Dawood Hercules Corporation Limited | Sukuk: PACRA Rating Report

Transcription

1. The Pakistan Credit Rating Agency Limited Rating Report Report Contents Dawood Hercules Corporation Limited | Sukuk Dissemination Date 28-Jun-2019 28-Dec-2018 28-Jun-2018 19-Oct-2017 Long Term Rating AA AA AA AA Rating History Short Term Rating - 1. Rating Analysis 2. Financial Information 3. Rating Scale 4. Regulatory and Supplementary Disclosure Outlook Stable Stable Stable Stable Action Maintain Maintain Initial Preliminary Rating Watch - Rating Rationale and Key Rating Drivers The ratings reflect Dawood Hercules Corporation Limited's (DH Corp) strong profile as an InvestCo holding significant investments through it's subsidiary Engro Corp. Divestment in Hub Power Company Limited at healthy gains has led to accumulation of sizeable liquid funds. The Company continues to hold these funds in money market instruments and has recently started investing in blue chip market securities indicating very strong liquidity. DH Corp is exploring new investments avenues to add to its portfolio including those in the technology sector. Meanwhile, DH Corp is expected to have a steady and increasing dividend stream from it's subsidiary, Engro Corp, which has announced a new investment of up to PKR 7.5bln in the telecom sector in April'19 through Enfrashare, a wholly owned subsidiary of Engro Infiniti. Further, Engro Energy Limited have also announced significant investments in the energy sector. The business acumen of the sponsoring family and strong governance practices provide support to the ratings. The ratings require upholding strong overall risk profile and prudent investment policy by the Company. DH Corp enjoys sizeable liquid funds from divestment in HUBCO, giving it ample liquidity and cushion for debt servicing. At the same time, the management's commitment to maintain existing debt levels and coverages would be critical. Disclosure Powered by TCPDF (www.tcpdf.org) Name of Rated Entity Dawood Hercules Corporation Limited | Sukuk Type of Relationship Solicited Purpose of the Rating Debt Instrument Rating Applicable Criteria Methodology | Corporate Ratings(Jun-18),Methodology | Sukuk(Jun-18),Methodology | Debt Instrument(Jun-18),Methodology | Criteria | Rating Modifier(Jun-18),Methodology | Holding Company (Jun-18) Related Research Sector Study | Holding Company(Aug-18) Rating Analysts Silwat Malik | silwat.malik@pacra.com | +92-42-35869504
2. Holding Company The Pakistan Credit Rating Agency Limited Profile Legal Structure Dawood Hercules Corporation Limited is a public limited company listed on the Pakistan Stock Exchange . Background The Company was incorporated in Pakistan on April 17, 1968 under the Companies Act, 1913 (now Companies Act, 2017) as Dawood Hercules Chemicals Limited. As a result of restructuring in January 2011, Dawood Hercules Chemicals Limited demerged its fertilizer operations by establishing a wholly owned subsidiary – DH Fertilizers Limited. As a result Dawood Hercules Chemicals Limited was renamed to Dawood Hercules Corporation Limited. Operations The principal activity of the Company is to manage investments including in its subsidiary and associated companies. The group’s business portfolio spans across various sectors including chemical fertilizers, PVC, food, power generation, coal mining and LNG storage. The registered office of the Company is in Karachi. Ownership Ownership Structure As at Apr'19, Dawood Group (Dawood Family and associates) holds 34% stake in DH Corp through its’ corporate entities (20%) and individuals (14%). Other related foreign companies hold 54% shareholding in DH Corp, 9% is held by corporate and financial institutions whereas 3% is held by general public. Stability Ownership of the business is seen as stable as the major ownership vests with the sponsors i.e. Dawood Family. Business Acumen DH Group is a conglomerate with over three generations of experience in commercial and social enterprises. Currently, the Group has interests in various sectors of the economy including Fertilizers, Foods, Power Generation, Technology, Financial Services, Chemical Storage, and Petrochemicals. Strong affiliation and technical track record with international JVs have added to the success of the companies within the Group. Financial Strength Dawood Group’s main holding companies are DH Corp and Dawood Lawrencepur Limited. The Groups’ main investments in Engro Corp are consolidated in DH Corp while investments in energy sector are consolidated in Dawood Lawrencepur Limited. In addition, the Group's businesses include Cyan Limited (a listed entity, engaged in making equity investments in companies with high growth potential). DH Corp has a strong consolidated asset base of ~ PKR435bln supported by an equity base of ~ PKR 208bln as at Mar'19. Consolidated Revenue stood at ~ PKR 171bln for CY18 (~PKR 40bln: 3MCY19). Governance Board Structure BoD has ten members. All except the