Sunday 12, November 2017 by Matthew Amlôt

Moody's downgrades Dangote Cement Plc's rating to B1

Moody's Investors Service, has downgraded Dangote Cement Plc's (DCP) corporate family rating (CFR) to B1 from Ba3. At the same time Dangote Cement 's probability of default rating was downgraded to B1-PD from Ba3-PD. The company's national scale rating (NSR) remains unaffected at The outlook on the ratings is stable.

"We have downgraded Dangote Cement because it is not totally immune from Nigeria's continuing economic challenges which the country's government has been slow in responding to," says Douglas Rowlings, Vice President -- Senior Analyst and lead analyst for Dangote Cement Plc at Moody's.

"But Dangote Cement's rating is one notch above the Nigerian sovereign's to reflect its resilient and strong credit profile and management's continuing success in navigating Nigeria's tough operating environment," added Mr. Rowlings.

Dangote Cement's B1 CFR, one notch above the Government of Nigeria's B2 rating considers the company's stronger intrinsic credit quality balanced against the meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level. The CFR also reflects the track record of demonstrated financial support from a larger and more diversified parent, Dangote Industries Limited (DIL). This affords additional parent level financial strength by being part of a broader diversified group of companies under the DIL umbrella.

Dangote Cement has a very strong credit profile, and would likely be rated higher without its linkage with Nigeria, in part because of its leverage which registered 1.3x gross debt/EBITDA for the last twelve months ended 30 September 2017. This is significantly low relative to global peers, even those rated investment grade. The strong standalone profile also incorporates 1) high operating margins trending above 50 per cent;

(2) high interest coverage as measured by EBIT/interest expense trending above 8x over the next 18 months; and (3) conservative funding policies with debt funding matched to the currency of cash flow generation and prudent financial policies which will ensure sustenance of strong credit metrics through operating and project build cycles.

Furthermore Dangote's sales and margins continue to benefit from the ongoing activity in the Nigerian economy. Nevertheless Dangote remains at this stage strongly linked to Nigeria and its economy, with 89 per cent of its EBITDA anchored in the country for the nine months ended 30 September 2017.

Its investments in new plant capacity in other sub Saharan countries will provide more diversification in future but it will take several years before there is a meaningful diversification of revenue, profits and cashflows away from the Nigerian economy. Pan-African volumes expected to reach 40 per cent of total sales volumes by 2020.

The ratings also factor in (1) the relatively small scale level of cement production when compared to global peers along with production of 23.6 million tonnes (mt) for the Financial Year Ended (FYE) 31 December 2016; and (2) a concentration of production in Nigeria, representing around 68 per cent of revenues for the FYE 2016.

DCP's ratings are further predicated upon (1) a continuing growing cement market share of 65 per cent in Nigeria as Africa's most populous country and its largest economy where GDP is expected to reset to growth levels of around 2.5 per cent in 2017 despite the ensuing low oil price environment; (2) protected domestic production in the various African markets in which it operates, given on-going restrictions on imports; and (3) competitive advantage brought about by an intention to always be the lowest cost cement producer in the markets where it operates, with a differentiated offering in Nigeria through access to low cost coal as an energy resource and a comprehensive fleet network.