Johannesburg, 30 May 2017 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to Curro 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 Curro Holdings Limited (“Curro”) based on the following key criteria:
The ratings take cognisance of Curro’s well entrenched brand, being a market leader in the basic private education sector. The strength of the management team and well-defined investment strategy has seen the group consistently deliver on its ambitious expansion targets, leading to it becoming the largest listed private school operator in South Africa over a relatively short period.
Curro has successfully increased student enrolments, registering a 5-year CAGR of 31%, while simultaneously escalating tuition fees, indicating strong pricing power for its products. The rising capacity utilisation at each school is margin accretive, with the EBITDA margin trending higher YoY to reach 22% in FY16, from 15% in FY12. With additional student capacity still to be filled, as Curro has only utilised 52% of eventual capacity at present, this indicates significant potential future margin progression and cash flows.
Debt has risen moderately over the past two years, with the large capex requirements largely funded by strong shareholder support, with a substantial R1.7bn raised in FY16 alone, bringing the cumulative total to R4.2bn over the last five years. Together with strengthening cash flows, gross gearing levels have eased notably from historic highs, and are even more conservative on standalone basis (excluding the legally ringfenced Meridian operations). With no intermediate capital injections planned, however, Curro is projecting a large debt draw down in FY17, although credit protection metrics are expected to trend within acceptable ranges. Continued growth in operating cash flows will be imperative in view of the forecast ramp up in leverage to maintain sound debt service coverage.
Curro is well positioned to benefit from the strong and growing baseline demand for affordable quality basic private education, as its school brands are largely targeted at servicing the growing middle class. However, as new participants infiltrate the lower-fee schools segment in view of the perceived lucrative for-profit education business model, this could lead to increasing competition for students over the medium term. Furthermore, Curro currently displays limited earnings diversification, as its schools division dominates overall performance and its small tertiary business (which has promising growth dynamics) is to be spun-out of the group shortly. The stratification within its school base across income brackets does, however, aid in insulating cash flows.
Positive rating uplift is likely if Curro were to achieve its targets over the medium term. This should translate into stronger cash generation that could be available to increasingly fund growth internally. Negative rating action could be considered if business fundamentals deteriorate abruptly, leading to 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 2016)
|Long term: BBB(ZA)
Short term: A3(ZA)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2017
Curro issuer rating reports, 2013-16
Curro Secured Bond New Issuance and Surveillence Reports, 2013-16
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|CAGR||The compound annual growth rate is the year-on-year percentage growth rate of an investment over a given period of time.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or “’Evolving’ (the rating symbol may be raised or lowered).|
|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 Curro Holdings Limited with no contestation of the rating.
The information received from Curro Holdings Limited and other reliable third parties to accord the credit ratings included:
- The 2016 audited annual financial statements (plus prior year of comparative numbers)
- 2017 capex and cash flow projections
- 2016 audited financial statements for CAPMAC and MOP
- 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.
GCR affirms Curro Holdings Limited’s rating of BBB(ZA); Outlook Stable