Announcements

GCR affirms Jasco Electronics Holdings Limited’s rating of BB-(ZA); Outlook Stable.

Johannesburg, 3 Nov 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Jasco Electronics Holdings Limited of BB-(ZA) and B(ZA) in the long and short term respectively; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Jasco Electronics Holdings Limited (“Jasco”) based on the following key criteria:

Jasco recently completed a 3-year realignment to create a leaner group structure, rebrand, unlock efficiencies and attain a more sustainable cost base. The process also included the sale of non-performing and peripheral subsidiaries, with the automotive, lighting structures and telecommunications structures businesses sold to date. Most significantly, the group has entered into a non-binding sale agreement to dispose of its interest in M-TEC. The investment’s carrying value was impaired by R73m to R116m in F13, driving the R106m net loss incurred that year. The transaction is expected to conclude by 31 January 2015 and will see Jasco redeem the outstanding R90m preference shares. The redemption date on the obligation has been extended to December 2014. To enhance its financial flexibility, Jasco plans to make an initial draw down from its R750m DMTN programme before the end of January 2015, although the size of the issue is yet to be finalised. It is considered unlikely that AfroCentric would enforce its rights under the preference shares in the event of a default, although Jasco has other options should the M-TEC sale be delayed, which include a letter of comfort for alternative funding.

Having risen by 16% to a high of R1.2bn in F13 on the back of a major contract, revenue contracted by 9% in F14 (3% growth on a like-for-like basis), due to the asset disposals and weak demand. Although steady at 28.1%, the gross margin remained well behind a high of 37% achieved in F11, while the operating margin eased to 2.8% (F13: 3.6%). There were no anomalous impairments in F14, although the impact of restructuring and other once-off costs led to a 28% drop in operating profit to R30m and constrained net income to a low R7m. Net interest cover registered at 2x (F13: 2.1x), while free cash flow coverage was positive, at 0.6x.

Weak profitability has translated to low or negative discretionary cash flows over the review period. Positively, debt moderated to R191m (FYE13: R272m), on the back of the R55m cash proceeds from the January 2014 rights issue and the sale of non-core assets. This reduced net gearing to 105% at FYE14 (FYE13: 184%), while net debt to EBITDA eased to 450% (FYE13: 495%). Excluding the preference shares from debt, net gearing and net debt to EBITDA would have registered at 54% and 231% respectively (FYE13: 115%; 308%). Management expects gearing to be reduced to 30% post the M-TEC sale, below the 50% internal upper limit.

Upward rating pressure could emanate from sustainable medium to long term earnings growth. In this regard, successfully concluding the M-TEC sale and bedding down the restructured group would materially deleverage the balance sheet, strongly positioning Jasco for growth in its core operations. However, further delays in the M-TEC transaction would be negatively viewed. In addition, adverse developments materially curtailing the sales volumes or profitability of the core businesses would likely drive increased gearing and a heightened credit risk profile, placing downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Feb/2013)
Long term: BB-(ZA); Short term: B(ZA)
Outlook: Stable

Last rating (Apr/2014)
Long term: BB-(ZA); Short term: B(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Patricia Zvarayi
Senior Analyst
(011) 784-1771
Patricia@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 August 2014
Jasco Electronics Holdings Limited credit reports, 2013-2014

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.

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.

Jasco Electronics 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 Jasco Electronics Holdings Limited with no contestation of the rating.

The information received from Jasco Electronics Holdings Limited and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years of comparative numbers), budgeted financial statements for 2015, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available. In addition, information specific to the rated entity and/or industry was also received.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS REPORT

Balance Sheet

Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

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.

Impairment

Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.

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.

Leverage

With regards 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, EBITDA or by the value of investments.

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.

Preference Share

Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.

Rights Issue

One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.

GCR affirms Jasco Electronics Holdings Limited’s rating of BB-(ZA); Outlook Stable.

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