South Africa Corporate Analysis | Public Credit Rating
KAP Industrial Holdings Limited
South Africa Corporate Analysis May 2015
Financial data:
(USD’m comparative)
30/06/13 30/06/14
R/USD (avg) 8.84 10.38
R/USD (close) 9.88 10.59
Total assets 1,390.8 1,340.6
Total debt 446.4 380.5
Total capital 505.1 525.9
Cash & equiv. 133.6 127.3
Turnover 1,528.6 1,420.8
EBITDA 215.7 203.5
NPAT 78.8 73.4
Op. cash flow 197.4 138.1 Market cap.* R14.3bn/USD1.2bn
Market share n.a
*As at 01/06/15 @ R12.26/USD.
Rating history:
Initial/last rating (April 2014)
Long-term: A-(ZA)
Short-term: A2(ZA)
Rating outlook: Stable
Related methodologies/research:
Global Criteria for Rating Corporate
Entities, Updated February 2015
KAP Industrial Holdings Limited (“KAP,
or the group”) rating report, 2014
GCR contacts:
Primary Analyst
Patricia Zvarayi
Senior Analyst
Committee Chairperson
Eyal Shevel
Sector Head: Corporate Ratings
Analyst location: JHB, South Africa
Tel: +27 11 784 – 1771
Website: http://globalratings.net
Summary rating rationale
KAP’s operations are underpinned by assets acquired from Steinhoff
International Holdings Limited (“Steinhoff”), which entrench its
position as a diversified group, providing branded logistics solutions and
an extensive industrial offering, which includes various timber-based
products, chemicals, automotive products, and bedding components.
Although KAP is now a Steinhoff associate following a reduction in the
latter’s shareholding, the entities have maintained close linkages, with
KAP using Steinhoff’s legal, corporate services and other structures. As
such, and given the retention of former Steinhoff executives and its
board representation, the linkage is considered in support of the ratings.
While the group structure in its current guise has a short track record,
operations are underpinned by established entities that generate sound
earnings, leveraging off a strategy to maintain a significant market share
by integrating its businesses into the operations of its customer base or
by controlling the value chain.
Top line growth registered at 9% in F14, to see turnover rise to R14.8bn
(1H F15: 9% YoY). With cognisance taken of the sale of ancillary
entities, this matched the organic growth achieved in F13. KAP’s core
businesses continue to reflect steady operating margins (9.3% in F14
and 1H F15), supporting sound cash flows. Despite rising pressure from
import costs, Rand fuel prices and high utility expenses, structural
refinements are expected to support stable medium term margins.
KAP has secured R5.4bn in facilities and issued R1bn in bonds under its
DMTN programme, a portion of which was used to repay R3.2bn in
Steinhoff loans related to the reverse acquisition. Debt has remained
below the R4.9bn review period high reported at FYE12, registering at
R4bn as at FYE14 (1H F15: R4.6bn). This translated to lower than
projected net gearing and net debt to EBITDA of 48% and 127%
respectively (1H F15: 57%; 145%). With future capex to be mainly
funded from internal cash flows, the metrics are expected to moderate
further in the medium term.
Although cash generation has been robust, working capital pressure saw
an 18% decline in F14 operating cash flows. As expected, interim
pressure impacted cash flows in 1H F15 (with a 12% YoY decrease
attributed to higher stocks and debtors due to increased activity and
seasonality), albeit that normalisation is expected for the full year. Debt
serviceability is sound, with net interest cover registering at 4.7x in 1H
F15 (F14: 4.2x), and R1.3bn in credit lines remaining unutilised.
The effects of the weak domestic economy will continue to impact
operations, although note is taken of the burgeoning regional footprint
and balanced exposure to both cyclical and defensive sectors.
Factors that could trigger a rating action may include
Positive change: The continued bedding down of new capacity and
operational structures, coupled with proven ability to sustain the growing
regional presence, should ensure sound earnings growth despite the
challenging operating environment.
Negative change: A material elevation in debt and gearing metrics (even
to fund strategic acquisitions), and/or the significant underperformance of
KAP’s core subsidiaries against budget, would place downward pressure
on the ratings.
Rating class Rating scale Rating Rating outlook Review date
Long term National A-(ZA) Stable May 2016
Short term National A1-(ZA)
South Africa Corporate Analysis | Public Credit Rating Page 2
Business profile and recent developments
KAP is a diversified logistics and manufacturing group
with a presence in 13 African countries. Its operations
consist of specialised logistics and passenger transport
solutions (under Unitrans), an integrated timber business
(“PG Bison”) and other manufacturing businesses that
produce various automotive components, PET, resin, and
bedding components. KAP’s shareholding and corporate
structure shifted materially with the April 2012 reverse
acquisition of Steinhoff’s African industrial assets,
which were valued at R8.9bn at the time. Nonetheless,
the group is underpinned by established businesses with
an extensive history in logistics and manufacturing.
Table 1: History and evolution in shareholding
1978 Incorporation of Kolosus Holdings Limited (“Kolosus”). JSE-listed in 1994,
following a share consolidation in November 1993.
Jul 2003 Daun & Cie gained control of Kolosus Holdings Limited, which was used as
an acquisitive platform to create a diversified manufacturing group.
Nov 2004 The group was renamed KAP International Holdings (“Kap der Guten
Hoffnung”), and was reverse-listed on the JSE.
2012
Reverse acquisition of Steinhoff Industrial assets, reducing the Daun & Cie
shareholding from 45%. The group was renamed KAP Industrial Holdings. Steinhoff’s shareholding is increased to 88%, from 34% previously.
Sep 2012 Daun & Cie reduced its stake from 7% to less than 2%. The company
relinquished its residual shareholding and exited the group in June 2013.
As reflected in table 2, Steinhoff’s stake in KAP has also
changed since the reverse takeover. From 88%, its
interest was reduced to 62%, when it partially funded the
JD Group acquisition via an exchange of 16 KAP shares
for every JDG share. The more recent reduction to 45%
was mainly because Steinhoff decided to account for
KAP as an associate in anticipation of its planned
European listing.
Table 2: Major shareholders’ beneficial interest (%) FYE13 FYE14
Steinhoff* 61.78 44.73
Allan Gray Asset Management 13.16 23.51
Investec Asset Management 15.82 15.77
*Held through a subsidiary of Steinhoff Africa Holdings Pty Limited.
According to Steinhoff’s management, the motivation
for this change was strategic, given the complexities of
having to consolidate a business whose operations are
not aligned with Steinhoff’s retail oriented focus. This
was especially so, given how substantial the overseas
retail operations have become since the Conforama
acquisition. Such considerations aside, Steinhoff remains
strongly vested in KAP, which still utilises many of its
structures and expertise in its day to day operations. In
addition, key positions are still held by executives with
several years of experience within the former Steinhoff
businesses. In respect of Steinhoff’s long term view of
KAP and the mitigation of key man risk (evidenced by
clear retention policies, succession planning, and an
enhanced reporting and remuneration structure), the
affiliation is still considered in support of the ratings.
