Johannesburg, 30 Apr 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Pinnacle Holdings Limited of BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Pinnacle Holdings Limited (“Pinnacle”) based on the following key criteria:
Pinnacle is a listed ICT provider, with a leading domestic position in the distribution of hardware and software. Its position is entrenched by longstanding relationships with key product vendors, as well as with important public and private sector customers. This is strengthened by its Datacentrix shareholding, providing exposure to the higher margin services sector. Its leasing subsidiary, Centrafin, has also become a core component of profitability, as well as bolstering recurring income and facilitating sales by other divisions. However, the business requires ongoing debt funding to sustain growth.
Although Pinnacle has a long track record of double digit revenue and operating profit growth, this has stalled somewhat over the past 18 months. More significantly, severe margin pressure in the core distribution business saw operating profit fall by 8% in F14 and 23% (YoY) in 1H F15. While the distribution margin has evidenced an improvement from the low in 2H F14, it remains below historical levels.
Debt has risen from just R10m at FYE10 to almost R1bn at 1H F15, on the back of large acquisitions and working capital pressures. Combined with the weaker earnings, this has resulted in net gearing of 79% at 1H F15 (FYE14: 83%) and net debt to EBITDA of 240% (FYE14: 202%). Gross interest cover has also fallen from 9.3x in F12 to 3.7x in 1H F15. Liquidity metrics are also weak, with all debt maturing over the 18 months to FYE16. Cash coverage of short term debt is negligible, while operating cash flow coverage of debt has also historically been low.
However, measures being implemented to reduce debt are positively noted. Pinnacle has reached agreements to dispose of its properties, as well as for the sale of Infrasol to Datacentrix, which combined will reduce net debt by around R240m. Winding down certain unprofitable business lines and better working capital management should release further cash. Applied retrospectively, this would see net gearing reduce to around 60% and net debt to EBITDA to below 180%. Management has also committed that no dividends will be paid until gearing falls to around 50%. A new funding structure for Centrafin is being considered to more appropriately match the asset maturity profile, and to fully benefit from asset backed securities. As part of efforts to realign the business, the Pinnacle board has also been reconstituted to bolster independence and more fully comply with King III.
While the weak financial position as at 1H F15 points to downward rating pressure, cognisance is taken of efforts being made by the Pinnacle to reduce debt. Were these not to materialise, or if margin pressure continues to the extent that earnings and cash flows weaken further, a downgrade would be likely. Conversely, an upgrade is unlikely in the short term due to the constrained operating environment, and the current high level of debt. Over the longer term, stable earnings growth and further strengthening the relationship with Datacentrix could see the rating improve.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Mar/2013)|
|Long term: BBB+(ZA); Short term: A2(ZA)|
|Last rating (Sept/2014)|
|Long term: BBB+(ZA); Short term: A2(ZA)|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Pinnacle rating reports (2013-2015)
RATING LIMITATIONS AND DISCLAIMERS
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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.
Pinnacle 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 Pinnacle Holdings Limited with no contestation of the rating.
The information received from Pinnacle Holdings Limited and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years of comparative numbers), unaudited interim results for the six months to 31 December 2014, analyst presentations, a breakdown of facilities available and related counterparties, internal company documentation, corporate governance and enterprise risk framework, and 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Asset Backed Securities||Securitisation: debt securities issued that are backed or covered by a pool of assets or receivables (Auto loans and leases, consumer loans, commercial assets, credit cards, mortgage loans).|
|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.|
|EBITDA||Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.|
|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 Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Working Capital||Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.|