GCR has maintained JD Group Limited’s (JDG”) national scale ZAR currency ratings at A (single A) in the long term and A1 (single A one) in the short term, with both ratings remaining on rating watch. Former Steinhoff assets acquired during the year underpinned the strong top line growth reported in F11. Nonetheless, cognisance was taken of the tangible organic revenue growth deriving from stronger furniture and cash retail volumes, as well as a more diverse financial services offering. Restructuring and improved management oversight of operations engendered operating efficiencies and enhanced asset quality in F10 and F11. This saw operating income register above the R1bn mark in F11 (F10: R808m), while net income before discontinued operations rose by 43% to R703m. Although some margin compression is projected for F12, stronger medium term earnings and cash flows should accrue as recent acquisitions are bedded down.This notwithstanding, GCR notes the elevated business risk associated with the acquisition of Unitrans Automotiveand Steinbuild, which provide no economic diversification and deviate from core competencies.
Improved profitability supported successive increases in cash generation since F10, and underpinned a 1.6x increase in operating cashflows to R640m in F11.Having reined in expansionary capex over the years, JDG registered total capex of R805m in F11 (F10: R188m), of which R710m relatedto store refurbishments and IT projects. Borrowings increased by R968m, although nearly R600m was retained in cash, and will go towards capex in F12. Net gearing, however, rose moderately, to 25% at FYE11 (FYE10: 15%), as this coincided with a 16% increase in shareholders interest to R5.2bn at FYE11, underpinned by shares issued to Steinhoff and retained earnings. Despite stronger profitability, net debt to EBITDA was reported at a 5-year high of 102% (F10: 70%). Net interest cover approximated previous highs, at 11.6x (F10: 7.5x). JDG secured R3.6bn in facilities, of which 25% remained unutilised at FYE11.
Notwithstanding the adverse near term economic outlook, JDG projects stable revenue growth across all its strategic business units for F12. As the automotive business is typified by strong volumes and comparatively low margins, this should see group margins ease from F11 levels. Nonetheless, JDG intends to leverage a fuller complement of financial services products, as well as amplified focus on the rural customer base. As the recent acquisitions are bedded down, this should support stronger future earnings and stable cash flows. Net gearing and net debt to EBITDA are expected to rise to around 50% and 150% respectively (excluding goodwill and intangibles) by FYE12, but should ease over the medium term. Credit protection should remain robust, although the higher gearing presents elevated investment risk, particularly in view of aggressive growth projected. JDG intends to initiate a DMTN programme in 2H F12, to refinance maturing debt and to partially fund expansion. As very little information is available regarding the DMTN programme, GCR intends to review the rating prior to its issuance.
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