Steinhoff has undergone major changes lately, the most
significant being the raising of R18.2bn through a rights
issue (which was used to settle maturing debt), and the
R62.8bn acquisition of a 92.3% stake in Pepkor Holdings
Pty Limited (“Pepkor”). The latter was settled via an
issue of shares (R47.8bn) and cash. The enlarged group
will comprise 4.7 million m2 of retail space (over 6,000
stores), contributing over R150bn to group revenues.
This represents a 33% rise in revenue and a 25% increase
in operating income. Pro forma statements based on June
2014 results showed that the Steinhoff balance sheet
would increase by R83.9bn to R286.2bn, with R65.5bn
of the uplift coming from goodwill and other intangibles
related to the Pepkor acquisition. The recent repayments
effectively neutralise the impact of the transaction on
debt, which is expected to see Steinhoff sustain the
marked improvement in its credit protection metrics
reported at 1H F15. Specifically, net gearing (excluding
goodwill and intangibles) was reduced to 38%, from
138% at FYE14 (gross: 117%; 222%), while finance
charges fell to just R59m for the half year, from R2bn in
F14. Fitch rates Steinhoff A-(zaf) (positive outlook),
while Moody’s Issuer rating is at A3.za (stable outlook),
against a one notch international long term Issuer rating
upgrade to Baa3 in May 2015.
KAP Industrial (Holding Company)
Unitrans Supply
Chains Solutions
(Pty) Ltd
Unitrans Passenger
(Pty) Ltd
PG Bison Holdings
(Pty) Ltd
KAP
Manufacturing
(Pty) Ltd
Diversified Logistics Diversified Industrial
Fuel, Agriculture and Mining
Freight and Logistics
Passenger Transport
PG Bison†
Hosaf†
Feltex†
Bedding and Towelling*
†House the timber, chemical and vehicle assembly component operations respectively.
*Housed within the Bedding Components strategic business unit (“SBU”).
The group has adopted a much more compact operating
structure, with two clearly delineated business segments.
This represents further streamlining from the former
organisational structure, which comprised the Integrated
Logistics, Integrated Manufacturing and Integrated
Timber divisions. The refinement is both an efficiency
optimisation and strategic initiative. In the latter respect,
it is meant to ensure the effective use of the expertise and
relationships in closely aligned businesses, and to ensure
that each segment has sufficient scale to comfortably
carry the cost of its independent structures. The tighter
cost controls and enhanced efficiencies in each division
are also meant to improve the price competitiveness of
KAP’s offering and to better sustain customer retention.
KAP’s operations are anchored by branded companies
with strong positions in their respective markets. This
stems from the group’s strategy to invest in businesses
ranked first or second in the segments that they compete
in. As such, the group sold Bull Brands and Brenner
Mills (the former to Rhodes Food Group) as part of a
three-year streamlining process. KAP has also sold its
footwear businesses (made up of Jordan Shoes, Wayne
Plastics, United Fram Footwear and Mossop-Western
Leathers to Bolton Footwear (Pty) Ltd) for R290m.
While still considered to be quality assets, the scale and
positioning of these operations was misaligned to KAP’s
longer term objectives. To consolidate its Bedding
Components business, KAP recently purchased Restonic,
with the acquisition effective January 2015. Coupled
with further investment in plant and technology, the
Restonic acquisition is meant to enhance the scale and
market position of the Furniture Components business,
securing KAP a more defensive, higher-end offering.
Bedding has shown resilience to harsh operating climates
globally, and as such, management anticipates a recovery
in margins once the overhauled business unit is fully
bedded down. According to KAP, these improvements
South Africa Corporate Analysis | Public Credit Rating Page 3
should see this business generate strong double digit
returns on capital employed.
The group operates on renewable medium to long term
contracts, particularly in the Logistics division, which
underpin steady annuity revenue and predictable cash
flows. The contracts also include sustainable escalations,
with the variable cost component for the customer’s
account in order to protect KAP’s margin. FMCG
contracts are usually of a relatively shorter tenor than
those for fuel, mining and agriculture, and are put up to
tender, and so margins are thinner. This notwithstanding,
the long term contracts inherently result in high entry
barriers, as a long engagement process is needed to
establish customer requirements and to develop the
specific capacity necessary.
Backward integration and established relationships with
main suppliers ensure the stability of raw material
supply. Diversified industrial, for example, is backed by
91,000ha of forestry land (for the PG Bison business)
and 16 manufacturing plants. Manufacturing capacity
has become a particularly important differentiator in the
face of the weak Rand, which materially elevates the
USD and opportunity costs of importing and installing
fixed capital. The investment in modern technology has
also enabled KAP to introduce more innovative products
to the local market, enhancing productive efficiencies
and ensuring sustainable margins. Group operations still
reflect diversification of revenue and earnings, although
(given the weak local economy), robust growth would
have to be derived from a stronger geographic footprint
or acquisitions. KAP’s logistics business is specifically
structured to cater to the needs of large corporate
customers. Due to the diversified customer base and
participation in both cyclical and defensive sectors,
however, KAP has no unduly large customer exposures.
*Fuel, agriculture and mining.
In the 30 months to 31 December 2014, KAP spent over
R3.1bn on capex, which was mainly invested in state-of-
the-art capacity for the integrated timber business. The
recent focus has been on augmenting and modernising
the Logistics fleet and its related structures to cater for
the broader geographic expansion planned and to
entrench KAP’s local position. The latter is especially
significant, given KAP’s participation in specialiased
niche markets, such as freight for oil & gas groups.
Accordingly, KAP has already achieved its 3-year target
of acquiring 350 new generation fuel tankers by FYE15.
The group has also invested in Euro5 latest technology
coaches, and plans to acquire vehicles for local cement
contracts, its Botswana fuel business and to expand the
Mozambican fleet in anticipation of new business. With
replacement capex being mainly funded from internal
cash flows, debt is expected to moderate further in the
medium term, unless the group secures fairly large bolt-
on acquisitions. Management’s view towards the latter
remains very conservative, in line with historical trends,
which have seen very few, measured acquisitions outside
of the integration of Steinhoff assets. The preference is to
procure competitively placed businesses that are self-
sustaining to avoid placing undue strain on group
resources. With the group continuing to rationalise its
structures to ensure a more competitive product range, it
is considered counterintuitive to procure businesses that
would compress KAP’s margins. The acquisition process
is run by a dedicated mergers and acquisitions team, with
oversight from the executive committee.
KAP’s businesses have an established presence in sub-
Saharan Africa, on the back of partnerships with large
South African and multi-national corporates (“MNCs”).
The businesses are structured for scalability, with
application across a range of sectors. The entry barriers
created by regulatory stringency, logistical challenges
inherent in these markets and the expertise its teams have
developed over the years further protect KAP’s position.
Albeit contributing just 11% of group revenue in F14,
the rest of Africa forms an important part of the medium
term strategy. In this respect, KAP is taking advantage of
the both private and public fixed capital formation on the
rest of the continent to augment its regional businesses.
