Johannesburg, 16 Nov 2015 — 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 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 Jasco Electronics Holdings Limited (“Jasco”) based on the following key criteria:
Jasco is an established player in the South African ICT industry, with operations encompassing a diversity of services and products. Recent years have seen the group undertake a restructuring process, aimed at consolidating smaller businesses into larger/more-efficient business units, disposing of non-core and/or loss-making operations, and generally unlocking cost savings and synergies across the group. This process is largely complete, with the group expected to realise significant benefits in F16 and beyond. Aligned to this, Jasco has accepted an initial offer to sell its 51% stake in Malesela Taihan Electrical Cable (Pty) Limited (“M-TEC”) for a consideration of R60m, which was approved by shareholders at a general meeting held on 10 November 2015. This should enable the group to materially reduce gearing in F16, while it should also significantly free up management’s time and focus.
The weak domestic operating environment has seen Jasco report constrained revenue growth and operating profitability, with operating income of R40m attained at a 3.6% margin in F15; being well below the R66m and 8.5% margin reported in F11. The weaker performance has been compound by large impairments to goodwill and investments in F13 and F15 particularly, which underpinned retained losses of R107m and R83m in these two years respectively. The weak operating results and working capital pressure have seen the group report operating cash outflows in three of the past five years, resulting in significant liquidity strain. Nonetheless, F16 budgets indicate stronger operating results and cash flows, which (if attained) would result in improved gearing and liquidity.
Jasco issued a R100m corporate bond on 30 January 2015, using the proceeds to repay the R90m preference shares that were held by the group’s equity empowerment partner, Afrocentric Investment Corporation Limited. Together with a rise in overdrafts that resulted from working capital pressure, this saw gross debt remain elevated at R188m at FYE15. Accordingly, gearing metrics remained high at FYE15, with net debt to equity of 141% and net debt to EBITDA of 360%.
Looking ahead, the domestic operating environment for ICT companies remains constrained by a weak general economy, depressed levels of corporate spend on ICT and high competitive forces, and these conditions are expected to persist over the medium term. Nonetheless, a return to sustainable profitability and the stabilisation of working capital levels, together with the reductions in debt and gearing as indicated in the F16 budgets, could have a positive impact on the ratings. In contrast, further large impairment charges, continued working capital pressure and/or unexpected rises in debt and gearing could negatively impact the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (February 2013)|
|Long term: BB-(ZA); Short term: B(ZA)|
|Last rating (October 2014)|
|Long term: BB-(ZA); Short term: B(ZA)|
|Sector head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Jasco rating reports, 2013-2014
RATING LIMITATIONS AND DISCLAIMERS
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|Annual Report||A status report on the current financial condition of a company. It usually includes the chairman’s report, the auditor’s report and detailed financial statements. It is issued once a year for shareholders to examine before the annual general meeting (AGM). In many markets, comprehensive Integrated Reports covering a wide spectrum of information have replaced traditional annual reports.|
|Bond||A long term debt instrument issued by either a company, institution or the government to raise funds.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|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.|
|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.|
|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.|
|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||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 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.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|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 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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|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.
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 2015 Integrated Report and Audited Financial Statements, as well as Integrated/Annual Reports and Annual Financial Statements for prior years in the five-year review period;
- The 2015 results presentation;
- SENS notices for Jasco, and other circulars; and
- Budgets for the year ended 30 June 2016.
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