20170721-法国巴黎银行-EM_CREDIT_STRATEGY_Eskom_Credit_fairly_valued,_but_risks_to_emerge_in_the_longer-term_14页_856kb

Eskom Credit Analysis Summary

Core Content

Eskom, a 100% government-owned utility in South Africa, reported its FY16/17 financial results, which showed some positive elements such as improved EBITDA margins and reduced leverage. However, the long-term outlook for Eskom's credit profile remains concerning due to several underlying issues.

Main Points

• Current Credit Valuation: Eskom's bonds are considered fairly valued, and real-money accounts should be market-weighted. The company is included in the popular EMBI benchmark.
• Positive Elements in FY16/17 Results:
  • EBITDA margin improved by 1pp to 21.2%.
  • Debt-to-EBITDA ratios declined year-on-year to 9.5x (gross) and 8.9x (net).
  • Better margins and reduced leverage were observed.
• Tariff Increase Challenges:
  • Eskom's recent tariff increase of 9.4% was below expectations.
  • The FY2017/18 tariff increase is capped at 2.2%, which is insufficient to improve financial performance.
  • High consumer pressure and potential legal opposition make a near-20% increase unlikely.
• Government Guarantee Framework:
  • The company relies heavily on a ZAR 350bn government guarantee.
  • Reduction in the guarantee will likely increase debt servicing pressure.
  • EBITDA coverage of net financing costs fell to 2.6x in FY16/17.
• Debt and Capital Expenditure:
  • Gross debt increased by 10% to ZAR 355bn.
  • Capital expenditure (CAPEX) remained high at ZAR 57bn, leading to negative free cash flow.
  • Debt levels are still very high at 9.5x, despite some improvement.
• Financing Needs:
  • Eskom faces significant annual funding requirements of ZAR 71.7bn for FY17/18.
  • Around ZAR 32bn has already been secured, mainly from development finance institutions.
  • The company will need to access both local and international markets for further funding.
• Market Outlook:
  • In a low-volatility, yield-hungry environment, being underweight or short Eskom is likely to be costly.
  • The spread of Eskom over the sovereign is relatively stable and justified by its long-term issues.
  • Credit rating concerns may only become apparent in the FY17/18 results next July.
• Nuclear Energy Plans:
  • There is uncertainty around Eskom's nuclear energy strategy.
  • The government's stance on nuclear energy is expected to be clarified in February 2018.
  • The nuclear programme is likely to be pursued at a pace and scale the economy can afford.

Key Information

• Financial Highlights:
  • Total revenue increased by 8% y/y.
  • EBITDA increased by 14.4% to ZAR 37.5bn.
  • Free cash flow (after dividends) was negative at ZAR -36.62bn.
• Credit Strategy:
  • Recommend market-weight for Eskom bonds.
  • Emphasize that fundamental issues are already priced into bond spreads.
• Operational and Structural Issues:
  • Eskom has a weak leadership structure and faces challenges in operational performance.
  • The company is in the middle of a capacity expansion program, which is costly.
• Market Access:
  • Eskom is likely to approach the eurobond market for additional financing.
  • EM hard-currency funds are showing strong inflows, supporting issuance.
• Risks:
  • Insufficient tariff increases and a reduction in the government guarantee are key risks.
  • Contingent liabilities on the government's balance sheet are a concern.
  • Potential legal challenges and political resistance to tariff increases.

Conclusion

While Eskom's recent financial results show some improvement, the long-term credit risks remain substantial. The company's reliance on government support, coupled with the difficulty in securing sufficient tariff increases and the planned reduction of the guarantee framework, could lead to significant debt servicing pressures. Investors are advised to maintain a market-weighted position for now, as the risks are expected to materialize in the future.