S&P places Foodcorp ratings on watch negative

International ratings agency Standard & Poor's (S&P) has placed its 'B+' long-term corporate credit and 'B+' senior secured debt ratings on South African food manufacturer Foodcorp on CreditWatch with negative implications.

Foodcorp is South Africa's largest black owned food company and is a subsidiary of Pamodzi Investment Holdings. It is also the country's fourth largest food producer.

"The CreditWatch placement follows the announcement of disappointing results for the quarter ended November 2007, with evidence of material margin compression that will take some time to restore, together with indications that financial leverage is unlikely to be at levels consistent with the guideline for the ratings within the timeframe required," said S&P's credit analyst Philip Temme.

Foodcorp has been affected by a number of negative operating trends. Commodity prices for several key raw materials, including wheat, maize and sunflower oil - have risen substantially in the past year and Foodcorp has been unable to pass these input price increases on to customers in full, leading to a decline in EBITDA margins to a low of 8.5% in the quarter to November 2007, or 10.8% on a last-12-month basis, from previous levels closer to 12%.

Nola weaker

At the same time, growing competitive pressures, particularly from multinationals such as Nestle S.A. in the mayonnaise market, have resulted in weakness at the group's Nola division.

Margin compression is disappointing in view of the positive impact expected from the 2007 acquisition of 80% of First Lifestyle, which gave the group access to a wealthier clientele than hitherto, S&P said.

S&P added that South Africa's economy is meanwhile weakening off the back of 400 basis points of successive rises in the repo rate and growing pressures on manufacturers and on consumer confidence as a result of recent power cuts.

Foodcorp announced earlier this week that load-shedding by utility Eskom - would require it to divert up to one-third – or 50 million rand - of planned capital expenditure for 2007/2008 to fund the purchase of back-up generating equipment.

S&P added that Foodcorp is also the subject of an investigation by the South African Competition Commission into an alleged bread price-fixing cartel, which has already led that body to fine local market leader Tiger Brands 799 million rand.

"There are growing public pressures on the South African bread producers as a result of both recent price increases and the antitrust investigations. Regulatory risk is therefore a growing ratings concern," S&P said.

"Adjusted total debt to EBITDA was a high 8.1x at end-November, reflecting only a five-month contribution from FLS, and there are growing indications that the company will struggle to demonstrate progress toward achieving an adjusted debt-to-EBITDA ratio closer to 5x by Aug. 31, 2008, as required to maintain the ratings, despite a 160 million rand rights issue in September 2007," the ratings agency noted.

"We expect to resolve the CreditWatch within a few months after receiving further trading updates from the company," Temme added.

"In current market conditions, we anticipate that any potential downgrade would be limited to one notch, subject to regulatory developments," he added.

Article via I-Net-Bridge