Johannesburg, 25 Apr 2014 — Global Credit Ratings has today affirmed the long term and the short term national scale issuer ratings assigned to Pinnacle Holdings Limited of BBB+(ZA) and A2(ZA) respectively; with the rating placed on Rating Watch.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on Pinnacle Holdings Limited based on the following key criteria:
Pinnacle Holdings Limited (“Pinnacle”) is a listed ICT provider, with a leading domestic position in the distribution of hardware and software. This is entrenched by longstanding relationships with key product vendors, as well as with important public and private sector customers.
On 24 March 2014, Pinnacle announced that legal proceedings had been instituted against one of its directors. This could have an adverse reputational impact on Pinnacle, which in turn could affect supplier and customer relations, and result in lost business volumes (particularly in terms of the public sector). Accordingly, GCR has placed the ratings on “Rating Watch”, and will monitor developments closely and respond accordingly as new information emerges.
Acquisitions and organic growth have translated to strong topline performance, a slight widening of margins and strong growth of nominal profits. This has resulted in strong core cash generation and sound debt serviceability, while interest income from the finance lease book has tempered rising interest charges. Despite this, persistent large working capital absorptions have constrained operating cash flows. Together with significant acquisitional activity (relating in F13 to the acquisition of 35% in Datacentrix ) and sustained investment in the finance lease book, this has driven a sharp rise in borrowings and gearing since FYE12. In this regard, gross borrowings rose by 148% to R885m at FYE13, and further to R976m at 1H F14. This has seen net gearing register much higher at 91% at 1H F14 (FYE13: 65%), and net debt to EBITDA at 210% (FYE13: 129%); from a net ungeared position at FYE10. GCR considers gearing to be high at these levels, albeit that it is expected to trend downwards over the medium term.
Pinnacle’s reports a growing presence in the ICT projects & services sub-segment, which offers higher margins and recurring annuity-like revenues. Similarly, the Centrafin equipment lease book bolsters recurring interest income, and facilitates sales by other divisions. Nonetheless, the group remains dependent on key vendors and large customers, and their loss remains a material risk (albeit somewhat mitigated by the group’s diversity of suppliers and clients). Exogenous to the group is the weak domestic economy, which is expected to affect private sector ICT spend, although robust public sector spend is expected to provide strong impetus to the industry over the medium term.
Looking ahead, unexpected adverse developments regarding the high-profile legal matter, and/or the unfavourable resolution thereof, could have negative ramifications if supplier and/or customer relations are materially affected. This aside, further borrowings and a deterioration in gearing or debt serviceability measures could drive a downward ratings movement. In contrast, reduced working capital and funding pressure would be positively considered, particular if it drives an improvement in key credit risk metrics. Nevertheless, a rating upgrade is dependent on long term sustained growth and diversification of earnings.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (Mar/2013)
Long term: BBB+(ZA); Short term: A2(ZA)
Last rating (Mar/2013)
Long term: BBB+(ZA); Short term: A2(ZA)
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s criteria for rating corporate entities, updated August 2013
Pinnacle Holdings Limited Rating Report (2013)
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 2013 audited annual financial statements (plus four years of comparative numbers), 1H 2014 interim results, latest board packs, full year budgeted financial statements, corporate governance and enterprise risk framework, industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties. In addition, other 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.
GCR affirms Pinnacle Holdings Limited’s rating of BBB+(ZA); outlook Rating Watch.