Johannesburg, 12 December 2018— 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; with the outlook accorded as Stable.
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:
GCR considers Jasco’s liquidity as less than adequate, based on liquidity sources coverage of uses during the next 12 months being less than 1x. Further, note is taken of the significant debt maturity wall due in FY20 and associated risks over tightening liquidity if not adequately addressed. The group’s main funding needs will be working capital, but this should not prevent it from generating positive cash flow from operations.
On the back of stronger profitability, Jasco’s net debt/EBITDA ratio improved further to 140% in FY18 (FY17: 149%). Net interest cover, however, dropped to 3.3x from 3.9x previously, whilst discretionary cash flow to net debt decreased to 19% (FY17: 31%), with the latter considered weakly positioned. Consideration is also given to the weaker balance sheet in view of the erosion in tangible equity following significant impairments. Comfort is derived from the group’s stated intention to reduce debt, particularly the redemption of the R45m corporate bond over the next 12 months. In this regard, management is currently exploring options to meaningfully recapitalise Jasco before FY19 (albeit subject to appetite and pricing), with part of the proceeds to be used to expunge debt obligations and to fund future acquisitive opportunities, particularly in terms of pursuing minority interest buyouts of existing businesses.
Jasco’s business risk profile assessment remains constrained by its small size, exposure to a highly fragmented and rapidly evolving industry, and the presence of significant minority interests in the group structure. Nevertheless, a strength for Jasco is certain vertically integrated capabilities, as well as its long-term track record in the industry and maintaining sound relationships with customers, resulting in a high level of repeat business.
Positively, Jasco reported stronger results for FY18, with revenue up 10% and operating profit up 44%. This was on account of new acquisitions, with organic revenue down 3%, illustrating the tough operating conditions. GCR expects stable to modestly improving operating profit trends over the rating horizon, supported by management’s continued focus on addressing under-performing businesses and cost rationalisation. These positives are counterbalanced by the group’s acquisition-led growth strategy, which does entail additional risks, whilst similarly the offshore expansion strategy has also encountered setbacks.
Upward rating migration is only likely on the back of growing operating profit trends and increased operational diversification, leading to stronger profitability and cash generation, in conjunction with improvements in gearing and liquidity (which may be supported by a successful recapitalisation). The ratings could be lowered if liquidity pressures persist or if free cash flows are lower than projected because of unexpected business challenges, leaving credit risk indicators weaker.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (February 2013)||Last rating (November 2017)|
|Long term: BB-(ZA); Short term: B(ZA)||Long term: BB-(ZA); Short term: B(ZA)|
|Outlook: Stable||Outlook: Positive|
|Primary Analyst||Committee Chairperson|
|Sheri Morgan||Eyal Shevel|
|Senior Analyst: Corporate Ratings||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Jasco Electronics Holdings Issuer rating reports, 2013-17
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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.|
|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.|
|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.|
|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.|
|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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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 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.|
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.|
|Shareholders’ Funds||The holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.
The information received from Jasco Electronics Limited and other reliable third parties to accord the credit rating(s) included:
- the 2018 audited annual financial statements (plus prior four years of comparative numbers);
- the 2018 integrated annual report;
- investor presentations;
- Financial forecasts for 1H FY19.
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), Stable outlook