There are no plans to enter volatile markets, but to
further entrench existing businesses by broadening the
range of products and services to existing customers,
partnering with SA corporates on new projects, and
expanding the passenger business within KAP’s existing
markets. Operations in Africa will also benefit from the
flatter reporting structures introduced, which should
improve their price competitiveness in the comparatively
smaller economies in which they operate.
Corporate governance
Following the partial reconstitution of the board in April
2012, which saw five directors retiring, some changes
were made in 2014 to facilitate smooth succession at the
executive level. Jo Grové, who was appointed CEO post
the reverse acquisition (and was at the helm of Unitrans
for many years), has stepped down as CEO to take up the
newly created position of group Deputy Chairman. He is
expected to remain intricately involved in the group’s
decision-making and other executive functions for at
least two years. The CEO position has passed to Gary
Chaplin, a CA who has been with Steinhoff for 17 years.
Prior to his appointment, he was CEO of the Integrated
Timber segment. The group chairman remains Jaap du
Toit, formerly the lead independent director of PSG
Group Limited and PSG Financial Services Limited.
These changes are meant to see a smooth transition in
leadership when Jo Grové eventually retires, and are
viewed positively. KAP adheres to King III with respect
to corporate governance, with the following exceptions:
Equitable treatment of shareholders: Steinhoff receives
information more regularly than other shareholders, but
the flow of information between the two companies is
well-regulated.
Independent assurance of sustainability reporting and
FAM* 22%
Freight & logistics 16%
Passenger 13%
Timber 16% Chemical
19%
Auto 8%
Furniture 6%
Revenue diversification
South Africa Corporate Analysis | Public Credit Rating Page 4
disclosure: KAP plans to comply with this requirement
once sustainability report structures across all SBUs
have become effectively entrenched.
Table 3: Corporate governance summary
Independent non-executive directors 5
Executive directors 3° Non-independent, non-executive directors 4
Separation of the chairman Yes, the chairman is independent
Frequency of meetings Quarterly board meetings, with additional
meetings called as required
Board committees (4) Audit and Risk; Human Resources and
Remuneration; Nomination, Social and Ethics
Internal control and compliance Yes, reports to Audit and Risk committee
External auditors Deloitte & Touche. Unqualified audit opinions
have been issued over the full review period
°Inclusive of the former CEO, who was recently appointed Executive Deputy Chairman.
Earnings diversification
Following the sale of the food and footwear businesses,
KAP presented restated F14 numbers at 1H F15 to better
compare the performance of its restructured continuing
operations. Unless otherwise stated, the analysis in this
section thus refers to the revised figures for F14.
Diversified Logistics
The restructured division, which accounts for around
51% of KAP’s revenue, is anchored by Unitrans Supply
Chain Solutions (“USCS”). The business has been
extensively restructured, such that Unitrans Fuel and
Chemical (tailored transportation and fuel logistics
solutions for the oil and gas industry) and Unitrans
Agriculture and Mining Services (transport, distribution
and related logistics, including ground clearing, earth
moving, road maintenance and other civil works) now
fall under Fuel, Agriculture and Mining. Unitrans Freight
is now housed under the Freight and Logistics business
unit, which provides bespoke supply chain and logistics
services to manufacturers and a range of segments such
as FMCG, construction and food retail. Passenger
Transport, which also carries the Unitrans brand,
provides transport to corporates and local authorities
under contract. It also has a fleet for tourist services and
covers a network of public commuter routes in South
Africa and the rest of the region. KAP’s brands include
Mega Bus and Coach, Magic Bus, Greyhound, Citiliner,
Bojanala Bus (which transports mining staff on a
contractual basis). It also owns Mega Express, which is
the sub-contractor that manages the Gautrain bus service
under a 15-year contract.
Several changes were made to create a more cohesive
division with shared internal infrastructure. As such,
Diversified Logistics achieved 6% revenue growth YoY
in 1H F15, on the back of strong margins. Volumes were
also enhanced by resilient demand in the foods and
industrial sectors, and in freight forwarding. Demand in
the consumer durables space remained constrained into
1H F15, a trend that is likely to continue. Although there
was an improvement in the performance of the Fresh
Freight operations, KAP has exited the sub-segment to
focus on the niche markets where it is well-entrenched.
Despite more selective market participation, the group
also secured new contracts in the fuel division, and has a
promising pipeline across the various USCS businesses.
KAP sustained sound mining volumes into 1H F15,
while some uplift on the margins supported continued
cost rigour. Due to the nature of its contracts, the group
passed on fuel price decreases to its logistics customers.
The passenger business nonetheless benefited from lower
fuel prices, which reflected in 2Q F15 performance.
Table 4: Diversified Logistics (R’m) F14 1H F14 1H F15
Revenue* 7,737 3,916 4,158
Op. profit* 762 392 430
Total assets 5,520 5,347 5,734
Revenue ∆ (%) n.a n.a 6.2
Op. margin (%) 9.8 10.0 10.3
Asset turnover (x) 1.4 1.5 1.5
*Revenue is shown before intersegment adjustments, and op. profit before capital items.
Commuter transport was hard hit by the 2014 strike in
the platinum belt, but had begun to show sustainable
recovery in 1H F15. Tourism growth (c.6% in 2014) has
also helped to boost the group’s earnings from the sector.
KAP secured a new personnel transport contract in
Mozambique, effective September 2014, which will help
to boost passenger volumes for F15. The contract is
reflective of traction that KAP is making in the region, as
it continues to look for new opportunities to leverage off
its cross-border infrastructure.
Looking ahead, the operating environment is expected to
remain challenging, with local competition especially
continuing to rise amidst subdued demand. Nonetheless,
the group expects that its logistics operations will benefit
from the continual replacement of infrastructure and the
leaner operating model adopted. Further efficiencies are
expected from the consolidation of specialised freight
with the warehouse and distribution operations. KAP
also plans to capitalise on developing market trends,
including the preference by MNCs to engage established
brands, especially in the rest of Africa; 32% of USCS’
operating income comes from offshore business, against
20% in revenue. The superior margin thus justifies the
group’s focus on enhancing these operations, especially
given weak local demand. On the domestic front, the
three-year wage agreement reached in 2014 will continue
to provide stability, although GCR notes the increasing
militancy of unionised labour.
Diversified Industrial Table 5: Division
snapshot Companies Product range Production
Timber PG Bison
Fibre/particle board and
a number of feeder
products
747,750m3 of particle
and fibre board p.a.
Chemical Hosaf
Woodchem PET, resin
128,000t of PET resin
p.a.
Automotive
components Feltex
Moulded foam seats,
floor carpets & acoustic
products
16.5m components
p.a.
Bedding
components
Restonic, Vitafoam,
BCM, DesleeMattex,
Glodina
Foam, mattresses,
springs, towelling
14,800t of foam p.a.;
2,100 spring
mattresses per day
The businesses reflected in table 5 carry the group’s key
brands, whose operations are anchored by extensive
manufacturing facilities catering to various industries.
