Johannesburg, 6 November, 2017— Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Jasco Electronics Holdings Limited of BB-(ZA) and B(ZA) for the long and short term respectively. A positive rating outlook has been accorded to the ratings.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Jasco Electronics Holdings Limited (“Jasco”) based on the following key criteria:
Following the completion of an extensive restructuring process, which saw the disposal of M-TEC in FY16, Jasco’s focus shifted to organic and acquisitive growth, coupled with geographical expansion into East Africa and the Middle East
Despite group revenue declining 3% to R1.04bn in FY17 on the back of a weak domestic economy, enhanced cost control and efficiencies across the all segments underpinned an improvement in gross and operating margins to 30.2% and 5.3% respectively (FY16: 28.8% and 4.7%). However, a number of once-off unusual costs, among them retrenchment costs, associated with the exiting of unprofitable business lines and transaction costs associated with the group’s acquisition activity during the year, resulted in net profit declining marginally from R14m in FY16 to R12m in FY17.
Cash generation remained robust for the second year running which, coupled with tight working capital controls, resulted in strong operating cashflows of RR37m, albeit down from the 5-year high of R55m in FY16. While the strong cashflow position is positively viewed, further working capital efficiencies will be required to improve the predictability of net cash from operations.
Interest-bearing debt increased 70% to R213m at FY17, on the back of the Reflex Solutions acquisition, somewhat offset by the partial redemption of the DMTN, which declined from R87 to R44m using proceeds on the M-TEC sale. The higher level of debt at FY17 was offset by significant cash reserves and accordingly, adjusted net gearing reported at a moderate 77% (FY16: 71%). Notwithstanding the resultant drag on earnings, net debt to EBITDA improved to 172% in FY17 (FY16: 188%), while unadjusted debt to equity fell in line with internal targets for the first time in the five years review. Operating leases and other contingencies are moderate.
Further deleveraging of the balance sheet remains a priority for the group, with management planning a rights issue in the short term to retire the corporate bond in full. Any future acquisitions are to be funded from new equity and internal cashflows, and accordingly, no additional pressure is expected from the capex trajectory.
Expected improvements in financial performance notwithstanding, the domestic environment for the ICT industry remains constrained by the sluggish general economy and depressed levels of capex spend in the local telecommunications industry. Accordingly, successful expansion into other regions would be positively viewed.
Upward rating migration is only likely when Jasco has demonstrated sustained profitability and strong cash generation, driving improvements in key gearing and credit risk indicators. Conversely, negative rating pressure would arise from deteriorating earnings and cashflows, resulting in key gearing and credit risk indicators rising to unsustainable levels.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (February 2013)||Last rating (November 2016)|
|Long term: BB-(ZA); Short term: B(ZA)||Long term: BB-(ZA); Short term: B(ZA)|
|Outlook: Stable||Outlook: Positive|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Analyst||Sector Head: Corporate & Public Sector Debt Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
Jasco Electronics Holdings rating reports, 2013-16
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.
|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.|
|Bond||A long term debt instrument issued by either a company, institution or the government to raise funds.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|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.|
|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.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|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.|
|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.|
|Short-Term Rating||A short-term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|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 process was influenced by any other business activities of the credit rating agency; b.) the ratings are based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings 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 ratings have been disclosed to Jasco Electronics Holdings Limited with no contestation of the ratings.
The information received from Jasco Electronics Limited and other reliable third parties to accord the credit rating(s) included:
- The 2017 integrated report and related supplements
- Four years comparative audited results
- Jasco Electronics Holdings Limited 2017 results presentation booklet
- Industry comparative data
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), Positive outlook