CEO are non- executive. It has four members from the Dawood family and two independent directors. Members’ Profile The Board is chaired by Mr Hussain Dawood, the patriarch of Dawood Family. He is a Pakistani businessman and philanthropist and chairs an array of profit and not-for- profit ventures. All members are seasoned professionals with experiences in energy, chemical, technology and financial sectors, bringing a diverse range of requisite skills to the BoD. Board Effectiveness Board has three committees to assist the Board in governing the affairs of the Company. These comprise: a) Human Resource & Remuneration Committee, b) Board Audit Committee, and c) Board Investment Committee. The Board met eight times during CY18 with an average attendance of ~80%. The audit committee met four times during the year, while the Human Resource and Remuneration Committee met five times during the year, respectively. Financial Transparency DH Corp’s External Auditors are A.F. Ferguson & Co who have issued an unqualified auditor’s report on CY18 financial statements. Management Organizational Structure The Company operates through seven departments namely: a) Investment, b) Finance, c) Corporate affairs, d) Human Resource, e) Protocol and Services, f) Information Technology and g) Internal Audit. All department heads report directly to the CEO. The head of internal audit department reports administratively to the CEO and functionally to Board Audit Committee. Management Team Mr. Inam-Ur-Rehman, is serving as CEO since Dec ’16. Before joining DH Corp he held the position of CEO at Dawood Lawrencepur Limited, Reon Limited and Tenaga Generasi Limited. Mr. Muhammad Shamoon Chaudry joined as CFO in place of Mr. Shafiq Ahmed during CY18. He has a Masters in Finance from London Business School and a MBA from Lahore University of Management Sciences (LUMS). He has more than 25 years of progressive and varied experience in the financial sector. Effectiveness Key members of DH Corp's Board are also present on the Board of their investee companies that helps exercise greater oversight and control. MIS DH Corp generates a standardized quarterly MIS for its board members – Dashboard – which provides a structured breakdown of information on predetermined key indicators for the Company as a whole as well as each group entity individually. Control Environment DH Corp previously had outsourced its internal audit function to Ernst & Young Ford Rhodes Chartered Accountants. The Company now has an inhouse internal audit department headed by Certified Internal Control Auditor (CIA). Business Risk Holding companies are an emerging phenomena in Pakistan. Some operating companies that held strategic investments, for the purpose of diversification and growth, eventually de-merged from their operations and structured itself so that holding companies could concentrate their investments for the purpose of business growth and diversification. Relative Position DH Corp enjoys a sizable position in the universe of Holding Companies owing to it's subsidiary, Engro Corp. The subsidiary is engaged in various sectors of the economy. The fertilizer business is the second largest producer in it's sector in Pakistan. The PVC business is the sole producer of PVC in Pakistan, with 66% market share of domestic PVC demand. The dairy business is the market leader in Pakistan’s UHT market and number 2 dairy dessert brand serving over 12 million consumers. Company operates Pakistan’s first LNG receiving terminal, and a integrated bulk liquid chemical & LPG terminal. The energy side of the Company is operating Pakistan’s first 217MW power plant on permeate gas. The mining business in a JV with the Government of Sindh and CMEC, is developing Pakistan’s first open-pit coal mine. Revenues DH Corps’ topline comprises of dividend income from its investee company i.e Engro Corp. On a standalone basis, the topline for CY18 stood at PKR 4,353mln reflecting a decline of ~25% as against PKR 5,778mln for the same period last year. The trend continued during 3MCY19 to ~PKR 584mln compared to similar period last year (3MCY18:PKR 748mln). This decline is due to the lower dividends from Engro Corp and discontinuation of dividend stream from HUBCO post divestment in CY18. Margins Finance cost increased by ~80% amounting to PKR 883mln in CY18 (PKR 493mln: CY17) owing to increase in borrowings and interest rates. Other income supported the bottom line by PKR 5,020mln which includes profit from short term fixed income investments (PKR 1,477mln) and gain on disposal of HUBCO investment (PKR 3,542mln). Bottom line increased to ~PKR 6,053mln as at CY18 compared to PKR 3,852mln in CY17. Excluding the one time capital gain (net of tax), the profit was PKR 2,490mln. Bottom-line during 3MCY19 was lower at ~PKR 109mln (~PKR 3,848mln: 3MCY18) due to last year's one-off capital gains, higher finance costs and lower dividend income. Sustainability Going forward, the Company plans