PG Bison and Hosaf, for example, own the most modern
and largest facilities in their respective niche markets in
Africa. Coupled with streamlined operations and the
retention of highly skilled staff, this ensures the delivery
of price competitive products to the market. Against this
backdrop, the segment achieved 11% growth in revenue
YoY in 1H F15, supported by the medium density
fibreboard (“MDF”) upgrade for PG Bison and a
normalisation in Feltex volumes. Furniture Components,
however, detracted from overall margins due to intense
competitive pressures.
South Africa Corporate Analysis | Public Credit Rating Page 5
Table 6: Diversified Industrial (R’m) F14 1H F14 1H F15
Revenue* 7,212 3,592 3,981
Op. profit* 710 328 347
Total assets 8,501 8,357 8,461
Revenue ∆ (%) n.a n.a 10.8
Op. margin (%) 9.8 9.1 8.7
Asset turnover (x) 0.8 0.9 0.9
*Revenue is shown before intersegment adjustments, and op. profit before capital items.
To optimise utilisation of the modernised manufacturing
plants, PG Bison has restructured its internal processes,
and rationalised both its product range and customer
base. With the MDF facility operating at full capacity
(c.300m3 per day), revenue went up by 8% to R2.6bn in
F14. Sound revenue uplift continued in 1H F15, buoyed
by a higher-end product range that PG Bison has been
able to produce, given its increased capacity. Material
cost savings feeding through from the adopted initiatives
supported a 1.4% increase in Integrated Timber’s core
margin in 1H F15. The second MDF upgrade planned for
2H F15 will increase capacity to 380m3 per day, enabling
PG Bison to cater to the market demand for its enhanced
product range.
The Chemical businesses reported 7% YoY growth in
1H F15, supported by resilient demand for PET and the
growth in Woodchem’s resin market share. This is on the
back of 23% growth in revenue achieved by Hosaf in
F14 (on the back of an 8,000 tonne increase in sales
volumes and 26% growth in exports). Feltex was
affected by both scheduled and unplanned disruptions in
F14, which saw revenue decline by 10% to R1.1bn. 1H
F15, however, saw new models that had previously been
delayed come into production, boosting sales volumes.
Once secured, Feltex’s revenues are fairly predictible, as
it retains its contracts for the life of a vehicle model.
Comfort is also taken from the high quality customer
base, which comprises leading global car manufacturers.
The Chemical division’s margins are expected to show
resilience going forward, on the back of the retention of
a strong PET market share, robust car exports and further
efficiencies from the integrated business.
Having achieved 6% growth in revenue in F14, Bedding
Components struggled in 1H F15, as Vitafoam and BCM
were negatively impacted by rising competition amidst
slowing consumer spend. Its exposure to Ellerines also
impacted performance, and as such, margins came under
significant pressure. Positively, the group’s investment in
technological advancements saw DesleeMattex deliver a
broader product range, supporting stronger volumes and
margin uplift. The division is set to be transformed by
the integration of Restonic, which will help to improve
margins on the back of new value added products.
Operating environment
Real GDP growth slowed further to 1.9% in 2014, from
2.2% in 2013. This was largely driven by labour unrest,
which particularly affected mining and manufacturing.
The Rand traded weaker against major currencies in F14,
closing at R11.61/USD (YE 2013: R10.50/USD). This
exacerbated inflationary pressures over most of 2014,
and saw the SARB effect a 75b.p. cumulative hike in the
repo rate. These factors elevated household indebtedness
and have worsened consumer strain. In addition fiscal
constraints saw a tapering of government spend, and a
contraction in corporate fixed capital formation. While
reduced oil prices have eased some of the financial
pressure, the exchange rate remains weak (with the
currency trading well above R12.00/USD in June 2015)
and the government has been forced to increase certain
taxes to fund the deficit, adding to inflationary pressures.
Performance in 2015 has not instilled much comfort,
however, with manufacturing widely expected to lose
ground in the second quarter due to power disruptions.
Mining also faces uncertainty related to labour, mainly
stemming from the gold industry’s wage negotiations.
The most pervasive challenge, however, remains the
availability and cost of electricity. A number of larger
manufacturers and mining houses have contingent
measures in place to cater for unanticipated outage.
Others, such as KAP have or are investing in energy
efficient plants. That said, such arrangements usually do
not cover protracted outages.
Local manufacturers’ competitiveness continues to be
eroded by an influx of unregulated Asian imports, sharp
escalations in labour and utility costs, volatile Rand
commodity prices, as well as weak domestic demand.
Transportation bottlenecks have exacerbated logistical
and other weaknesses for a number of producers, forcing
players to invest extensively in enhancing supply chain
management and other operating efficiencies to make
their products more price competitive. Although some
corporates have retained their freight and logistics
function in-house, a number have chosen to outsource, to
the benefit of large conglomerates such as Supergroup,
Barloworld and Imperial, as well as entrenched brands
such as Unitrans. With cost containment remaining a key
priority, however, it has become increasingly important
for these companies to provide a holistic offering or
tailored solutions (such as bespoke freighting for oil and
gas companies) to avoid persistent margin attrition.
While transportation costs have risen sharply in recent
years to account for nearly two thirds of total logistics
costs for most firms, KAP’s offering remains
competitive by being tailored to customer requirements.
Management has also chosen to walk away from
unprofitable and low margin logistics contracts, which
were being subsidised by more profitable business.
Ongoing refinements to its operating structures have also
enabled KAP to retain sustainable margins across most
of its businesses despite growing pricing pressure.
Financial performance
A financial synopsis, which includes the historical
performance of the former Steinhoff assets in F11, is
appended to this report, with commentary hereafter. The
analysis that follows reviews audited results for F14,
prior to restatements adopted for the unaudited 1H F15
financials, unless otherwise stated.
Table 7: Operating
performance (R’m) F13 F14° 1H F14 1H F15 %∆
Revenue 13,513 14,748 7,418 8,114 9.4
EBITDA* 1,907 2,112 1,047 1,139 8.8
Op. profit* 1,179 1,367 672 755 12.4
Net finance charge (364) (325) (172) (162) (5.8)
NPAT 697 762 366 430 17.5
Annualised revenue ∆ (%) 28.9 9.1 2.9 10.0
EBITDA margin (%) 14.1 14.3 14.2 14.0
Op. margin (%) 8.7 9.3 9.0 9.3
Net profit margin (%) 5.2 5.2 4.9 5.3
*Interim EBITDA and operating income numbers are inclusive of unrealised gains/losses.
° F14 totals include contributions from operations discontinued post year end.
South Africa Corporate Analysis | Public Credit Rating Page 6
Following the inclusion of the original KAP assets for
the full year, the group reported a 29% rise in turnover to
R13.5bn in F13. Organic revenue growth, however, was
stable in both F13 and F14, at 9%. The F14 growth in
revenue to a new high of R14.8bn was underpinned by
resilient volumes and stronger margins across KAP’s
core operations. 1H F15 growth also registered at 9%
YoY, as certain group businesses recouped ground lost
to disruptions in F13 and F14.
