GCR affirms ratings of JD Group Limited on the initial issue of Senior Unsecured Notes
GCR affirms ratings of JD Group Limited on the initial issue of Senior Unsecured Notes under the group’s R8bn DMTN programme; stable outlook
GCR has accorded a long term rating of A(ZA) (single A) to the R1bn Series 1 Notes issued under JD Group Limited’s (“JDG”) R8bn DMTN programme. JDG’s national scale ratings have also been affirmed at A(ZA) (single A) and A1(ZA) (single A one) for the long and short term respectively. All ratings have a stable outlook.
The 3-year, floating rate notes are senior unsecured obligations, ranking pari passu with all other debt obligations (with the exception of obligations that legally have preference), and are jointly and severally, irrevocably and unconditionally guaranteed by wholly-owned JDG subsidiaries.
JDG’s well-entrenched position as a retailer and consumer financier, its established brands, strong management and improved efficiencies have underpinned a turnaround in performance. Although some margin compression resulted from the acquisition of automotive retail assets, the considerably larger group’s attributable earnings have nearly doubled in the 2 years to F12, with firmer margins registered across key divisions. This has driven strong cash generation, although working capital pressure somewhat depressed operating cash flows in F12. Improved management oversight deriving from full SAP implementation is expected to reduce working capital pressure going forward, underpinning more predictable cash flows.
The financial services division has performed robustly in recent years and is expected to drive growth going forward. Specifically, the personal loan book quadrupled to R1.1bn, supporting a 23% increase in instalment sale receivables and loans to R7.3bn in the ten months to June F12. While elevated investment risk is inherent in the rapid growth of the loan book, asset quality has improved consistently since F09. In view of JDG’s enhanced credit score cards and early signalling processes, this is likely to be maintained going forward.
The DMTN programme is expected to see debt rise to unprecedented levels, driving gearing metrics above FYE12 highs. Positively, competencies in retail and financial services are indicative of sustainable earnings and stable returns on capital employed. Interest coverage is also expected to remain sufficient, while a well spread debt maturity profile will serve to mitigate refinancing risk. Weakening macroeconomic fundamentals or policy changes (particularly on interest rates) could materially constrain group earnings. Improvements to the business model and the markedly larger scale are, however, supportive of sustainable financial stability.
An upgrade is deemed unlikely in the near term, due to the considerably higher gearing projections. Nonetheless, consistent earnings growth and stable cash flows will be required to sustain the current ratings. Negative pressure on JDG’s ratings and outlook could result from weakening macroeconomic fundamentals and elevated competition within the sector. To the extent that this drives persistently higher than projected gearing metrics, the ratings would necessarily be reviewed.
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