to explore further investment avenues for diversification and growth. It's subsidiary, Engro Corp has announced a new investment of up to PKR 7.5bln in the telecom sector in April'19 through Enfrashare, a wholly owned subsidiary of Engro Infiniti. Further, Engro Energy Limited has annouced investment in four solar power plants of 50MW each in Balochistan for $144mln. These plants are expected to achieve commercial operation date by June 2020. Industry Dynamics Financial Risk Working Capital The Company being a holding company has limited/ no working capital needs in line with it's operations. The Company holds sizeable liquid investment (~PKR 23bln) in the form of T-bills with no short term borrowings as at Mar'19. Coverages In line with the increase in leveraging, reduction in dividend streams , the Company’s interest coverage deteriorated from 9.3x in CY17 to 0.1x in 3MCY19. The Company holds sizeable liquid funds (~PKR 23bln) in the form of T-bills to service its debt obligations. Capitalization DH Corp has two sukuks of PKR 5.2bln and PKR 6bln for a period of five years, bringing its total debt to ~ PKR 11bln at end of Mar'19. These sukuks bear a 3MK+1% profit rate and will mature in Nov ’22 and Feb ’23, respectively. DH Corp | Sukuk II is exercisable via a Call option while Call option on DH Corp | Sukuk will trigger post Nov'19. The Company has witnessed an increasing leveraging since CY15. With the new sukuks, the ratio clocked in at 24% at end of Mar'19 up from 16% in Dec ’17. The Company maintains a moderate level of leveraging. Dawood Hercules Corporation Limited | Sukuk Rating Report Jun-19 www.PACRA.com
3. Holding Company Financials (Summary) The Pakistan Credit Rating Agency Limited PKR mln Dawood Hercules Corporation Limited (DH Corp) BALANCE SHEET 31-Mar-19 3M Un-Audited Accounts 31-Dec-18 Annual Audited Accounts 31-Dec-17 Annual Audited Accounts 31-Dec-16 Annual Audited Accounts Non-Current Assets Investments (Incl. associates) Equity Others Advance against Investment Current Assets Inventory Trade Receivables Others Total Assets 130 46,652 23,753 22,899 556 556 47,337 137 45,051 23,516 21,535 2,146 2,146 47,334 157 39,147 37,478 1,669 297 297 39,601 126 37,478 37,478 - Debt Short-term Long-term (Inlc. Current Maturity of long-term debt) Other short-term liabilities Other Long-term Liabilities Shareholder's Equity Total Liabilities & Equity 11,106 11,106 1,152 6 35,073 47,337 11,227 121 11,106 1,137 6 34,964 47,334 6,381 1,242 5,140 450 4 32,766 39,601 6,758 2,869 3,889 351 2 30,839 37,950 INCOME STATEMENT Turnover Gross Profit Other Income Financial Charges Net Income 347 347 37,950 603 448 3 (304) 109 4,353 3,343 5,020 (883) 6,054 5,779 5,287 2 (493) 3,852 7,422 6,675 12 (393) 5,470 Cashflow Statement Free Cashflow from Operations (FCFO) Net Cash changes in Working Capital Net Cash from Operating Activities Net Cash from InvestingActivities Net Cash from Financing Activities (245) 1,596 1,057 341 (1) (2,354) 222 (2,955) 23,596 2,104 4,589 (111) 3,980 (1,729) (681) 5,873 (152) 5,328 (9) (6,041) Ratio Analysis Performance Turnover Growth Gross Margin Net Margin ROE -7.1% 74.4% 18.1% 1.2% -24.7% 76.8% 139.1% 17.0% -22.1% 91.5% 66.7% 11.6% -66.2% 89.9% 73.7% 17.3% Capital Structure (Total Debt/Total Debt+Equity) 24.0% 24.3% 16.3% 18.0% Dawood Hercules Corporation Limited (DHCL) Jun-19 www.pacra.com
4.        DEBT INSTRUMENT RATING SCALE & DEFINITIONS The instrument rating reflects forward-looking opinion on credit worthiness of underlying debt instrument; more specifically it covers relative ability to honor financial obligations. The primary factor being captured on the rating scale is relative likelihood of default.   LONG TERM RATINGS   SHORT TERM RATINGS AAA   Highest credit quality. Lowest expectation of credit risk. Indicate exceptionally strong capacity for timely payment of financial commitments.   AA+   Very high credit quality. Very low expectation of credit risk. Indicate very strong capacity for timely payment of financial commitments.   This capacity is not significantly vulnerable to foreseeable events.   AA   AA-   A+   A  A-   BBB+   BBB   BBB-   BB+   BB               A1+: The highest capacity for timely repayment. High credit quality. Low expectation of credit risk.   The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be vulnerable to changes in circumstances or in economic conditions.   A1:. A strong capacity for timely   repayment.   A2: A satisfactory capacity for timely repayment. This may be susceptible to adverse changes in business, economic, or financial conditions.   Good credit quality. Currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity.     Moderate risk. Possibility of credit risk developing.   There is a possibility of credit risk developing, particularly as a result of adverse economic or business changes over time; however, business or financial alternatives may be available to allow financial commitments to be met.   