OREANDA-NEWS. Fitch Ratings has affirmed Societe des Ciments d'Enfidha (SCE) National Long-term rating at 'BBB(tun)' with Stable Outlook and National Short-term rating at 'F3(tun)'.

The affirmation reflects Fitch's expectation that SCE will maintain its steady operational profile of the past two years, despite market liberalisation. In 2014, the cement sector was liberalised, but SCE has sustained a leading market position, resilient trading performance and improved profitability.

The Stable Outlook is supported by the company's strong leverage headroom despite increased dividends to shareholders, a trend likely to be sustained over the next two years in the context of minimal capex. Fitch expects SCE's funds from operations (FFO)-adjusted gross leverage over FY15-FY16 to be below 1x a threshold compatible with the 'BBB(tun)' rating.

KEY RATING DRIVERS
Sector Liberalisation
The Tunisian cement sector was subject to radical changes in 2014. Cement prices were liberalised in January 2014 and SCE reported a 21% increase in the average selling price in 2014, driven by a price adjustment following two years of price freeze. Local authorities also set exports free in October 2014 and cancelled energy subsidies for local cement producers. Fitch expects SCE will continue to benefit from domestic price appreciation in 2015 and 2016, particularly if economic conditions improve. We also believe it will fully capitalise on its productive capacity and good access to neighbouring countries to increase exports. We expect the full year impact of higher energy costs to be offset by lower international energy prices, a positive cement price trend and management efforts to record efficiency gains. EBITDA margin should be maintained around 26% over the next two years (expected at 29% in 2014).

Leading Market Position
SCE demonstrated capacity to sustain its leading market position and growth in 2014, a challenging year, and Fitch expects this will remain the case in 2015. Local cement consumption has been quite resilient to the economic and political environment following the revolution. However, most of the demand was driven by households and to a lesser extent by residential and commercial projects. Now that the transition period is over and a new government was elected in late 2014, we expect demand to be driven increasingly by infrastructure projects. However, we do not expect the initiatives to be taken by the new government in terms of infrastructure projects to benefit the cement industry before 2016/2017.

Consistently Low Leverage
SCE has paid back its long-term loans, and in the absence of major investments Fitch does not expect its credit metrics to change in the foreseeable future. SCE enjoys sufficient headroom for its rating, which enables it to withstand increased sector risks. FFO-adjusted net leverage stood at -0.3x at end-2014 (-0.4x at end-2013) and Fitch expects the net cash position will be sustained.

Muted Capex Offsets High Dividends
SCE has reduced its investments to a minimum. Fitch's rating base case assumes capex/revenues ratio to be maintained at around 5% over the next three years to cover maintenance capex. Conversely, distributions to shareholders have increased and Fitch expects a pay-out ratio at around 1x over the next two years. These two developments should result in neutral FCF.

Relationship with Shareholder
Fitch rates SCE on a standalone basis despite Cementos Portland Valderrivas indirectly owning 88%, due to weak legal and strategic ties according to Fitch's Parent and Subsidiary Rating Linkage criteria. Considering the financial difficulties of the parent, our forecasts for SCE factor in a high proportion of free cash flow being distributed in dividends.

RATING SENSITIVITIES
Upward rating potential is currently limited due to SCE's small size, weak geographical diversification and limited end-market diversification. A downgrade may be driven by an adverse change in its business profile resulting from sector overcapacity, declining prices, a weaker trading performance, a material reduction in profitability, negative FCF, and/or an increase in FFO-net adjusted leverage to above 2x.

LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity
SCE continued to post positive FCF supported by healthy trading performance and minimal capex. Consequently, readily available cash has increased to around TND50m in 2014 (TND44m in 2013) and compares favourably with short-term debt of TND10m. SCE continues to have access to TND12m of available undrawn bank credit lines and added a new revolving credit facility of TND5m in 2014. Fitch expects SCE to maintain strong liquidity. A high dividend pay-out is likely to be offset by minimal investments.