Inclusion of the traditional KAP assets had a deflationary
impact on group margins from F13, and as such, results
post the reverse acquisition are not comparable with
prior years on a like-for-like basis. Downward margin
pressure from higher raw material and energy costs (the
latter makes up the third highest cost for PG Bison and
Feltex after raw material and labour) has been countered
by the optimisation of production processes and the
efficiencies from recent facility upgrades. Overall, the
normalised gross profit margin rose to 25.1% in F14
(F13: 23.5%). Stated after depreciation, the margin
registered at 21.2%, from 19.4% previously. Coupled
with modest volume growth, this drove a 19% increase
in gross profit to a new high of R3.1bn.
The focus on streamlining operations and investment in
more modern fixed capital has helped to sustain group
margins during a particularly challenging period, which
was exacerbated by disruptions impacting both KAP and
its customers’ operations. Group costs remained well
controlled, with staff expenses equating to 21% of
turnover in F14 (F13: 23%). In this respect, the operating
margin inched up to 9.3% in F14 (F13: 8.7%), translating
to a 16% increase in operating income to R1.4bn. A
moderately higher margin is expected for the full year in
F15 due to stronger throughput in the second half,
attributed to some of KAP’s seasonal businesses.
Net interest costs declined further to R325m in F14 (F13:
R364m), as KAP secured cheaper funding to refinance
the Steinhoff loans, both from its bankers and from the
capital market. As such, and notwithstanding the large
draw down from short term facilities to fund working
capital, the 1H F15 net finance charge was also reduced
by 6% YoY to R162m. Management estimated that a
100b.p. increase in interest rates would have reduced F14
net income by R35m. While this is deemed relatively
modest, considering most facilities are at variable rates,
note is taken of the moderate gearing that management
plans to maintain. Normalised net interest cover as per
GCR’s standard methodology strengthened to 4.2x in
F14 (F13: 3.2x), and to 4.7x in 1H F15.
Fair value changes are mostly attributed to the valuation
of PG Bison’s plantations, which are carried at fair value
less estimated costs to sell. Net of the decrease in value
due to harvesting, the fair value gains on these biological
assets amounted to R114m in F14 (F13: R105m). The
balance related to capital items and foreign exchange
gains/losses attributed to the conversion of cash flows
and hedges used to mitigate currency risk. In 1H F15,
capital items included the impairment of goodwill and
intangibles related to the Fresh Freight business, which
KAP has now exited. Overall, and after accounting for
taxation (at an effective rate of 26.5%, from 28.1% in
F13), net income increased by 9% to R762m in F14,
underpinned by a flat net profit margin of 5.2%. In 1H
F15, net income was up 18% YoY to R430m, with an
uptick in the margin to 5.3%, from 4.9% in 1H F14.
KAP’s operations remain strongly cash generative, with
cash derived from group activities having registered at a
robust R2.1bn in F14 (F13: R2bn). Cash generated in 1H
F15 was up 12% YoY, supported by enhanced margins.
Having reported fairly sizeable working capital releases
in F12 and F13, KAP registered a R183m absorption in
F14. While the prior releases were sustained by trade
creditors, the F14 absorption was due to a large debtors
absorption largely attributed to rising levels of activity in
2H F14. Working capital pressure mostly stems from the
manufacturing entities, which reflect large absorptions at
the half year, driving an intermittent spike in debt. This
usually normalises by year end, as debtors unwind and
inventories are used up or sold. The annual interest
outlay thus typically takes a fair amount of cash. Given
KAP’s strong cash flows, however, interest absorbed just
16% of the cash generated in F14 (F13: 18%), from a
high of 33% in F11. After accounting for a modest tax
outlay, group operating cash flows were reduced by 18%
to R1.4bn in F14, and by 12% YoY in 1H F15.
*Movements from F09 to F11 are based on former Steinhoff businesses only.
Capex has been largely funded from internal cash flows,
in keeping with internal policy that the underlying
operations should be self-sustaining. Management has
tended to be quite conservative in terms of acquisitions,
and most of the capex has been to increase or modernise
existing capacity and to replenish the Logistics fleet.
Capex was ramped up to R1.3bn in F13 (F12: R933m),
easing to R1.2bn in F14. According to KAP, 58% of F14
capex was for USCS, 20% for the Passenger operations,
with the balance invested in the manufacturing entities.
F15 spend on manufacturing has already been elevated
by the Restonic acquisition, with further outlay expected
for modernising some of the existing capacity. 2H F15
will also see a fairly high outlay for Logistics, given the
plans outlined by management.
Apart from the second MDF upgrade set for 2H F15, the
capex for the PG Bison business is expected to be quite
moderate given the sizeable spend in recent years. The
group has received a fair amount of cash from disposals,
the most recent being the R160m from the Footwear
division sale (with a further R139m received in March
2015). Net debt continued to decline, falling by R427m
in F13, and by R400m in F14, due to a build-up of
reserves from free cash flows. Accordingly, cash and
equivalents have closed at around R1.3bn since FYE12.
As discussed, the half year typically sees net debt spike
(1H F15: R625m increase), albeit that the position
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
800
F09 F10 F11 F12 1H F13 F13 1H F14 F14 1H F15
R'm Working capital movements
Debtors Creditors Inventory Other Net ∆
South Africa Corporate Analysis | Public Credit Rating Page 7
unwinds fairly quickly. According to KAP, the cash on
balance sheet on a month-to-month basis usually relates
to regional businesses and JVs, as cash from the main
businesses is offset against overdrafts in order to mitigate
interest leakage.
Funding and liquidity
Table 8: Balance sheet
composition (R’m)* FYE12 FYE13 FYE14° 1H F15
Non-current assets
Fixed assets 6,090 6,355 6,614 6,860
Biological assets 1,656 1,761 1,875 1,917
Other non-current assets 122 163 190 170
Current assets
Inventory 1,367 1,382 1,197 1,425
Trade receivables 2,457 2,365 2,528 2,757
Cash & equiv. 1,346 1,320 1,348 1,299
*Excludes goodwill, patents, trademarks, software and other nominal intangibles.
° FYE14 totals include balances related to operations discontinued post year end.
The former Steinhoff businesses dominate the balance
sheet with respect to scale, and constitute the bulk of the
R15.9bn in assets held at 1H F15 (FYE14: R15.6bn).
