GCR has downgraded Basil Read Holdings Limited’s (“BR”) national scale credit ratings to BBB+(ZA) (triple B plus) in the long term and A2(ZA) (single A two) in the short term. The down grade was triggered by the continued slump in the construction industry, which saw BR report a decrease in operating profit, and gearing for the first time over the review period.
Although BR reported modest revenue growth in F11, operating revenue reduced by 29% to R292m. The decline was precipitated by a substantial reduction in the operating margin, across all construction sectors. In addition, BR was impacted by a R115m impairment on loss making contracts during the year. The losses arose partly due to under-pricing on contracts, providing evidence of the substantial pricing pressure facing the industry. Sustaining revenue was the mining division, as well as the engineering division, which is closely linked to mining activity.
Debt rose to a review period high of R1.1bn at FYE11 (FYE10: R836m), in contrast to the reduction in cash holdings to R716m (FYE10: R1bn). While a large portion of debt related to contract specific capex, the group also evidenced significant working capital pressure. This was driven by delayed debtors payments, particularly from the public sector. Such working capital pressure is likely to persist in the short term, although funding requirements may be eased by a reduction in capex.
Going forward, BR is in a better position than some of its large competitors. At FYE11, the order book had risen to R14bn, more than two years revenue, supported by the large St Helena project that was awarded during the year. While much of the order book extends for several years, over 90% of work for F12 has been secured. Nevertheless, despite plans for major infrastructure expenditure, weak construction demand in South Africa is expected to persist, as funding and capacity constraints within government departments delay the implementation. Accordingly, margins are likely to remain under pressure as more construction companies vie for the same projects, while additional working capital may be required to fund a longer dated debtors book.
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