Johannesburg, 30 June 2017 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to Basil Read Holdings Limited of BBB-(ZA) and A3(ZA) in the long term and short term respectively; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Basil Read Holdings Limited (“Basil Read”) based on the following key criteria:
Despite the recent restructuring measures undertaken and the return to net profitability in FY15, certain pressures negatively detracted from the group’s FY16 financial performance. This included the R61m loss on the distressed Olifants River legacy contract, a R32m loss attributed to the discontinued pipeline business, a R33m loss on the sale of SprayPave, as well as the R41m charge in relation to the government settlement in respect of sector transformation. While the group is expected to close out the aforementioned large distressed legacy contract shortly, GCR is of the view that performance will remain under pressure going forward as significant downside risks persist in terms of trading conditions and project execution.
Another risk factor constraining the ratings is the negative free operating cash flows reported over the past three years, and as such the efficient management of working capital remains critical. Additional liquidity relief could stem from the release of cash resources trapped in outstanding contract claims, although the timing remains uncertain.
While Basil Read remained in a net cash position in FY16, this reduced to the lowest closing balance reported over the five-year review period. Management is actively pursuing channels that will enhance funding flexibility in view of tight liquidity, with a potential equity injection at negotiation stage. Additional debt financing options are being explored by the new centralised treasury function, whilst GCR would also expect management to increase its unutilised banking facilities buffer ahead of new contracts in view of the down-cycle.
The South African construction sector remains structurally volatile, with the group’s business activities highly concentrated to this market. Basil Read has, however, been successful in gaining new contracts, with the order book increasing by R1.6bn to R12.3bn at year-end FY16. While this suggests enhanced revenue traction in FY17, the protracted weakness in the domestic economy could curtail future contract deal flow, particularly in the quality of secured work. Moreover, Basil Read remains overly reliant on local government-related expenditure and has a negligible presence in concessions, which tend to offer more stable cash flows.
An upgrade in the ratings is unlikely, given the negative outlook and until an improvement is seen in the construction environment. Medium term ratings uplift would be dependent on management’s ability to successfully deliver on its business plan, demonstrating a track record of sustainable core profitability and solid growth in the higher margin order book. The proven ability to efficiently manage working capital and improve and maintain a stronger liquidity profile could also provide rating support. Conversely, if Basil Read’s performance and liquidity position remains weak as a consequence of serious project-related problems, this would warrant negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
Initial Rating (March 2008)
|Long term: A-(ZA)
Short term: A2(ZA)
Last rating (June 2016)
Long term: BBB-(ZA)
Short Term: A3(ZA)
|Senior Analyst: Corporate Ratings|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for rating corporate entities, updated February 2017
Basil Read issuer rating reports (2008-2016)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY>
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing 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.|
|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.|
|Debt Financing||Raising capital by selling debt instruments such as bonds, bills or notes.|
|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.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|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.|
|Order Book||This refers to the portfolio of confirmed contracts/orders that a corporate entity has at any point in time, and is jargon typically associated with construction and manufacturing companies in reference to their prospective business.|
|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.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|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.|
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 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.
Basil Read 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 ratings have been disclosed to Basil Read Holdings Limited with no contestation of the ratings.
The information received from Basil Read Holdings Limited and other reliable third parties to accord the credit ratings included:
- The 2016 audited annual financial statements (plus four years of comparative audited numbers)
- Analyst presentations
- A 5-year strategic overview
- Actual (unaudited) performance to 31 May 2017
- Other non-public information
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 Basil Read Holdings Limited’s rating of BBB-(ZA); Outlook Negative.