Johannesburg, 04 Jul 2013 — Global Credit Ratings has today assigned HomeChoice Holdings Limited initial national scale issuer ratings of BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) on HomeChoice Holdings Limited based on the following key criteria:
HomeChoice has grown into South Africa’s largest home shopping retailer. Retail forms the core of group operations, accounting for 80% of revenue, albeit as sales are predominantly on credit, interest and service fees make up a significant portion of this. Products are largely focused on the household and comprise bedding and textiles, homeware and appliances. The financial services division, FinChoice, is a relatively small scale provider of short term micro financing and was established as a natural extension of HomeChoice’s core competency in credit based retail. Critical to HomeChoice’s business model is the close focus on a specific customer group, which in turn is a factor of the merchandise it sells. In this regard, customers are typically female urban dwellers, falling into LSM groups 4 to 8. This demographic has evidenced very strong growth over the past few years, with HomeChoice adding in excess of 115,000 new customers per annum.
HomeChoice’s rating is supported by its strong revenue, which has increased at a CAGR of 26% over the review period. Earnings have been underpinned by wide margins, with the gross and operating margins at 51.1% and 28.6% respectively in F12 (F11: 53.4%; 31.1). Margin pressure has emanated from exogenous factors (cotton prices, exchange rates, disposable income) but the business model allows for significant flexibility to manage margins within the target range. Thus operating profit rose to a review period high R403m in F12 (F11: R342m).
HomeChoice’s debtors book has risen at a CAGR 36% since FYE08, to almost R1.2bn at FYE12. Performance of the book worsened slightly in F12, largely as a result of the higher delinquencies on new business and the general worsening of the credit environment. Thus, the debtors cost ratio climbed to 12.6% and the provision for doubtful debts was raised to 18.9% of the book, both four year highs. While there has been a slight increase in arrears in F11 and F12, the vintage curves have plotted in a tight band since F09, attesting to the relatively stable performance of the book.
Notwithstanding the high working capital requirements, robust operating profit has translated into strong cash generation over the review period, allowing the group to fund all activities internally. Moreover, shareholders have reinvested a large portion of earnings into the business, which has seen equity rise to R1bn. In contrast debt stood at just R103m at FYE12. Thus, net gearing was at a low 9% (FYE11: 4.4%), while net debt to EBITDA was 22% (FYE11: 10%). Looking ahead, debt is forecast to rise to around R400m to fund capex and the on-going growth of the debtors book. Nevertheless, gearing metrics should remain moderate, with net gearing budgeted to peak at just 26.9% in F14 and net debt to EBITDA at 66%.
The general international trend towards direct retail is favourable for HomeChoice, whilst the strong growth in group’s core mid-market customer segment is also positive. Nevertheless, the group is likely to face greater competitive pressure from some of the traditional retailers as they enter the home retail space. Moreover, increased consumer pressure has seen retail sales growth slow, a trend that is expected to continue, particularly if interest rates begin to rise. Thus, while strong earnings growth is forecast over the medium term, it will be at a lower rate than the past five years.
GCR believes that the current rating fully accounts for the risks and opportunities facing HomeChoice. Thus, rating action will only be likely over the medium term if budgeted growth is achieved and the external environment improves. However, a worsening in the retail and/or credit environment could impact volumes and the level of bad debts, thus requiring higher provisions. Aggressive competition from other retailers could eat into HomeChoice’s market share.
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GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
HomeChoice Holdings Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to HomeChoice Holdings Limited with no contestation of the rating.
The information received from HomeChoice Holdings Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a break down of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.