Announcements

GCR affirms Pinnacle Technology Holdings Limited rating of BBB+(ZA); Rating Watch removed

Johannesburg, 19 Sep 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Pinnacle Technology 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 Technology Holdings Limited (“Pinnacle”) based on the following key criteria:

In April 2014 GCR placed Pinnacle’s ratings on “Rating Watch” as a result of the potential reputational fallout from the criminal case against one of its directors. In August 2014, all charges against the director were dropped. Associated with these charges, the FSB had initiated investigations against certain Pinnacle directors into allegations of insider trading, which have also now been dropped. Accordingly, following the release of Pinnacle’s preliminary results for the year to 30 June 2014 (“F14”), GCR has affirmed the group’s ratings and has changed the outlook to ‘Stable’.

Pinnacle’s revenue rose 8% to R7.1bn in F14, significantly lagging the CAGR of 25% reported for the preceding four years. Slowing growth was also accompanied by a weakening of key earnings margins, with the gross margin falling to 14.4% (F13: 15.6%) and the operating margin declining to 5.3% (F13: 7.1%). Although F14’s performance lagged the prior year, management has attributed this to the weaker operating environment and to the loss of focus arising from the aforementioned litigation, as well as a write-down of certain slow-moving inventories in 2H F14. Importantly, management has confirmed that the group retained all of its key clients and product vendors during this time, and expects Pinnacle to resume its profitable growth path in F15.

Despite improved operating cash flows due to reduced working capital pressure, Pinnacle reported systematically higher gearing metrics as at FYE14. Specifically, net debt to equity has risen to 83% (FYE13: 65%), while net debt to EBITDA amounted to 227% (FYE13: 129%). However, it is noted that much of the rise in gearing relates to the growth of the finance lease receivables book (Centrafin), which rose by 45% to total R364m at FYE14 (R382m including operating lease assets). This book remains of a very high quality, reporting low levels of delinquency. In addition, a large portion of new borrowings related to the acquisition of shares in Datacentrix (with R284m spent over the last two years), while R33m was also borrowed in F14 to purchase land in Samrand for a new head office. Much higher average debt balances drove 55% higher net finance charges of R29m, which saw net interest cover recede to 13.2x in F14 (F13: 25.1x), albeit remaining at a comfortable level.

Notwithstanding the dropped legal charges and recovery of Pinnacle’s share price, management does not anticipate increasing its stake in Datacentrix over the short term. Rather, focus in F15 is expected to be on the core businesses, with a view to raising earnings margins to the F13 levels and attaining sound business volume growth. Cognisance is also taken of the difficult prevailing operating environment, which is affecting corporates, consumers and government alike. This has seen constrained ICT spend across the economy and, with no impending improvement in these conditions, this will likely persist over the medium term.

Going forward, a rating upgrade would be predicated on a sustained return to profitable growth by Pinnacle, as well as the further diversification of its earnings streams. In addition, a reduction in earnings-based gearing metrics would be required for such an upgrade to occur. In contrast, persistent working capital pressure, driving further borrowings and a rise in earnings-based gearing measures, would adversely impact on the Pinnacle’s credit risk profile. This aside, the loss of significant clients and/or suppliers could drive a rating downgrade.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Mar/2013)
Long term: BBB+(ZA); Short term: A2(ZA)
Outlook: Stable

Last rating (Apr/2014)
Long term: BBB+(ZA); Short term: A2(ZA)
Rating Watch: Yes

ANALYTICAL CONTACTS

Primary Analyst
Richard Hoffman
Senior Analyst
(011) 784-1771
Hoffman@globalratings.net

Committee Chairperson
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated August 2014
Pinnacle Holdings Limited (previously Pinnacle Technologies Holdings Limited), Rating Reports (2013-2014)

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.

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 30 June 2014 preliminary annual financial statements (plus four years of comparative numbers), full year budgeted financial statements to 30 June 2014, 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, Pinnacle Holdings Limited, and therefore, GCR has been compensated for the provision of the ratings.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS REPORT

CAGR

The compound annual growth rate is the year-on-year percentage growth rate of an investment over a given period of time.

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.

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.

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.

Portfolio

A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.

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.

GCR affirms Pinnacle Technology Holdings Limited rating of BBB+(ZA); Rating Watch removed

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