Excluding goodwill and other intangibles (as per GCR’s
standard methodology), the balance sheet advanced to
R14.6bn at 1H F15 (FYE14: R14.2bn), from the FYE11
total of R9.6bn, which reflected the standalone position
of the Steinhoff assets at the time. Most of the group’s
operations are fixed capital intensive, with immoveable
assets at FYE14 largely comprising the Logistics vehicle
fleet (R3.3bn), plant and equipment (R1.6bn), as well as
land and buildings (R1.5bn). The balance mostly relates
to debtors and inventory, the latter for the manufacturing
entities. KAP reported its FYE14 credit risk exposure at
R3.7bn (FYE13: R3.5bn), of which 42% related to
Logistics and 38% to Manufacturing. As at FYE14, 83%
of this total was fully performing (FYE13: 85%), with a
further 14% up to 90 days past due and unimpaired. KAP
has liens and/or secures collateral over certain items sold
until payment is made. Credit insurance taken out with
reputable counterparties is also used to mitigate risk.
Inter-company balances are negligible, and no single
customer represents more than 5% of debtors.
Equity accounted for 40% of total funding at 1H F15,
(FYE14: 39%), from 36% at FYE13. Note is taken of the
reverse acquisition reserve (R4bn), which reflects the
adjustment to equity for the acquisition of the former
Steinhoff assets. Debt represented 32% of funding at 1H
F15 (FYE14: 28%) and creditors a stable 22%.
The former Steinhoff assets were partially funded by
unsecured intercompany loans of no fixed tenor (FYE10:
R3.7bn; FYE09: R5.2bn). Treating these loans as equity,
net gearing would have been low (FYE10: 11%; FYE09:
18%). The debt was consolidated into one loan and
formed the basis for the Consideration Loan Account
(R3.9bn) as part of the reverse acquisition. Both the
Consideration Loan Account and other pre-existing
facilities were priced at market rates, albeit with less
onerous covenants than those KAP would have secured
on a standalone basis, as they were procured by the
centralised treasury function of Steinhoff and on-lent to
KAP. The former Steinhoff subsidiaries and Steinhoff
Africa provided suretyships, guarantees and indemnities
in respect of the pre-existing liabilities. These were
initially retained as it was deemed costly and impractical
to unwind them at the time. KAP has, however, since
independently secured R5.4bn in facilities and issued
R1bn in bonds under its R5bn DMTN programme. Its
banking counterparties drew comfort from its stable
standalone balance sheet, and the underlying businesses,
and preferred to have direct recourse to KAP’s assets. A
portion of the facilities and medium term notes issued
was used to repay the Steinhoff loans, and in this respect
(discounting the usual interim increase related to group
working capital), debt had declined palpably from the
FYE13 level at FYE14.
Table 9: Debt profile Balance (R'm)
Interest Maturity FYE13 FYE14°
Steinhoff loans 3,241 481 n.a n.a
Amortising term loan 1,075 - Jibar +310bps 15-Dec-18
Revolving term loan 1,500 - Jibar +285bps 15-Dec-16
Med. term loan facility 620 - Jibar +260bps 15-Dec-14
Interest due to Steinhoff 46 31 Overnight rates On demand
GroCapital FS Pty Ltd - 450 3M Jibar+270bps 16-Aug-20
FI term facilities 877 1,973 n.a n.a
Investec-5 year - 300 3M Jibar+245bps 27-Jun-19
Nedbank-5 year - 300 3M Jibar+193bps 28-Jun-19
Nedbank-3 year* - 500 3M Jibar+215bps 15-Aug-16
PCF3U 305 300 3M Jibar+165bps 29-Mar-16
PCF4U 202 203 3M Jibar+165bps 01-Nov-16
PCF5U 370 370 3M Jibar+175bps 27-Jun-17
DMTN - 1,000 n.a n.a
KAP01 - 322 3M Jibar+175bps 13-Jun-17
KAP02 - 428 3M Jibar+204bps 13-Jun-19
KAP03 - 250 3M Jibar+204bps 06-Jun-19
Other 151 56 n.a n.a
Overdrafts 141 520 n.a On demand
Total 4,410 4,030 - -
*Finance charge includes 0.28% cost.
°FYE14 totals include balances related to operations discontinued post year end.
Note: The GroCapital loan is meant to be settled in the short term.
As discussed, Steinhoff has retained close operational
oversight of KAP, with the broader group’s treasury
monitoring its exposures and mandating strict debt
covenants. Debt has fluctuated moderately since F11,
registering at R4bn at FYE14, compared to a high of
R4.9bn at FYE12. Its composition has again changed
substantially with repayment of the Steinhoff loans. The
loans are mostly secured, except for the bonds and the
GroCapital loan. The latter relates to a loan that was used
by PG Bison, with Steinhoff as the originating lender.
While the loan only matures in 2020, management
intends to settle it in the short term. Phaello Finance
Company (“Phaello”) has master lease agreements with
Unitrans, and holds the general notarial bond (as well as
related agreements) on behalf of its lenders. Encumbered
assets of R1.3bn at FYE14 (FYE13: R1.4bn) included
R503m in cash. The interim spike in debt (1H F15:
R4.6bn; 1H F14: R4.7bn) is reflected in the movement in
overdrafts that funded working capital. Debt is all Rand-
denominated, with a modest portion of cash for offshore
businesses in hard currencies.
Having peaked at 135% at FYE11, net gearing has
declined progressively, registering at 48% at FYE14 (1H
F15: 57%). Although gross debt was slightly higher than
anticipated, gearing metrics were moderately lower than
GCR’s expectations. Note is also taken of the group’s
policy of managing cash vis-à-vis its short dated
facilities to reduce the all-in cost of funding. Inclusive of
the group’s income-generating intangibles (specifically
trademarks and patents), net gearing improved to 40% at
FYE14, thereafter rising moderately to 48% at 1H F15.
Net debt to EBITDA also improved to 127% at FYE14
(1H F15: 145%). Given that the group primarily invests
in assets with a long income generating trajectory (apart
South Africa Corporate Analysis | Public Credit Rating Page 8
from the Logistics fleet, of which at least a third is
replaced annually), the gearing and debt service metrics
are deemed comfortable with respect to the current
ratings. KAP has maintained a relatively well-spaced
debt maturity profile, with bank loans only beginning to
amortise in September 2016 and the first bond maturity
in June 2017. Some pressure is expected in 2016, when
c.R1bn worth of loans mature. Comfort is nonetheless
derived from the untapped bank facilities, and flexibility
from the DMTN programme.
Table 10: Funding profile (R’m) FYE12 FYE13 FYE14† 1H F15
Shareholders interest 5,683 6,301 6,859 7,030
Goodwill and other 183 205 205 183
Patents and trademarks 1,128 1,106 1,085 1,078
Revised equity 4,372 4,990 5,569 5,769
Short term debt 1,086 491 588 1,167
Long term debt 3,800 3,919 3,442 3,431
Total debt 4,886 4,410 4,030 4,598
Net gearing (%) 81.0 61.9 48.2 57.2
Adjusted net gearing (%)* 64.4 50.7 40.3 48.2
Net debt: EBITDA (%) 223.3 162.0 127.0 144.8
EBITDA: net interest (x) 4.2 6.8 5.7 7.3
Net interest cover (x) 2.5 3.2 4.2 4.7
Receivables: debt (x) 0.5 0.5 0.6 0.6
FCF cover (x) 0.7 1.5 2.2 0.4
Adj. FCF cover (x)° 1.7 3.0 2.6 1.2
*Assuming that equity is only adjusted for goodwill and ancillary intangibles.
