Announcements Corporate Rating Alerts

GCR affirms KAP Industrial’s A+(ZA) rating due to cash preservation amidst elevated industry risks. Outlook Stable.

Rating Action

Johannesburg, 25 March 2020 – GCR Ratings (“GCR”) has affirmed the national scale long term and short term Issuer ratings accorded to KAP Industrial Holdings Limited (“KAP” or “the group”) of A+(ZA) and A1(ZA) respectively, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
KAP Industrial Holdings Limited Long Term Issuer National A+(ZA) Stable Outlook
Short Term Issuer National A1(ZA)

Rating Rationale

The affirmation of the KAP rating along with a stable outlook reflects the benefits of liquidity conservation in mitigating the negative effects of the deteriorating operating environment.

KAP reported earnings pressure in 1H FY20, mainly arising from subdued profitability in the Chemicals division. That said, the benefits of diversification were evident, as the other divisions reported sound cash flows. Overall, the group’s cash generation remained relatively resilient, and as a result, its leverage ratios only weakened slightly year-on-year. Covenant and facility headroom also remain reasonable.

The operating environment has, however, weakened significantly since with the national shutdown related to the COVID-19 outbreak and deterioration in market fundamentals. GCR expects both the manufacturing and logistics sectors to experience lower volumes through the crisis, but a stable base of demand and long-term contracts should ensure that KAP has sufficient resilience to maintain a reasonably sound financial profile.

Positively, GCR’s liquidity assessment of KAP has improved to 12-months’ cover of approximately 1.8x, which supports rating stability. Specifically, comfort has been taken from management’s interventions to preserve cash going forward, as well as other initiatives taken to ensure sound liquidity amidst considerable market uncertainty.

Outlook Statement

The Stable outlook reflects GCR’s expectation that KAP’s interventions to preserve cash and reinforce liquidity will help to stabilise the group’s credit risk profile amidst disruptions and other risks arising from the COVID-19 crisis in the short term.

Rating Triggers

The group’s ratings could be lowered if there is a significant deterioration in credit risk metrics due to a protracted weakening in the operating climate. Adverse regulatory findings that curtail group operations would also be negatively viewed. In view of current market headwinds, GCR does not anticipate an upgrade over the rating horizon.

Analytical Contacts

Primary analyst Patricia Zvarayi Deputy Sector Head: Corporates
Johannesburg, ZA patricia@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector Head: Corporates
Johannesburg, ZA shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Companies, May 2019
GCR Ratings Scale, Symbols & Definitions, May 2019
GCR Country Risk Scores, January 2020
GCR Corporate Sector Risk Scores, March 2020
GCR Special Report – Corporate Performance in Infected by COVID-19, March 2020

Ratings History

KAP Industrial Holdings Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial National A-(ZA) Stable April 2014
Last National A+(ZA) Stable November 2019
Short Term Issuer Initial National A2(ZA) April 2014
Last National A1(ZA) November 2019

RISK SCORE SUMMARY

Risk score
Operating environment 12.00
Country risk score 7.50
Sector risk score 4.50
Business profile 1.50
Competitive position 1.50
Management and governance 0.00
Financial profile 1.50
Earnings performance -0.50
Leverage and capital structure 1.00
Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 15.00

Glossary

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ 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 exposures 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.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
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.
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.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS 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.

The credit ratings have been disclosed to KAP Industrial Holdings Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

KAP Industrial 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 information received from KAP Industrial Holdings Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results for June 2019;
  • Four years of comparative audited numbers;
  • Interim results for the six months to December 2019
  • Industry presentations;
  • Facility breakdown at December 2019


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