Johannesburg, 27 Jun 2014 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to HomeChoice Holdings Limited at BBB+(ZA) in long term and A2(ZA) in the short term; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to HomeChoice Holdings Limited (“HomeChoice”) based on the following key criteria:
HomeChoice has grown into South Africa’s largest home shopping retailer supported by its careful attention to, and knowledge of, its core customer base for whom products are specifically tailored. This knowledge, and the strong brand reputation amongst customers, provides an important competitive advantage over other retailers.
Conditions in the credit retail and unsecured lending environments deteriorated during F13, particularly amongst the lower LSM group. This impacted the debtors book performance, with debtors costs rising and higher provisioning required. However, early corrective action in terms of stricter credit granting criteria and reduced loan limits and duration, resulted in a noticeable improvement in credit performance in 2H F13.
Amidst this environment, HomeChoice still reported 16% revenue growth to a review period high of R1.7bn in F13 (albeit slower than previous years). Growth was evidenced in retail sales volumes, as well as in the number and quantum of loans. Although the gross margin and operating margin remained high in F13, they narrowed due to the weak rand and rising debtors costs. This was partially offset by efficiency improvements in other areas, with the operating profit still rising by 8.5% to a review period high R383m. Further efficiencies are expected to derive from the new distribution centre over the medium term.
Positively, the curtailment of credit granting generated substantial cash inflows, evidencing the defensive nature of its business model. Net gearing (15.5%) and net debt to EBITDA (42.7%) thus remained low at FYE13, despite a 150% increase in gross debt to R258m.
Little improvement in the operating environment is expected in F14, with HomeChoice expecting slightly weaker growth on the back of constrained consumer demand and the maintenance of strict credit criteria. However, as the debtors book continues to perform well, this should result in continued strong cash generation and moderate gearing metrics.
GCR considers the current rating to fully account for the strong performance of the business. Over the medium term, sustained double digit growth and the maintenance of moderate gearing may result in a rating upgrade. However, the weak economic environment continues to impact both retail and credit demand. To the extent this results in negative earnings growth, rating action may be taken. Such action may also be precipitated by a deterioration in HomeChoice’s debtors book.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (Jun/2013)
Long term: BBB+(ZA); Short term A2(ZA)
Last rating (Jun/2013)
Long term: BBB+(ZA); Short term A2(ZA)
Sector Head: Corporate Ratings
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated August 2013
HomeChoice Holdings Limited rating report 2013
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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.
HomeChoice 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 rating/s has been disclosed to HomeChoice Holdings Limited with no contestation of the rating.
The information received from HomeChoice Holdings Limited and other reliable third parties to accord the credit rating(s) included the 2013 audited annual financial statements (plus four years of comparative numbers), credit performance information, latest internal and/or external report to management, and detailed budgeted financial statements for 2014/2015.
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 HomeChoice Holdings Limited’s rating at BBB+(ZA); Outlook Stable.