A3: An adequate capacity for timely repayment. Such capacity is susceptible to adverse changes in business, economic, or financial conditions.   BB-   High credit risk.   A limited margin of safety remains against credit risk. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.   B+   B  B-   C: An inadequate capacity to ensure timely repayment.   CCC   CC C   D B: The capacity for timely repayment is more susceptible to adverse changes in business, economic, or financial conditions.     Very high credit risk. Substantial credit risk   “CCC” Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. “CC” Rating indicates that default of some kind appears probable. “C” Ratings signal imminent default.   Obligations are currently in default.     Outlook (Stable, Positive, Negative,   Developing)   Indicates the potential and direction of a rating over the intermediate term in response to trends in economic and/or fundamental business/financial conditions. It is not necessarily a precursor to a rating change. ‘Stable’ outlook means a rating is not likely to change. ‘Positive’ means it may be raised. ‘Negative’ means it may be lowered. Where the trends have conflicting elements, the outlook may be described as ‘Developing’.     Rating Watch   Alerts to the possibility of a rating change subsequent to, or in anticipation of, a) some material identifiable event and/or b) deviation from expected trend. But it does not mean that a rating change is inevitable. A watch should be resolved within foreseeable future, but may continue if underlying circumstances are not settled. Rating Watch may accompany Outlook of the respective opinion.   Suspension   It is not possible to update an opinion due to lack of requisite information. Opinion should be resumed in foreseeable future. However, if this does not happen within six (6) months, the rating should be considered withdrawn.     Withdrawn   A rating is withdrawn on a) termination of rating mandate, b) the debt instrument is redeemed, c) the rating remains suspended for six months, d) the entity/issuer defaults., or/and e) PACRA finds it impractical to surveill the opinion due to lack of   requisite information   Disclaimer: PACRA's ratings are an assessment of the credit standing of an entitiy/issue in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors. PACRA's opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.  
5. Regulatory and Supplementary Disclosure (Credit Rating Companies Regulations,2016) Rating Team Statements (1) Rating is just an opinion about the creditworthiness of the entity and does not constitute recommendation to buy, hold or sell any security of the entity rated or to buy, hold or sell the security rated, as the case may be | Chapter III; 14-3-(x) 2) Conflict of Interest i. The Rating Team or any of their family members have no interest in this rating | Chapter III; 12-2-(j) ii. PACRA, the analysts involved in the rating process and members of its rating committee, and their family members, do not have any conflict of interest relating to the rating done by them | Chapter III; 12-2-(e) & (k) iii. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)] Explanation: for the purpose of above clause, the term “family members” shall include only those family members who are dependent on the analyst and members of the rating committee Restrictions (3) No director, officer or employee of PACRA communicates the information, acquired by him for use for rating purposes, to any other person except where required under law to do so. | Chapter III; 10-(5) (4) PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during business relationship with the customer | Chapter III; 10-7-(d) (5) PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of entity subject to rating | Chapter III; 10-7-(k) Conduct of Business (6) PACRA fulfills its obligations in a fair, efficient, transparent and ethical manner and renders high standards of services in performing its functions and obligations; | Chapter III; 11-A-(a) (7) PACRA uses due care in preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verifies or validates information received in the rating process or in preparing this Rating Report. (8) PACRA prohibits its employees and analysts from soliciting money, gifts or favors from anyone with whom PACRA conducts business | Chapter III; 11-A-(q) (9) PACRA ensures before commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest; | Chapter III; 11-A-(r) (10) PACRA maintains principal of integrity in seeking rating business | Chapter III; 11-A-(u) (11) PACRA promptly investigates, in the event of a misconduct or a breach of the policies, procedures and controls, and takes appropriate steps to rectify any weaknesses to prevent any recurrence along with suitable punitive action against the responsible employee(s) | Chapter III; 11-B-(m) Independence & Conflict of interest (12) PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has no influence on PACRA´s opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity and independence of its ratings. Our relationship is governed by two distinct mandates i) rating mandate - signed with the entity being rated or issuer of the debt instrument, and fee mandate - signed with the payer, which can be different from the entity (13) PACRA does not provide consultancy/advisory services or other services to any of its customers or to any of its customers’ associated companies and associated undertakings that is being rated or has been rated by it during the preceding three years unless it has adequate mechanism in place ensuring that provision of such services does not lead to a conflict of interest situation with its rating activities; | Chapter III; 12-2-(d) (14) PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA; | Reference Chapter III; 12-2-(f) (15) PACRA ensures that the rating assigned to an entity or instrument is not be affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship | Chapter III; 12-2-(i) (16) PACRA ensures that the analysts or any of their family members shall not buy or sell or engage in any transaction in any security which falls in the analyst’s area of primary analytical responsibility. This clause shall, however, not be applicable on investment in securities through collective investment schemes. | Chapter III; 12-2-(l) (17) PACRA has established policies and procedure governing investments and trading in securities by its employees and for monitoring the same to prevent insider trading, market manipulation or any other market abuse | Chapter III; 11-B-(g) Monitoring and review (18) PACRA monitors all the outstanding ratings continuously and any potential change therein due to any event associated with the issuer, the security arrangement, the industry etc., is disseminated to the market, immediately and in effective manner, after appropriate consultation with the entity/issuer; | Chapter III | 18-(a) (19) PACRA reviews all the outstanding ratings on semi-annual basis or as and when required by any creditor or upon the occurrence of such an event which requires to do so; | Chapter III | 18-(b) (20) PACRA initiates immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating; | Chapter III | 18-(c) (21) PACRA engages with the issuer and the debt securities trustee, to remain updated on all information pertaining to the rating of the entity/instrument; | Chapter III | 18-(d) Probability of Default (22) PACRA´s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e, probability). PACRA´s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA´s Transition Study available at our website. (www.pacra.com). However, actual transition of rating may not follow the pattern observed in the past | Chapter III | 14-(f-VII) Proprietary Information (23) All information contained herein is considered proprietary by PACRA. Hence, none of the information in this document can be copied or, otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s prior written consent Powered by TCPDF (www.tcpdf.org)
6. Regulatory and Supplementary Disclosure Name of Issure Name of Issue Sector Type of Relationship Dawood Hercules Corporation Limited Dawood Hercules Corporation Limited | Sukuk 1 Holding Company Solicited Purpose of the Rating Independent Risk Assessment Name of Issuer Placement Issue size Issue Date Tenor Maturity Profit Rate Principal Repayment Nature of Instrument|Sukuk Dawood Hercules Corporation Limited Over the counter listed securities, issued to qualified institutional buyers through private placements PKR 5.2bln 16-Nov-17 5 yrs including a 15 month grace period 15-Nov-22 3MK + 1% (Quarterly in Arrears) 8 step-up semi-annual payments in arrears Exercisable in full at any time after two (2) years of the Issue Date on a profit payment date, subject to a 30 days’ notice; Call Option Security • Pledge of shares of Engro Corporation Limited, inclusive of 50% margin, in a designated CDC account. In the event of any sale and repurchase of security. • Floating or Hypothecation charge on all present and future assets of the Company inclusive of a 25% margin. Market Value Trustee PKR 10,931,555,692/- (As at 31-May-2019) JS Bank Limited Dawood Hercules Corporation Limited | Sukuk| Redemption Schedule Principal Repayment PKR in mln Opening Principal 5,200 5,200 4,680 4,680 4,160 4,160 3,640 3,640 3,120 3,120 2,600 2,600 2,080 2,080 1,040 1,040 520 520 520 520 520 520 1,040 1,040 Markup Payment Markup Due Date 15-Feb-19 17-May-19 16-Aug-19 16-Nov-19 15-Feb-20 16-May-20 15-Aug-20 15-Nov-20 14-Feb-21 16-May-21 15-Aug-21 15-Nov-21 14-Feb-22 16-May-22 15-Aug-22 15-Nov-22 Rate 11.5% 11.5% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 150 150 163 163 145 145 127 127 109 109 91 91 73 73 36 36 Installment Payable PKR in mln 150 670 163 683 145 665 127 647 109 629 91 611 73 1,113 36 1,076 Principal Outstanding 5,200 5,200 4,680 4,680 4,160 4,160 3,640 3,640 3,120 3,120 2,600 2,600 2,080 2,080 1,040 1,040 -