Johannesburg, 1 June 2018 — Global Credit Ratings has today affirmed the national scale long term Issuer rating assigned to Curro Holdings Limited of BBB(ZA) and upgraded the short term rating to A2(ZA); with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Curro Holdings Limited (“Curro”) based on the following key criteria:
Curro is the largest listed for-profit operator within the South African private education school sector. The group’s strong business profile is underpinned by an entrenched brand and a proven strategic expansion plan that continues to accommodate sturdy student demand. That said, the group is not immune to prevailing macroeconomic fundamentals, given some price sensitivities in this segment, and is also reliant on its academic reputation, which are considered partly offsetting risk factors.
Overall, favourable enrolment trends have been supportive of a rapid increase in revenues and earnings margins over the review period. While a degree of financial pressure was evidenced in FY17, due to some student attrition, enrolments for the start of 2018 breached 50,000, representing sound YoY growth of 14% (FY17: 8%) and 5-year CAGR of 21%. Although cognisance is taken that the Meridian business is financially ringfenced, GCR notes its weakening operating performance and expected debt refinancing challenges, which is being addressed. Nevertheless, the demonstrated upward trajectory of EBITDA growth is expected to continue over the rating horizon as Curro maintains focus on ramping up utilisation at its schools. Accordingly, the ratings have been placed on Positive outlook.
Strong shareholder support and greater profit retention have aided in a relative improvement in credit metrics over recent years. However, with no intermediate capital injections planned against sustained high capex investment expansion requirements, gross debt levels are projected to trend notably higher in FY18. While this will place upward pressure on gearing (even excluding the ringfenced Meridian obligations), management is expected to pursue a balanced financial policy, with credit protection metrics to remain within acceptable parameters.
Curro’s liquidity position has strengthened, supported by the robust upward progression in cash flows over the review period, strong banking relationships, whilst there are no near-term refinancing requirements. Accordingly, the short term rating was upgraded. GCR expects that strong earnings growth will continue to generate positive and robust free cash flows that are imperative to partly fund business growth as leverage will also increase.
A ratings upgrade would be depended on Curro achieving or surpassing its earnings targets, supporting greater cash generation in order to maintain fairly moderate gearing levels. Negative rating action could follow a weaker operating performance and cash flows, or if the company were to pursue significant additional borrowings beyond the current plan, which places credit protection metrics under pressure.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (May 2013)
|Long term: BBB-(ZA)
Short term: A3(ZA)
Last rating (May 2017)
|Long term: BBB(ZA)
Short term: A3(ZA)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Mater Criteria for Rating Corporate Entities, updated February 2018
Curro Issuer rating reports, 2013-17
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.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|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.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
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.
Curro 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 and contested by Curro Holdings Limited, and were amended.
The information received from Curro Holdings Limited and other reliable third parties to accord the credit ratings included:
- The FY17 audited annual financial statements (plus prior four year of comparative numbers)
- FY18, FY19 and FY20 cash flow and debt projections
- FY17 audited financial statements for CAPMAC and MOP
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 Curro Holdings Limited’s rating of BBB(ZA); Outlook Positive