Johannesburg, 08 Nov 2013 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to JD Group Limited of A(ZA) and A1(ZA) respectively; with the outlook accorded as Stable. Concurrently, Global Credit Ratings has affirmed the following long term credit rating(s) to the transactions issued by “JD Group Limited”;
JDG01 – R1bn senior Unsecured Notes – A(ZA), Outlook Stable
JDG03 – R450m senior Unsecured Notes – A(ZA), Outlook Stable
JDG04 – R3000m senior Unsecured Notes – A(ZA), Outlook Stable
Global Credit Ratings has accorded the above credit rating(s) on JD Group Limited (“JDG”) based on the following key criteria:
The acquisition of Unitrans and other African retail assets from Steinhoff International Holdings Limited (“Steinhoff”) has seen a marked increase in the scale and scope of JDG’s operations. As a result, revenue increased to R32.2bn in F13, more than double the F11 level. However, these are inherently lower margin businesses, resulting in an overall compression in the group’s operating margins to 8.6% in F12 and F13, compared to the double digit margins previously. Nevertheless, nominal operating profit registered a review period high R2.8bn in F13. While earnings are now generated from more diversified retail segments and are weighted towards cash sales, JDG has become increasingly dependent on the consumer finance business, accounting for over 30% of operating profit. Overall NPBT fell to R872m, impacted by a substantial rise in debtors costs and impairment of the group’s new IT system.
Concern stems from a deterioration in the quality of the debtors book, with a high R914m debtors cost reported in F13. While operating cash flows remain sound, further negative developments in respect of the loan book could impact cash generation. In this regard, while JDG has reduced the origination of personal loans, it cannot do so in terms of its credit sales without impacting its retail sales volume. Nonetheless, credit vetting criteria have been raised, while new systems and risk management processes are expected to improve debtor management.
Although retail operations remain relatively lowly geared, JDG has borrowed extensively to fund its distribution centres and ERP systems, as well as the growth of instalment sales and the extension of personal loan products. Gearing measures have thus increased sharply, with net debt to equity rising to 125% at FYE13 (FYE12: 53%) and net debt to EBITDA to 219% (FYE12: 119%), well above historical levels. With the higher gearing, net interest cover fell to 5.6x at F13, from the high 19.3x in F11, albeit still remaining firm.
Having Steinhoff as the majority shareholder provides JDG with access to significant retail and logistics expertise, although given Steinhoff’s high debt burden, its ability and willingness to provide financial support is considered to be limited.
GCR considers the increased reliance on financing activities, unrelated to retail operations, to have increased group risk. Thus, a slowing of credit extension and an improved quality of the debtors book would be positively considered. Conversely, further aggressive credit extension, even if profitable, could lead to a downgrade. A deterioration of the debtors book could impact cash flows and profitability, and have a negative bearing on the rating. Exogenous to JDG, an improvement in economic conditions (and particularly employment and consumer health) would aid the group and improve its credit risk profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Jun/2000)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (Apr/2013)|
|Long term: A(ZA); Short term: A1(ZA)|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
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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.
JD Group 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 JD Group Limited with no contestation of the rating.
The information received from JD Group Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), 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.