Johannesburg, 07 Apr 2014 — Global Credit Ratings has today affirmed the long term national scale and the short term national scale issuer ratings assigned to Jasco Electronics Holdings Limited of BB-(ZA) and B(ZA) respectively; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) on Jasco Electronics Holdings Limited based on the following key criteria:
Jasco Electronic Holdings Limited (“Jasco”) is an entrenched and established niche player in the domestic ICT and electronics industries. The group is in its final year of a 3-year restructuring process aimed at divesting of non-core low margin operations, extracting synergies and operating efficiencies, and strengthening its financial position. The telecommunications structures, lighting structures and automotive businesses have been sold, in addition to the head office property. The group also continues to seek an exit from its 51% stake in M-TEC, which has reported significant losses in recent periods. However, protracted negotiations between Jasco and the minority shareholder (Taihan Electric Cable Limited) have delayed this sale, with Jasco impairing the investment to R116m (despite its net asset value of R350m) and classifying it as an “asset held for sale”.
Positive benefits of the restructuring process have yet to manifest, despite strong topline growth. In this regard, although revenue rose from R773m in F11 to R1.2bn in F13, this was accompanied by a compression in gross margins from 37% to 28% over the same period. Accordingly, operating profit fell from R66m in F11 to R28m in F13, with the operating margin lower at 2.5% in F13 (F12: 3%; F11: 8.5%). Revenue declined somewhat in 1H F14 and a further compression in the gross margin to 25.9% was reported, although efficiencies saw the operating margin widen to 3.4% for the period. In addition to this weak operating performance, the restructuring process has resulted in material impairments and write-downs of R110m in F13, which resulted in a R107m attributable loss for the period. To address the resultant capital strain, R55m was raised through a rights issue in January 2014, serving to bolster both liquidity and solvency post the interim period.
Delays in the sale of the M-TEC stake have also prevented the repayment of the R100m in preference shares that were issued to Afrocentric (Jasco’s largest shareholder) as part of the M-TEC acquisition price. While this debt is unlikely to precipitate a default (with Afrocentric having condoned covenant breaches and extended the maturity date), it continues to account for a signficant proportion of interest charges and elevates Jasco’s gearing. Further to this, gearing measures have spiked in recent periods, with net gearing of 165% and net debt to EBITDA of 483% reported at 1H F14 (FYE13: 184% and 656% respectively). However, retrospectively applying the rights issue proceeds to equity and excluding the preference shares from debt, net gearing and net debt to EBITDA would have been more comfortable at 66% and 270% respectively at 1H F14.
Going forward, management expects a strong improvement in the group’s operating performance, with focus expected to be maintained on core existing operations and no major acquisitions expected (apart from potential small bolt-on purchases). Moreover, the sale of the M-TEC stake is expected to have a dual-positive impact on attributable earnings by removing the earnings drag of this loss-making business, as well as enabling the repayment of preference shares and thereby significantly reducing finance charges. From a ratings perspective, the M-TEC sale would result in a materially less geared balance sheet and position the group for positive growth in its core operations. If accompanied by a sustained return to operating profitability, this would drive an upwards ratings migration in the medium term. Conversely, continued delays in the M-TEC sale and adverse developments in core businesses would place further strain on credit risk metrics, and could negatively impact on the rating.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Feb/2013)|
|Long term: BB-(ZA); Short term: B(ZA)|
|Last rating (Feb/2013)|
|Long term: BB-(ZA); Short term: B(ZA)|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
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/RATING-SCALES-DEFINITIONS. 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 2013 audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, 1H F14 interim results, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. 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.
GCR affirms Jasco Electronics Holdings Limited’s rating of BB-(ZA); outlook Stable