Basil Read’s rating unchanged, placed on rating watch
GCR has affirmed domestic construction company Basil Read Holdings Limited’s (“Basil Read”) domestic ZAR currency long term credit rating at A- (A minus) and the short term rating at A1- (A 1 minus). However, in line with GCR’s view of the construction industry, the rating has been placed on Rating Watch.
Following the end of the “super cycle” in 2009, the construction industry continues to face a difficult operating environment, with a dearth of new contracts and continued delays in the awarding of government contracts. As a result, construction companies have not been able to secure the same level of margins as were contracted at the height of the boom. Moreover, rising costs are also becoming a concern, placing additional pressure on margins. Uncertainty regarding the Competition Commission’s enquiry into alleged collusion threatens the industry with hefty fines, adding further pressure on future earnings.
Nevertheless, Basil Read’s focus on its core Roads division, which accounts for around 66% of earnings, continues to support strong net profits. Furthermore, the scope of Bail Read’s operations has been enhanced more recently by the skills set provided by TWP and the strong growth in the mining division. This has seen Basil Read secure new mining contracts post year end, raising its order book to R9.1bn at FYE10, with R4bn relating to projects in F11.
Overall, the second tier of the construction industry is considered a more favourable space to focus on. The massive construction projects continue to face substantial delays, as well as contracting and technical difficulties. However, there remain a number of projects between the R100m and R500m mark, spread across the public and private sectors, which offer decent opportunities for Basil Read.
This notwithstanding, the difficult operating environment is likely to place additional working capital burdens on the company. Accordingly, Basil Read is expected to revert to a small net geared position at year-end 2011.
Andrew Suddards https://globalratings.net/uploads/files/June_2011.pdf
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