GCR has accorded the Steve Tshwete Local Municipality (“Steve Tshwete”) national scale credit ratings of A-(ZA) (single A minus) and A2(ZA) (single A two) in the long and short term respectively.
Steve Tshwete is the second largest local economy in the Nkangala region by total income (4th largest in Mpumalanga region), with agriculture, manufacturing and coal mining being the predominant economic growth contributors and employment creators. With respect to coal mining, cognisance is taken of significant industry risk, specifically given the fact that the manufacturing segment is largely dependent on the relatively cost effective supply of coal. Further, the coal mines also provide essential fuel to the local power stations in the area, highlighting their importance to the local economy.
The rating is supported by the fact that Steve Tshwete has remained in a net cash position throughout the review period, displaying net cash holdings of R235m at year end F11 (review period average: R294m). In this regard, the municipality’s liquidity position remains strong, with days cash on hand amounting to 168 days (F10: 292 days), well above the council’s peers. Further, council’s demonstrated control over its debtors book, with the average collection period amounting to 24 days in F11 (review period average: 29 days), is positively viewed. Cognisance is, however, taken of relatively high tariff increases that continue to be passed onto consumers, which may lead to collection concerns over the medium term.
The rating takes note of the proposed debt raising activities by Steve Tshwete over the next 3 years, which could see gearing rise to 35% by F14 (F11: 19%), albeit remaining within manageable limits. Cognisance was taken of the general shortage of senior technical staff, exacerbated by prolonged supply chain management protocols, which has served to constrain the implementation and completion of capex projects. In this regard, the municipality has continuously underspent on its capex budget in recent years, which is expected to place increased strain on current infrastructure (specifically given an ongoing increase in residential demand).
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