Johannesburg, 17 August 2016 — Global Credit Ratings has today affirmed the national scale Issuer 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 ratings to Adcorp Holdings Limited (“Adcorp, or the group”) based on the following key criteria:
Adcorp’s geographic footprint has increased notably in the past five years, with R1.2bn out of R2bn in capex spent on offshore acquisitions. This has markedly reduced the group’s earnings exposure to domestic labour broking, from a high of 74% in F11, to an expected 35% for F17. Adcorp Holdings International (“AHI”) intends to raise capital offshore to fund further growth, with the target for group earnings to be evenly split between Asia-Pacific and Africa in the long term. While the positive outlook accorded reflects the potential upward rating impact of these developments, the difficult operating environment in some territories and South Africa in particular, currently constrain substantive upward rating migration.
Conservative market reaction to the passing of the Labour Relations Amendment Act led to a gross 20% decline in local volumes, commencing in 1H F16. Management has since clawed back part of these volumes, but the attrition will only be fully recouped in the medium term. Overall, group revenue rose by 17% YoY to R15.6bn in F16, on the back of the Dare (Australia) and Kelly acquisitions, as well as uplift on translation of foreign turnover. While enterprise-wide right-sizing helped absorb the impact of the loss in domestic scale, the related, once-off costs constrained the EBITDA margin to 3.5% (F15: 4.2%), translating to a 2% decrease in EBITDA to R548m. Impairments and other capital items of R117m also contributed to a 15% contraction in attributable earnings to R208m. Looking ahead, acquisitions are expected to drive material revenue growth, while cost rigour and other internal efficiencies should support margin resilience.
A retreat in the cash conversion ratio to 87% (F15: 97%) and a R212m, debtors-driven working capital increase reduced operating cash flow by 68% to R133m in F16. Collections remain under pressure, although GCR notes the refinement in internal protocols to mitigate credit risk. Access to the domestic debt capital market helps to manage significant liquidity pressures at month end and during the festive season, albeit GCR notes constrained market appetite amidst rising interest rates. Accordingly, the planned re-profiling of the domestic funding profile and further diversification of banking counterparties to lengthen average debt maturity bode positively.
Working capital pressures, along with the impact of debt raised to fund the acquisition of Dare, increased total borrowings to a new high of R2bn at FYE16 (FYE15: R1.4bn). Gross gearing thus rose to 171%, from 119% previously, while debt to EBITDA spiked to 367% (FYE15: 247%). Nonetheless, the metrics were moderated by the large running net cash balance, to 99% and 161% respectively. Excluding ring-fenced Australian debt, gearing metrics are more conservative. Adcorp also continues to meet covenants, including debtors coverage of at least 1.5x and a minimum EBITDA to interest ratio of 4x.
Looking ahead, crystallisation of offshore expansion and capital raising plans, translating to a material capital injection into the group, would improve its credit protection factors despite challenging operating conditions. However, protracted deterioration in collections and/or materially elevated gearing beyond management targets, even in pursuit of strategic offshore acquisitions, would be negatively viewed. Economic and regulatory pressures that significantly curtail cash flows and liquidity may also warrant negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2012)|
|Long term: BBB(ZA); Short term: A3(ZA)|
|Last rating (November 2015)|
|Long term: BBB(ZA); Short term: A3(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Adcorp Holdings Limited Issuer rating reports, 2012-2015
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Gearing||With regard 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 or by EBITDA.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Turnover||The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings 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 as well as written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Adcorp Holdings Limited with no contestation of the ratings.
The information received from Adcorp Holdings Limited and other reliable third parties to accord the credit ratings included:
- the FY 2016 audited annual financial statements;
- four years of comparative numbers;
- unaudited management accounts for the four months to 30 June 2016;
- a breakdown of facilities available and details of the SA operations’ indebtedness as at 11 August 2016;
- the South African debtors’ profile as at 30 June 2016; and
- the corporate governance and enterprise risk framework.
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.
GCR affirms Adcorp Holdings Limited’s rating of BBB(ZA); Outlook Positive.