Announcements

GCR affirms Adcorp Holdings Limited’s rating of BBB(ZA); Outlook Positive.

Johannesburg, 24 Nov 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Adcorp Holdings Limited of BBB(ZA) and A3(ZA) in the long and short term respectively, with the outlook accorded as Positive.

SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Adcorp Holdings Limited (“Adcorp”) based on the following key criteria:

Adcorp has made a number of strategic acquisitions in recent years, both in South Africa and internationally, with the latest being that of Kelly Group Limited (“Kelly”). These acquisitions have further broadened Adcorp’s workforce management solutions offering, significantly expanding its reach into the rest of Africa and Asia Pacific. Despite the ongoing uncertainties in the South African labour environment, this has materially reduced its exposure to regulatory changes impacting local temporary employment services. Accordingly, Adcorp expects labour broking to account for 39% of its earnings in F15, compared to a high 74% contribution in F11.

Strongly performing bolt-on acquisitions such as Paracon, Paxus and LSA have underpinned compound annual top line growth of 24% over the review period. F14 revenues were thus well ahead of target, rising by 37% to R11.8bn. Higher organic volumes have, in cases, been achieved at the expense of price, driving margin compression, while the business mix has changed to include some inherently lower margin offerings. In this regard, although profitability has been enhanced by acquisitions, with EBITDA rising by 123% YoY in 1H F15, the normalised EBITDA margin eased to 4.6% in F14 (F13: 4.9%), rising slightly to 4.7% in 1H F15. The group is currently bedding down initiatives to enhance efficiencies within its SA and African businesses, which include a shared service centre, the outsourcing of certain back office functions and an ERP system upgrade. This should enable Adcorp to price its offering more competitively, supporting robust medium term growth prospects.

Although strong cash generation and effective working capital management have historically supported sound operating cash flows, challenges with bedding down the ERP system led to slower collections in F14, driving a R298m working capital absorption. This position had largely been rectified by 1H F15; resulting in a R268m operating cash flow (F14: R43m). Debt eased from the FYE14 high of R1.2bn to close 1H F15 at R1.1bn. Given that equity was used to fund most acquisitions, net gearing was reduced to 55% at 1H F15, from a high of 102% at FYE14. Net debt to EBITDA also improved to 99% (FYE14: 215%), in line with medium term targets. The DMTN programme has improved funding flexibility, reducing the liquidity pressures inherent in Adcorp’s operations, which tend to peak at month end and during the festive season. Coupled with the refinancing of A$-denominated obligations, this has seen a marked improvement in the debt maturity profile, with a low 25% short dated at 1H F15, from a high of 92% at FYE13. Looking ahead, Adcorp does not intend to materially increase its local debt levels. In this respect, future acquisitions will be funded from internal cash flows and capital raised via a planned international treasury function. As local operations are ring-fenced, domestic creditors are insulated from additional credit risk exposure that could emanate from offshore expansion.

Successfully bedding down acquisitions should facilitate further market penetration despite the weak local economy and changing legislative landscape. In addition, volume growth and efficiency initiatives should result in margin enhancement and improve the group’s credit profile. However, materially elevated debt and gearing to fund acquisitions or working capital pressures could warrant negative rating action. Punitive regulatory changes could also curtail revenue generation or elevate the industry’s cost base, impairing earnings and financial flexibility.


NATIONAL SCALE RATINGS HISTORY

Initial rating (Dec/2012)
Long term: BBB(ZA); Short term: A3(ZA)
Outlook: Stable

Last rating (Nov/2013)
Long term: BBB(ZA); Short term: A3(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Patricia Zvarayi
Senior Analyst
(011) 784-1771
patricia@globalratings.net

Committee Chairperson
Eyal Shevel
Sector Head: Corporate Ratings
(011) 784-1771
shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, August 2014
Adcorp Holdings Limited Rating Reports, 2012-2013
Adcorp Holdings Limited Senior Secured Notes: Surveillance Reports, 2013-2014

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

SALIENT FEATURES OF ACCORDED RATINGS

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.

Adcorp Holdings Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Adcorp Holdings Limited with no contestation of the rating.

The information received from Adcorp Holdings Limited and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years of comparative numbers), unaudited financial statements for 1H 2015, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available. In addition, information specific to the rated entity and/or industry was also received.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS REPORT

A$

Currency notation designating Australian Dollars.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Credit Risk

The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.

EBITDA

Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.

Gearing

With regards to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds, EBITDA or by the value of investments.

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

Operating Cash Flow

A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.

Working Capital

Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.

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