GCR accords a further ratings downgrade to Gijima, as business volumes remain depressed
GCR has downgraded the long term domestic currency rating of Gijima Holdings Limited (“Gijima”) to BB(ZA), from BB+(ZA) previously. While the short term rating remains unchanged at B(ZA), both ratings remain on a negative ratings outlook. The rating downgrade follows a prior 1-notch downgrade in November 2012, at which time GCR had warned that significant risk factors remained.
Gijima’s recently announced interim results reflecting another poor operating performance, with a substantial operating loss reported for the period. In this respect, reflected the losses of key contracts with Absa and the South African Police force, whilst delays in other key projects further depressed revenue. As such, Gijima continues to report insufficient revenue to support its current level of operating costs. Although it has been positively noted that Gijima has undertaken substantial restructuring and cost rationalisation initiatives, a recovery to profitability remains premised on the garnering of new contracts and a resultant increase in revenue.
From a funding perspective, Gijima continues to evidence a stable profile, with interest bearing debt solely constituting the long term debentures raised through the debtors book securitisation. While the current level of debtors does not justify the quantum of outstanding debtors, cash is held by Gijima to offset this risk (in line with funding covenants). GCR has also positively considered the proposed R150m rights issue, which would provide an important cash injection to the business and bolster equity (which has been severely eroded by losses over recent years).
Prospects for Gijima remain depressed, despite the fact that much of the business continues to perform positively. However, the sale of the MineRP businesses has reduced the proportion of positively performing business segments, with the poor results emanating from the systems engineering segment markedly outweighing the positive results from other divisions. As such, recovery of Gijima will require improved performance on existing contracts from this segment, as well as the garnering of material new contracts. However, the depressed IT spending environment, as well as reputational issues for Gijima, could constrain management’s ability to attract and retain clientele.
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