°Free cash flow cover of debt service, calculated excluding overdrafts.
† FYE14 totals include balances related to operations discontinued post year end.
Outlook
Management continues to focus on further entrenching
the local businesses and improving their competitiveness
by delivering better priced products to the market. In this
respect, the ongoing rationalisation of the operating
model is positively viewed. Continual investment in
fixed capital also effectively positions the underlying
businesses, enhancing productivity and efficiency in
anticipation of stronger medium term demand. KAP is
augmenting its underperforming assets (specifically the
Bedding Components businesses), to ensure that they
reach critical mass and have effective entry barriers.
With respect to the rest of Africa, the group continues to
roll out additional capacity to cater for the new contracts
secured, while ensuring that the businesses adapt to the
same lean structures effected in the domestic operations.
The more robust margins in the regional businesses will
also provide important earnings underpin given pricing
pressures in the domestic market.
While GCR is of the view that the initiatives adopted
should shore up the margins of the existing businesses,
note is also taken of the difficult domestic operating
environment. Constrained productivity will continue
have a knock on impact on all industries, which will
curtail demand, even for defensive product offerings. In
this regard, the expectation is that volumes will remain
under pressure until stronger economic growth ensues.
With capex (apart from major acquisitions) funded from
internal cash flows, net gearing is expected to remain
within management’s comfort level of between 50% and
75% in the medium term. KAP is looking for other bolt-
on acquisitions, although these have to be self-sustaining
operations. Dividend policy is not expected to change
materially, and management plans to maintain a headline
earnings cover of 4x. While KAP has opted to fund its
operations independently, the strategic and operational
support from Steinhoff is still considered in support of
the ratings. The mitigation of key man risk, the treasury
support, and general oversight has helped to sustain the
earnings generating capacity of the group’s underlying
businesses. Should these linkages weaken materially,
GCR would need to review the ratings to ascertain the
impact on KAP’s credit risk profile.
South Africa Corporate Analysis | Public Credit Rating Page 9
KAP Industrial Holdings Limited (Rand in Millions except as Noted)
Income Statement Year end : 30 June 2011° 2012° 2013† 2014† 1H 2015ˣ
Turnover 8,861 10,481 13,513 14,748 8,114 EBITDA 1,488 1,585 1,907 2,112 1,139 Depreciation (566) (620) (728) (745) (384) Operating income 922 965 1,179 1,367 755 Net finance charge (475) (381) (364) (325) (162) Amortisation (9) (9) (14) (14) (9) Abnormal/Exceptional items 0 5 4 (69) 3 Capital items, foreign exchange and fair value gains (losses) (41) 223 164 105 5 NPBT 397 803 969 1,064 592 Taxation charge/(credit) (114) (218) (272) (302) (162) NPAT 283 585 697 762 430 Equity accounted earnings 6 11 14 (5) 2 Attributable earnings 272 574 677 724 415
Cash Flow Statement
Cash generated by operations 1,489 1,627 2,021 2,071 1,203 Utilised to increase working capital (29) 279 228 (183) (852) Net interest paid (494) (375) (372) (330) (163) Taxation paid (57) (68) (132) (125) (71) Cash flow from operations 909 1,463 1,745 1,433 117 Maintenance capex* (566) (620) (728) (745) (384) Discretionary cash flow from operations 343 843 1,017 688 (267) Dividends paid (11) (4) (158) (200) (295) Retained cash flow 332 839 859 488 (562) Net expansionary capex (283) (313) (548) (477) (213) Investments and other 137 106 (60) (30) (10) Proceeds on sale of assets/investments 110 211 175 419 160 Shares issued 0 0 1 0 0 Cash movement: (increase)/decrease 30 (590) 50 (15) 50 Borrowings: increase/(decrease) (266) (253) (477) (385) 575 Net increase/(decrease) in debt (296) (843) (427) (400) 625
Balance Sheet
Ordinary shareholders interest 2,717 4,253 4,855 5,419 5,615 Outside shareholders interest 51 119 135 150 154 Total shareholders interest 2,768 4,372 4,990 5,569 5,769 Short term debt 2,113 1,086 491 588 1,167 Long term debt 2,380 3,800 3,919 3,442 3,431 Total interest-bearing debt 4,493 4,886 4,410 4,030 4,598 Interest-free liabilities 2,359 3,795 4,341 4,598 4,220 Total liabilities 9,620 13,053 13,741 14,197 14,587 Fixed assets 6,375 7,746 8,116 8,489 8,777 Investments and other non-current assets 188 122 202 190 170 Cash and cash equivalent 770 1,346 1,320 1,348 1,299 Other current assets 2,287 3,839 4,103 4,170 4,341 Total assets 9,620 13,053 13,741 14,197 14,587
Ratios
Cash flow: Operating cash flow: total debt (%) 20.2 29.9 39.6 35.6 5.1 Discretionary cash flow: net debt (%) 9.2 23.8 32.9 25.7 neg Profitability: Turnover growth (%) n.a 18.3 28.9 9.1 10.0 Gross profit margin-incl. depreciation (%) 29.8 28.5 23.5 25.1 n.a EBITDA: revenues (%) 16.8 15.1 14.1 14.3 14.0 Operating profit margin (%) 10.4 9.2 8.7 9.3 9.3 EBITDA: average total assets (%) 26.6 15.4 15.8 16.7 17.4 Return on equity (%) 13.7 16.5 14.9 14.1 15.0 Coverage: Operating income : gross interest (x) 1.5 1.9 2.6 4.0 4.7 Operating income : net interest (x) 1.9 2.5 3.2 4.2 4.7 EBITDA : net interest (x) 3.1 4.2 6.8 5.7 7.3 Activity and liquidity: Trading assets turnover (x) 12.2 10.1 13.6 20.2 18.9 Days receivable outstanding (days) 47.6 72.4 65.1 60.5 59.4 Current ratio (:1) 0.8 1.3 1.5 1.5 1.3 Capitalisation: Net debt: equity (%) 134.5 81.0 61.9 48.2 57.2 Total debt: equity (%) 162.3 111.8 88.4 72.4 79.7 Net debt: equity-incl. patents and trademarks (%) 98.2 64.4 50.7 40.3 48.2 Total debt: equity - incl. patents and trademarks (%) 118.5 88.8 72.3 60.6 67.2 Total debt: EBITDA (%) 301.9 308.3 231.3 190.8 201.8 Net debt: EBITDA (%) 250.2 223.3 162.0 127.0 144.8
†2013 results were restated due to new/revised accounting standards and to depict the impact of discontinued operations, while F14 numbers remain based on audited financials released in August 2014. ˣ1H 2015 numbers are based on the unaudited financial results for the six months to December 2014. EBITDA and op. income for 1H F15 include unrealised gains related to biological assets and forex movements. ° In April 2012, KAP reverse-acquired Steinhoff’s industrial assets. Accordingly, 2011 numbers relate only to former Steinhoff assets, while 2012 includes the original KAP assets’ performance for 3 months. *Depreciation is used as a proxy for maintenance capex for the years 2010 to 2014.
