Johannesburg, 1 July 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to HomeChoice Holdings Limited of BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to HomeChoice Holdings Limited (“Homechoice”) based on the following key criteria:
Homechoice is an established domestic credit retailer, with a niche position in the home shopping industry. The company markets and sells its good through multiple channels, while orders are processed through its call centre and online platforms. This unique market positioning is further strengthened by a sophisticated logistics network, albeit that Homechoice is highly reliant on the South African Post Office (“SAPO”) for delivery of goods, statements and notices. Homechoice’s business model entails the provision of consumer credit to facilitate sales, while it now also provides personal loans to its retail clients through its financial services division. However, the favourable risk profile of the company’s clients (largely being employed woman in the 4-8 LSM groups) and the fact that around 75% of business is to recurring customers, have sheltered it from the challenging domestic operating environment. Together with a tightening of credit granting criteria, this has seen Homechoice report much lower credit losses and a generally healthier receivables book than its peers.
Homechoice has attained robust revenue and earnings growth over the five-year review period, with revenue growing at a CAGR of 25% and EBITDA at a CAGR of 30%. In F14, revenue rose 18% to reach almost R2bn, while operating income was 19% higher at R525m; with the company thus sustaining a high operating margin of 26.8% in F15. Furthermore, Homechoice’s operations are highly cash generative, albeit that working capital pressure has tempered operating cash flows, while investments in fixed assets and IT systems have driven large investing outflows over the review period. This has seen the company increase debt utilisation, with gross debt rising from R64m in F10 to R297m in F14 (F13: R258m). Despite this, net gearing and net debt to EBITDA remained comfortable at 16% and 43% respectively at FYE14, while net interest cover was sound at 26.4x. Borrowings are expected to rise in F15 to finance spend on the ERP, a new call centre and a retail showroom. However, comfort is taken from a R160m subordinated shareholder loan that has been provided during F15.
A restructuring exercise has seen a holding company established in Malta and listed on the JSE, with part of the rationale being to facilitate expansion outside of South Africa on the African continent. Further to this, the depressed economic environment in South Africa is expected to constrain growth. Expansion into other economies does offer strong growth opportunities, although these countries typically report higher socio-economic risks and generally under developed infrastructures as compared to South Africa.
Looking ahead, a ratings upgrade would be premised on the substantial growth and diversification of the business – both with regard to the business mix and in respect of operating geographies – as well as an improvement in domestic operating conditions. Conversely, should the weak operating environment manifest in a material deterioration in Homechoice’s receivables books and thus its cashflows, this could precipitate a deterioration in credit risk metrics and result in a ratings downgrade.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2013)
Long term: BBB+(ZA); Short term: A2(ZA)
Last rating (June 2014)
Long term: BBB+(ZA); Short term: A2(ZA)
Sector Head: Corporate and Public Sector Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Homechoice Rating Reports, 2013-2015
RATING LIMITATIONS AND DISCLAIMERS
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|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.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|Exercise||To exercise an option is to use the right of the holder to buy or sell the underlying asset on which the option is based at the strike price.|
|Financial Year||The year used for accounting purposes by a company or government. It can be a calendar year or it can cover a different period, often starting in April, July or October. It can also be referred to as the fiscal year.|
|Fix||The setting of a currency or commodity price for trade at a future date.|
|Fixed Assets||Assets of a company that will be used or held for longer than a year. They include tangible assets, such as land and equipment, stake in subsidiaries and other investments, as well as intangible assets such as goodwill, information technology or a company’s logo and brand.|
|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.|
|Goodwill||Arises upon the sale/acquisition of a business and is defined as an established entity’s reputation, which may be regarded as a quantifiable asset and calculated as the price paid for a company over and above the net value of its assets. Negative goodwill refers to a situation when the price paid for a company is lower than the value of its assets.|
|Intangible Assets||The non-physical assets of a company such as trademarks, patents, copyright, information systems and goodwill.|
|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.|
|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 Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|JSE||Johannesburg Stock Exchange.|
|LC||An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|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.|
|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.|
|Option||An option gives the buyer or holder the right, but not the obligation, to buy or sell an underlying financial asset at a pre-determined price.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|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.|
|Stock Exchange||A market with a trading-floor or a screen-based system where members buy and sell securities.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
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 have 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 2014 Integrated Report, including audited 2014 annual financial statements, as well four years’ historical audited financial statements;
– The analyst presentation for the 2014 financial year;
– Homechoice International PLC’s King III register of corporate governance;
– The Pre-listing statement; and
– Comprehensive forecasts for 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.