Announcements

GCR upgrades Centum Investment Company Limited’s rating to A(KE); Outlook Stable.

Johannesburg, 25 July 2014 – Global Credit Ratings has today upgraded the national scale long and short term ratings assigned to Centum Investment Company Limited, with respective ratings of A(KE) and A1(KE) assigned, and the outlook accorded as Stable. The rating(s) are valid until July 2015.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Centum Investment Company Limited (“Centum”) based on the following key criteria:

The upgrade of Centum’s rating follows the Positive Outlook assigned to the ratings during the prior rating exercise. In this regard, Centum has sustained its strong performance in the F14 review period, with growth of the portfolio accompanied by increased dividend and interest income, as well as other sources of recurring income. Thus, while the debt raised from the bond issuance has seen gearing measures rise since FYE12, debt serviceability has been robust, supported by the strong liquidity emanating from the quoted bonds and equities portfolio.

Centum reflects a robust and diverse portfolio of investment assets with a fair value of KShs27bn at FYE14. In this regard, Centum’s core investments have performed strongly in recent years, reporting growing cash yields and sizeable fair value gains (including significant realised gains). Much of Centum’s asset pool is strongly cash generative, with the group reporting significant interest and dividend income from its private equity and marketable securities portfolios. Such recurring cash earnings provide a strong underpin to debt serviceability. Cash flows are also bolstered by the trading of investments, which has historically resulted in large realised gains and provided liquidity for new investments. Centum currently reports low levels of debt relative to its investments and equity, and accordingly, strong solvency and gearing. Such debt is covered by sizeable marketable securities, resulting in comfortable liquidity. GCR considers core private equity and quoted investments to be of sufficient strength to support current debt serviceability.

GCR has noted the significant capital that has and will be invested in the Two Rivers real estate project, and the project related risks associated therewith. However, debt raised will be ringfenced to the project and Centum’s exposure limited to its equity investment therein. With the project proceeding timeously and without incident, debt is expected to be repaid in the short-to-medium term by the proceeds of sales out of the development. GCR has also positively noted the partnership formed with Broll of South Africa (Broll East Africa), which bring substantial skills and technical expertise to Centum as a whole (apart from being a strong business prospect in its own right). Nonetheless, new borrowings will raise the consolidated group’s debt servicing burden markedly in the interim. That said, positive cash flows from Two Rivers are expected during F15 and beyond from the sale of bulk rights, residential housing presales and the commercialisation of the retail component.

Centum is susceptible to the economic and socio-political factors in the East Africa region, as well as market risk in terms of its quoted investments. This notwithstanding, regional economic performances have been sound of late, with strong growth in real economic activity led by widespread public sector infrastructure development and the emergence of middle classes of growing wealth levels. Going forward, growth of the portfolio, accompanied by the sound cash returns and realised capital gains, would bolster debt serviceability. Together with the realisation of positive cash flows from real estate developments and the discharge of material project risks, resulting in reduced concentration to the Two Rivers project in particular, this would bode positively for credit risk and the group’s ratings. In contrast, delays in the real estate projects, together with unexpected further cash requirements, could strain the resources of Centum and negatively impact its debt serviceability. Adverse developments in terms of any of the key quoted or unquoted private equity investments could be weathered by the group. However, should problems simultaneously develop in multiple investments, this could affect investment yields and strain Centum’s ability to service its debt, which in turn would exert downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY

Initial rating (July/2012)
Long term: A-(KE); Short term: A1-(KE)
Outlook: Stable

Last rating (July/2013)
Long term: A-(KE); Short term: A1-(KE)
Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Richard Hoffman
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 2013
Centum Rating Reports, 2012-2013

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.

Centum Investment Company 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 Centum Investment Company Limited with no contestation of the rating.

The information received from Centum Investment Company Limited and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements for 2015, portfolio details and statistics, corporate governance and enterprise risk framework, production and operational statistics, and a breakdown of facilities available (including related counterparties). In addition, 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS ANNOUCEMENT

Capital Gains

An increase in the price of a capital asset or investment such as property, land or securities.

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.

Fair Value

The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.

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.

Market Risk

The risk that the value of a security will fall due to adverse movements in share prices, interest rates, currencies, commodities or wider economic factors.

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.

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