South Africa Corporate Analysis | Public Credit Rating Page 10
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR'S CORPORATE GLOSSARY
Amortisation From a liability perspective, the paying off of debt in a series of instalments over a period of time. From an asset perspective, the spreading of capital expenses for intangible assets over a specific period of time (usually over the asset’s useful life).
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.
Bond A long term debt instrument issued by either a company, institution or the government to raise funds.
capital The sum of money that is invested to generate proceeds.
Capital Intensive A project, a business or a production process is said to be capital intensive if it uses large amounts of assets to produce goods or services. Examples are oil refineries, and airlines. Projects/businesses can be either fixed capital intensive or working capital intensive or a combination.
Cash Equivalent An asset that is easily and quickly convertible to cash such that holding it is equivalent to holding cash. A Treasury Bill is considered cash equivalent.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Flow Statement The cash flow statement shows the cash flows associated with the operating, investing and financing activities of a company, combining to explain the net movement in cash holdings.
Commodity Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.
Conglomerate A company made up of subsidiaries that operate in several business sectors that are unrelated to each other.
Corporate Governance
Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
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.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Credit Rating Agency An entity that provides credit rating services.
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.
Currency Risk The potential for losses arising from adverse movements in exchange rates.
Current Ratio A measure of a company's ability to meet its short-term liabilities and is calculated by dividing current assets by current liabilities. Current assets are made up of cash and cash equivalents ('near cash'), accounts receivable and inventory, while current liabilities are the sum of short-term loans and accounts payable.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
Diversification Spreading risk by constructing a portfolio that contains different investments, 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.
Dividend The portion of a company's after-tax earnings that is distributed to shareholders.
Downstream Downstream refers to the processing of raw materials into a product required by end users and consumers.
EBITDA EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Exceptional Item Exceptional items are costs or profits that need to be shown separately in an income statement to provide a clear and accurate view of a company's core activities as they are often non-recurring, once-off items.
Exchange Rate The value of one country's currency expressed in terms of another.
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.
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.
Fix The setting of a currency or commodity price for trade at a future date.
Fixed Assets Assets of a company that will be used or held for longer than a year. They include tangible assets, such as land and equipment, stake in subsidiaries and other investments, as well as intangible assets such as goodwill, information technology or a company's logo and brand.
Fixed Capital Fixed capital is the part of a company's total capital that is invested in fixed assets such as land, buildings and equipment that remains on the balance sheet, usually for years, but for at least one accounting period.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders' funds or by EBITDA.
Goodwill Arises upon the sale/acquisition of a business and is defined as an established entity’s reputation, which may be regarded as a quantifiable asset and calculated as the price paid for a company over and above the net value of its assets. Negative goodwill refers to a situation when the price paid for a company is lower than the value of its assets.
Gross Profit Gross profit is the difference between company revenues or sales and the cost of sales, before accounting for administrative and financing costs.
Hedge A form of insurance against financial loss or other adverse circumstances.
Income Statement A summary of all the expenditure and income of a company over a set period.
Intangible Assets The non-physical assets of a company such as trademarks, patents, copyright, information systems and goodwill.
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.
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 Leakage Situation whereby a company has outstanding debt that yields a higher interest cost than the interest earned on cash balances.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually
South Africa Corporate Analysis | Public Credit Rating Page 11
expressed on an annual basis.
ISR International scale ratings relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.
JIBAR The Johannesburg Interbank Agreed Rate, or JIBAR, is the annualised interest rate at which banks obtain unsecured loans from each other. It is often used as the basis for pricing floating interest rate instruments, and is the main reference rate used in South Africa.
JSE Johannesburg Stock Exchange.
LC An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.
leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
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.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
LME The London Metal Exchange is one of the world's most important non-ferrous metals markets. It offers futures and options contracts in aluminium, copper, nickel, tin, zinc and lead. Producers and consumers use LME prices for long-term contacts.
London Metal Exchange
The London Metal Exchange is one of the world's most important non-ferrous metals markets. It offers futures and options contracts in aluminium, copper, nickel, tin, zinc and lead. Producers and consumers use LME prices for long-term contacts.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
National Scale Rating The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors' fees and directors' fees.
Off Balance Sheet Off balance sheet items are assets or liabilities that are not shown on a company's balance sheet. They are usually referred to in the notes to a company's accounts.
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.
Operating Margin Operating margin is operating profit expressed as a percentage of a company's sales over a given period.
Operating Profit Profits from a company's ordinary revenue-producing activities, calculated before taxes and interest costs.
Option An option gives the buyer or holder the right, but not the obligation, to buy or sell an underlying financial asset at a pre-determined price.
Overnight Rate The overnight rate is the interest rate at which money due to be returned the next day is lent by one bank to another.
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.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Rating Outlook A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: 'Stable' (nothing to suggest that the rating will change), 'Positive' (the rating symbol may be raised), 'Negative' (the rating symbol may be lowered) or “'Evolving' (the rating symbol may be raised or lowered).
Receivables Any outstanding debts, current or not, due to be paid to a company in cash.
REPO In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
REPO Rate In South Africa the REPO rate refers to the rate at which the South African Reserve Bank lends money to banking institutions. The money is lent through a repurchase agreement.
Repurchase Agreement
In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
Return On Equity Return on equity, or ROE, is the ratio of a company's profit to its shareholders' equity, expressed as a percentage. It is the most widely used measure of how well management uses shareholders' funds. Its main advantage is that it is a benchmark that allows investors to compare the profitability of companies in different industries.
Rights Issue One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.
Risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Stock Exchange A market with a trading-floor or a screen-based system where members buy and sell securities.
Tenor The time from the value date until the expiry date of an instrument, typically a loan or option.
Turnover The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.
Unrealised Gain The profit or loss that would be made if a position were to be liquidated.
Working Capital Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.
Yield Percentage return on an investment or security, usually calculated at an annual rate.
South Africa Corporate Analysis | Public Credit Rating Page 12
SALIENT POINTS 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. KAP Industrial Holdings 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 KAP Industrial Holdings Limited with no contestation of the rating. The information received from KAP Industrial Holdings Limited and other reliable third parties to accord the credit rating(s) include:
2014 audited annual financial statements (plus four years of comparative numbers);
Group budgets/financial forecasts for the years 2015 to 2018;
Unaudited financial statements for the six months to December 2014;
Corporate governance and enterprise risk framework;
Industry comparative data and regulatory framework;
Information relating to affiliated listed entities and
A breakdown of facilities available and related counterparties. 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.
ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGS-INFO. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE. CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE. Copyright © 2013 Global Credit Rating Co (Pty) Ltd. INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information. GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.