Johannesburg, 30 June 2016 — 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 Stable.
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:
The ratings take cognisance of Basil Read’s comprehensive review and restructuring of operations that were initiated in mid-F14. The changes have focussed on cost containment, the integration of systems to enhance project delivery and quality, as well as an overhaul of risk protocols. The positive effects of the corrective measures have started to materialise, with the group reporting a turnaround to financial profitability in F15, although the full impact will likely only be evident when industry volumes normalise. In this regard, as current market conditions will continue to challenge the company’s operating performance, Basil Read’s ability to demonstrate sustainable core profitability through the cycle is only likely to impact positively on GCR’s view of the company’s ratings over future reporting periods.
The group’s total order book was reported at a slightly higher R10.7bn at FYE15 (FYE14: R10.5bn; FYE15 target: R10bn), covering about 1.9x of revenues, which should mitigate material top line variability. This notwithstanding, the closing of two significant contracts could materially curtail medium term performance unless the order book can be replenished timeously despite the challenging domestic conditions. Albeit smaller and less diversified than some competitors, Basil Read is highly specialised in certain complex high value-add segments, such as roads. As such, the current operational structures in place have repositioned the business to capitalise on its traditional expertise in heavy construction.
Basil Read operates in a highly cyclical and competitive industry, with considerable project and operational risks. In this regard, large loss making contracts have significantly impeded past performance. That said, GCR notes that only two distressed legacy contracts remain and are expected to be closed out shortly. Coupled with strict delivery guidelines and project oversight, this should support future earnings stability.
The group has displayed volatile free cash flows over the review period, largely owing to sizeable swings in working capital. The efficient management of the latter remains a key concern, particularly given past liquidity pressures and the rising minimum replacement capex requirements. In this regard, management is actively pursuing channels that will enhance funding flexibility. At this stage, various scenarios have been projected, including a potential equity injection or additional debt financing to enable competitive bidding. Moreover, the current debt maturity profile is undemanding, largely aided by the large redemption in F15 that reduced debt to a review low of R375m at year-end. While debt levels may rise going forward, GCR expects gearing metrics to remain conservative, with Basil Read sustaining a net ungeared position, given the uncertainty in contract execution. In addition, impending debt maturities are expected to be maintained at manageable intervals, whilst serviceability is anticipated to improve on the back of more stable cash generation.
In view of the execution risk in respect of the medium term strategy amidst the challenging environment, ratings uplift will be premised on management’s successful delivery of its business plan YoY. The proven ability to efficiently manage working capital and capex needs would also be positively considered. A ratings downgrade could arise if Basil Read’s overall financial profile is weaker than expectations, causing ongoing cash outflows to increase and the liquidity profile to deteriorate as a result. This could stem from any unexpected strategy execution challenges as a consequence of the current downturn in the local construction market and/or serious project-related problems.
|NATIONAL SCALE RATINGS HISTORY|
Initial Rating (March 2008)
|Long term: A-(ZA)
Short term: A2(ZA)
Last rating (June 2015)
Long term: BBB-(ZA)
Short Term: A3(ZA)
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Basil Read issuer rating reports (2008-2015)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY>
|Bond||A long term debt instrument issued by either a company, institution or the government to raise funds.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|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.|
|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 Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.|
|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.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|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.|
|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 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.
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 rating.
The information received from Basil Read Holdings Limited and other reliable third parties to accord the credit ratings included:
- The 2015 audited annual financial statements (plus prior year of comparative numbers)
- Analyst presentations
- Full year budgeted financial statements for 2016, as well as a 5-year strategic overview
- Actual (unaudited) performance to 31 May 2015
- Other 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.