Announcements Corporate Rating Alerts

GCR affirms Curro Holdings Limited’s BBB+(ZA) ratings on stable performance despite uncertain environment; Outlook Stable

Rating Action

Johannesburg, 18 June 2021 – GCR Ratings (“GCR”) has affirmed the national scale issuer ratings assigned to Curro Holdings Limited of BBB+(ZA) and A2(ZA) for the long and short term respectively, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Curro Holdings Limited Long Term Issuer National BBB+(ZA) Stable Outlook
Short Term Issuer National A2(ZA)

Rating Rationale

Curro Holdings Limited’s (“Curro” or “the group”) ratings are supported by the stability of the education sector, as well as the group’s earnings growth trajectory, hinged on growing learner numbers and the potential to increase capacity at existing schools. Conversely, the ratings are restrained by the currently high leverage and moderate liquidity.

The group has historically operated with a high degree of leverage, increasing gross debt to R4.1bn at FY19 to fund investments into its growing stable of schools. However, after a successful R1.5bn rights issue in September 2020, Curro reduced its outstanding debt to R3.2bn, and coupled with the stronger cash position at FY20, effectively reduced net debt by R1.1bn year-on-year. As a result, despite a negligible drop in earnings of 1%, net debt to EBITDA improved to 4.2x (FY19: 5.6x) while operating cash flow coverage of debt increased to 15.5% and interest coverage was relatively flat at 2.4x (FY19: 11.5% and 2.3x respectively). The group intends to limit the aggressive pursuit of acquisitive growth, rather focusing on increasing capacity at existing schools. As such, outstanding debt is expected to be gradually reduced further over time, to the extent that cash flow generation is sufficient to cover capital expenditure requirements.

Liquidity coverage moderated to historical levels of approximately 1.0x for the coming 12-month period. This follows a much higher coverage ratio at the previous review as the cash from the rights issue had not yet been deployed. After the abovementioned repayment of debt Curro has minimal upcoming debt maturities, albeit the concentration of maturities in 2024 is noted. Although the resumption of capex projects is expected to be sufficiently covered from generated cash flows, it may pressurize liquidity going forward, while any opportunistic acquisitions may require additional debt. The group has a history of strong cash generation, which is expected to be sustained, however, the absence of committed unutilised debt facilities is a constraint to the liquidity assessment. Nonetheless, GCR is cognisant of the longstanding relationships with funders, giving access to funding should the need arise.

Learner numbers continue to be the driving force behind revenue growth, albeit growth in revenue has slowed down to a review period low of 5%. This reflected the difficult operating conditions faced in FY20 due to COVID-19 related disruptions, which led to reduced enrolment numbers and a growing debtors book as parents were faced with lower income growth and for some, job losses. Resultantly, Curro’s bad debt expense increased further to 5.4% (FY19: 1.8%) of revenue, from historically observed levels of less than 1.0%. In response to the deteriorating receivables, provisions were more than doubled to R215m, covering 48% of gross debtors. The high fixed cost base supports earnings accretion as capacity utilisation increases along the J-curve. This enhances the stability of earnings and is supportive of growth in profitability as the negative effects of the pandemic unwind.

Outlook Statement

The Stable Outlook reflects GCR’s expectation that Curro will continue to grow its revenue base and maintain a strong earnings profile despite the deterioration of the debtors book. This will be supported by ongoing demand for private education, growing capacity utilisation at schools and prudent provisioning.

Rating Triggers

Negative rating action would be considered if 1) earnings deteriorate and the EBITDA margin drops below 20%, 2) the group sustains a net loss for FY21, 3) cash flow generation is reduced and there is an increase in leverage metrics, 4) liquidity coverage deteriorates below 1.0x.

Positive rating action would be considered if 1) there is a sustained reduction in gearing and an improved liquidity coverage ratio, 2) the quality of the debtors book improves, thereby enhancing profitability.

Analytical Contacts

Primary analyst Tinashe Mujuru Credit Analyst: Corporate Ratings
Johannesburg, ZA TinasheM@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, March 2021
GCR Corporate Sector Risk Scores, April 2021

Ratings History

Curro Holdings Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial National BBB-(ZA) Stable May 2013
Short Term Issuer Initial National A3(ZA)
Long Term Issuer Last National BBB+(ZA) Stable July 2020
Short Term Issuer Last National A2(ZA)

RISK SCORE SUMMARY

Rating Components & Factors Risk scores
Operating environment 14.00
Country risk score 7.00
Sector risk score 7.00
Business profile 0.50
Competitive position 0.50
Management and governance 0.00
Financial profile (3.25)
Earnings performance 0.75
Leverage and capital structure (2.00)
Liquidity (2.00)
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Risk Score 11.25

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Conditions Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.
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.
Coverage The scope of the protection provided under a contract of insurance.
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.
Diversification Spreading risk by constructing a portfolio that contains different exposures 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.
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. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
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.
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.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
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 See GCR Rating Scales, Symbols and Definitions.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Offset A right (Right of Offset) to set liabilities against assets in any dispute over claims.
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.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
Reserves A portion of funds allocated for an eventuality.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.
Upgrade The rating has been raised on its specific scale

SALIENT POINTS 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Curro Holdings Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Curro Holdings Limited participated in the rating process through management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Curro Holdings Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results for December 2020
  • Four years of comparative audited numbers
  • Industry presentation for FY20
  • Detailed facility breakdown for FY20
  • SENS announcements


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