‘4’ for group structure due to complex group structure, limited transparency, and significant related-party transactions. It also scores ‘4’ for governance structure due to a lack of board independence and key person risk from the dominant shareholder Mr. Dangote. These factors have a negative impact on DIL’s credit profile and are relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.