Johannesburg, 29 Nov 2013 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to Adcorp Holdings Limited of BBB(ZA) and A3(ZA) respectively; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) on Adcorp Holdings Limited based on the following key criteria:
Cognisance was taken of the scale enhancement derived from the purchase of Paracon and Paxus (for a combined cost of R1.3bn). These acquisitions have extended Adcorp’s geographic reach into Asia Pacific and have notably enhanced its capacity to provide white collar, ICT labour solutions. As such, the group has transitioned from a mainly blue collar-oriented business model, and displays a much more balanced profile. Non-labour broking operations are therefore projected to account for 60% of Adcorp’s F14 earnings (F13: 35%), from a low of 26% in F11. Against this backdrop, revenue increased by 34% to R8.6bn in F13, and by an annualised 32% in 1H F14. The imminent purchase of Labour Solutions Australia and the recent strategic alliance with Randstad (a global recruiter) should underpin robust growth going forward. Locally, the group also expects to gain traction from the industry’s migration towards a ‘gatekeeper’ solution, where one agency serves as the single conduit (or master service provider) for a corporate’s workforce requirements.
Enhanced productivity supported a normalised EBITDA margin of 4.9% in F13 (F12: 4.8%), translating to a 37% increase in normalised EBITDA to R423m. Once-off BBBEE transaction costs (R85m) and the deflationary impact of the consolidation of just one month of Paxus results saw material margin compression in 1H F14. This is nonetheless expected to normalise in the short term. The group recently adopted shared back office capability and other cost containment initiatives, such as the outsourcing of certain elements of credit control. Coupled with an ERP framework upgrade, this should improve operating efficiencies and management’s oversight.
Liquidity management and retaining sufficient funding facilities is critical for Adcorp, as the group is generally required to settle wage bills on a weekly or monthly basis and only thereafter invoice its clients. In this regard, funding is underpinned by banking facilities (especially a combined R190m for overdrafts from ABSA and FNB) and the ability to tap capital markets. As of 1H F14, the group had raised R600m from secured notes and commercial paper under its R2bn DMTN programme. This was used to fund working capital and to improve the debt maturity profile. While net debt to EBITDA recently spiked to 195% at 1H F14 (FYE13: 126%), mainly due to the impact of non-recurring BBBEE costs on interim margins, it is projected to decline, approximating the F10 level in the medium term. The group has, to date, comfortably adhered to its debt covenants, which include a debtors cover ratio of at least 1.5x and minimum EBITDA interest cover of 4x.
Looking ahead, uncertainty is still inherent in the implementation of recent policy changes and pending legislative reviews. Furthermore, the slowing economy will constrain job creation, curtailing the industry’s advancement until a sustainable upturn in the cycle ensues.
Positive rating action over the medium term could derive from a demonstrated ability to secure further domestic market penetration despite the regulatory uncertainty and weakening macroeconomic indicators. Coupled with the successful bedding down of ongoing efficiency initiatives, this should support margin enhancement and improve the group’s credit profile. However, persistently higher than projected gearing metrics, or a marked deterioration in the performance of the debtors book would warrant negative rating action. Prohibitive legislative changes could also curtail revenue generation or elevate the cost base, impairing earnings and financial flexibility.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Dec/2012)|
|Long term: BBB(ZA); Short term: A3(ZA)|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
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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.
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 2013 audited annual financial statements (plus four years of comparative numbers), reviewed financial statements for 1H 2014, budgeted financial statements for 2014 to 2016, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. 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.