Announcements

GCR affirms Group Five Limited’s rating of A-(ZA); Outlook Negative.

Johannesburg, 30 Oct 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Group Five Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Group Five Limited based on the following key criteria:

As anticipated, F15 saw revenue contract by 10% to R13.9bn, on the back of reduced projects coming to tender locally and a comparatively large portion of the order book traded out in F14. The R224m loss incurred on an Eastern Cape power plant project in F15, coupled with fairly thin margins on existing work saw the EBITDA margin contract to 2.9% (F14: 5.6%). As such, EBITDA declined by 53% to R402m. This followed through to the operating margin, which fell to a review period low of 1.5% in F15 (F14: 3.8%). Firmer margins are nonetheless expected going forward, underpinned by recent restructuring and stricter implementation of risk management protocols. Although revenue in F16 is expected to be flat, the total order book of R18.8bn at FYE15 (FYE14: R17.1bn) suggests sound revenue growth in F17. However, the order book is concentrated to the Kpone project in Ghana, representing some project and country risk.

The group evidences improved working capital management despite working capital volatility which is typical in the industry. Accordingly, cash flow from operations have been positive in most years and sufficient to cover dividends and capex requirements. Although gross debt increased to R1.1bn at FYE15 (FYE14: R927m), the group remains in a strong net cash position, with cash covering the higher debt position 3x (FYE14: 3.1x). Liquidity is further bolstered by ample funding facilities available to the group.

The negative outlook reflects the very weak operating environment. The South African construction environment remains challenging, characterised by significant overcapacity, competition and margin pressure. In contrast, the rest of Africa offers strong opportunities, albeit at the cost of financial risk. While the group’s geographic footprint is positively viewed, its fortunes remain closely linked to the South African economy.

Upward rating pressure could emanate from sound medium term revenue growth and cash flows, despite the challenging environment. Demonstrated ability to profitably finalise offshore contracts, reflecting the robustness of the group’s refined risk processes, would also be positively viewed. Downward pressure could, however, derive from material losses due to (inter alia) low margin contracts, cost overruns, labour and other unforeseen disruptions. The persistence of the weak operating environment could result in a further erosion of profitability metrics.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (December 2006)    
Long term: A(ZA); Short term: A1(ZA)    
Outlook: Stable    
     
Last rating (October 2014)    
Long term: A-(ZA); Short term: A1-(ZA)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Patricia Zvarayi   Farai Mauchaza
Senior Analyst   Junior Analyst
(011) 784-1771   (011) 784-1771
Patricia@globalratings.net   Faraim@globalratings.net
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate & Public Sector Debt Ratings    
(011) 784-1771    
Shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015
Group Five Limited rating reports, 2006-2014

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
EBITDA Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.
Liquidity Risk The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.
Operating Margin Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.
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.
Working Capital Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.
   

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.

Group Five 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 rating/s has been disclosed to Group Five Limited with no contestation of the rating.

The information received from Group Five Limited and other reliable third parties to accord the credit rating(s) included;
• 2015 integrated report;
• Audited financial results of Company per 30 June 2015;
• Four years comparative audited results;
• Group Five 2015 results presentation booklet;
• Corporate governance and enterprise risk framework;
• Industry comparative data.

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.

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