Omnia : GCR affirms Omnia Holdings Limited's rating of A-(ZA); Outlook Stable.

Johannesburg, 16 August 2016 - Global Credit Ratings has today affirmed the national scale debt ratings for Omnia Holdings Limited of A- and A1- in the long term and short term respectively; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings ('GCR') has accorded the above credit rating(s) to Omnia Holdings Limited based on the following key criteria:

Omnia has an established position as a leading regional producer and supplier of fertilizers, mining explosives and industrial chemicals. This position is supported by a vertically integrated operating model, ample production capacity, as well as the Group's continually evolving, client-focused products and solutions across all its business units.

While Omnia is exposed to the weak agriculture and mining sectors, its specialised product offering and active customer engagement sustained largely stable agriculture volumes in SA despite the drought. The positive offset across business units partially mitigated downward pressure from subdued commodity prices and the volatile Rand. Thus, management's ability to sustain turnover at R16.8bn in an especially tough operating environment further emphasised strong execution through the cycle, and is positively noted. Nevertheless, the gross margin fell to 20.3% in F16 (F15: 23.4%), mainly due to pricing pressures in the Mining division and the inverted ammonia: urea ratio. Despite this, and non-cash restructuring costs, the decline in the operating margin was contained to two percentage points, to 7.6% in F16, translating to an 18% decrease in operating profit to R1.3bn. F17 is expected to see a correction in nearly all divisional margins, supporting further traction in earnings.

Cash generated by operations rose by 11% to a new high of R2bn, in F16, reflecting the inherently defensive nature of the underlying businesses. The Group unwound the anomalous F15 absorption, due to the higher fertilizer inventory at FYE15, which contributed to a nearly threefold increase in operating cash flow to R1.9bn in F16. Furthermore, the strong F16 cash flows were used to pay down debt, which was reduced to a new low of R344m (and R228m net cash position). As such, the Group closed F16 in an ungeared position. With most of Omnia's expansionary capex near completion, debt levels are not likely to change materially. While interest cover moderated to new lows, F17 will see a significant correction, given the markedly reduced debt. GCR also noted the substantial cash coverage of gross debt of in F16, from just previously.

The persistence of largely exogenous operational challenges could curtail Omnia's ability to achieve targeted margins and cash flows. Comfort is however, taken from ample untapped facilities and the virtually ungeared balance sheet, which could support potential acquisitions without unduly elevating funding pressures.

While the uncertain operating environment is a constraint on the ratings, positive rating action would be driven by operating efficiencies derived from the nitric acid plant, leading to sustained growth in operating profit and strong cash flows. Conversely, the rating could come under pressure if unexpected commodity price volatility materialises, necessitating increased short term debt to fund working capital requirements, and thereby increases gearing metrics materially.

NATIONAL SCALE RATINGS HISTORY

Initial rating (March 2009)
Long term: BBB+; Short term: A2
Outlook: Stable

Last rating (July 2015)
Long term: A-; Short term A1-
Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Farai Mauchaza
Analyst
(011) 784-1771
faraim@globalratings.net

Committee Chairperson
Eyal Shevel
Sector Head: Corporate and Public Sector Ratings
(011) 784-1771
shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2016
Omnia Holdings Limited Rating Reports 2009-2015

RATING LIMITATIONS AND DISCLAIMERS

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SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Omnia Holdings Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Omnia Holdings Limited with no contestation of the rating.

The information received from Omnia Group Limited and other reliable third parties to accord the credit rating(s) included:

• Audited financial results of Omnia per 31 March 2016 (plus four years of comparative numbers);
• Results presentation booklet for financial year end 31 March 2016;
• A breakdown of facilities available and related counterparties;
• Corporate governance and enterprise risk framework;

The ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.