Announcements Corporate Rating Alerts

GCR upgrades National Scale Issuer Rating on Curro to BBB+(ZA) on sustained earnings growth. Outlook Stable

Rating Action                                                

Johannesburg, 30 July 2019 – GCR Ratings (“GCR”) has upgraded the long term national scale Issuer rating assigned to Curro Holdings Limited to BBB+(ZA) and affirmed the short term rating at A2(ZA); with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Curro Holdings Limited Issuer Long Term National BBB+(ZA) Stable
  Issuer Short Term National A2(ZA)

Rating Rationale

The ratings upgrade on Curro Holdings Limited (“Curro” or “the group”) reflects its sustained strong earnings growth and widening margins counterbalanced by high gearing and sizeable ongoing capital expenditure requirements.

Curro’s ratings are underpinned by the supportive operating environment for private education and relative earnings stability. Against the backdrop of inadequate education spend in public schools, the underlying supply-demand dynamics in the private education space are also expected to sustain high growth in learner enrolments over the medium term.  Within this environment, the ratings take cognisance of Curro’s strong franchise value and entrenched brands, albeit tempered by the highly fragmented and competitive private education industry. Limited geographical and business line diversification also curtails the ratings.

Curro’s credit profile is bolstered by the very strong earnings growth that has been achieved on the back of sound organic growth in learner numbers and the successful integration of acquisitions into the group’s portfolio. In this regard, Curro has achieved a 31% five-year CAGR in revenue, while the EBITDA margin has steadily improved to 25% from just 17% in FY13. With Curro schools currently operating at 53% of available capacity, GCR expects the EBITDA margin to increase to between 27 and 30% over the next two years as additional schools in the group reach critical mass amidst continued operating cost rigour.

On the back of the substantial capital expenditure required to reach scale targets, debt doubled to R3.0bn in the five years to FY18. Accordingly, GCR considers the gearing metrics to be relatively weak, with net debt to EBITDA at 4.5x and EBITDA coverage of interest of 3.2x in FY18 (FY17: 3.8x and 3.3x respectively). In particular, the operating cashflow coverage of debt remains very low at 14% in FY18 (FY17: 17%). GCR expects the net debt to EBITDA to remain within the 4.0x to 5.0x range over the next two years as the increase in earnings is offset by additional debt drawdowns needed to fund planned expansion. A material decrease in gearing is only expected over the medium to long term as capital expenditure tapers off. Curro’s liquidity assessment is also constrained by the ongoing capital expenditure requirements and lumpy debt maturity profile, albeit that the sources of liquidity are expected to cover its uses by at least 1.3 times over the next twelve months. Although the group does not maintain unutilised facilities to meet debt redemptions, GCR is of the view that long established funding relationships with a number of highly rated domestic financial institutions somewhat mitigates the refinancing risk inherent in the group’s growth phase. Strong institutional shareholder support, demonstrated through successful previous equity raises, has also been considered in support of the ratings.

Outlook Statement

The Stable Outlook reflects GCR’s expectation that earnings will continue to evidence sound growth over the rating horizon, albeit that sizeable capital expenditure requirements will keep gearing metrics at elevated levels.

Rating Triggers

GCR could increase the ratings if Curro demonstrates a sustained improvement in EBITDA margins leading to a material improvement in earnings, while concurrently reducing gearing. Conversely, the ratings could be lowered if there is a severe deterioration in operating performance and/or material increase in debt which leads to a sustained weakening in credit metrics.

Analytical Contacts

Primary analyst Tavonga Muchemedzi Credit Analyst
Johannesburg, ZA tavongam@GCRratings.com +27 11 784 1771
     
Committee chair Eyal Shevel Sector Head: Corporate and Public Sector
Johannesburg, ZA shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Companies, May 2019
GCR Country Risk Scores, June 2019
GCR Corporate Sector Risk Scores, June 2019

Ratings History

Curro Holddings Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National BBB-(ZA) Stable May 2013
  Last National BBB(ZA) Positive May 2018
Issuer Short Term Initial National A3(ZA) May 2013
  Last National A2(ZA) May 2018

RISK SCORE SUMMARY

Risk score 12.00
   
Operating environment 15.50
Country risk score 7.50
Sector risk score 8.00
   
Business profile 0.00
Competitive position 0.00
Management and governance 0.00
   
Financial profile -3.50
Earnings performance 1.00
Leverage and capital structure -3.00
Liquidity -1.50
   
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures 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.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Income Money received, especially on a regular basis, for work or through investments.
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.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
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.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.


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