kap industrial holdings limitedaccount was established with steinhoff africa holdings limited...
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South Africa Corporate Analysis | Public Rating
KAP Industrial Holdings Limited
South Africa Corporate Analysis April
Financial data:
(US$’m comparative)
R/US$ (avg.)
R/US$ (close)
Total assets
Total debt
Total capital
Cash & equiv.
Turnover
EBITDA
NPAT
Op. cash flow Market cap.* US$811.7m
Market share° PG Bison: 54%
Hosaf: 85%
Feltex: 90%/95%
*As at 1 /2014 @ R10. /US$
°Market contribution in selected segments in
F13. Feltex percentages represent participation
in floor carpets/acoustic products and moulded foam seats respectively.
Rating history:
KAP Industrial Holdings Limited (“KAP”)
or the group; formerly KAP International
Holdings Limited
Initial rating ( / )
Long-term: A-(ZA)
Short-term: A2(ZA)
Rating outlook: Stable
Related methodologies/research:
GCR’s criteria for rating corporate entities,
updated August
GCR contacts:
Primary Analyst
Patricia Zvarayi
Senior Analyst
Committee Chairperson
Eyal Shevel
Sector Head: Corporates
Analyst location: JHB, South Africa
Tel: +27 11 784 –
Website: http://globalratings.net
Summary rating rationale
The ratings are based on the following key factors:
KAP, in its current guise, resulted from the reverse acquisition of
Steinhoff International Holdings Limited’s (“Steinhoff”) industrial
assets in April 2012, from which it emerged as a diversified group,
including specialised logistics solutions, timber and various timber-
based products, as well as an array of industrial products.
Although the group structure is fairly new, underlying businesses have a
proven track record of sustained earnings growth, with Unitrans
contributing % of KAP’s operating income in F and PG Bison %
(1H F14: 55% and 24% respectively). Its key competitive advantage has
been to entrench itself in the industries it operates through integrating
into the operations of its customer base or controlling the value chain.
The group has since reflected sound organic growth, with stable top line
performance over the medium term expected to derive from enhanced
capacity. While margin pressure continues to derive from increased
competition from imports as well as the impact of rising fuel prices and
other input costs, ongoing restructuring is expected to enhance the price
competitiveness of the group’s offering
As part of the reverse acquisition, KAP secured loans from Steinhoff on
an arm’s length basis and at market rates, which formed the majority of
its debt. Borrowings registered at R4.7bn at 1H F14 (FYE13: R4.4bn),
translating to net gearing of % (FYE13: %) and net debt to
EBITDA of % (FYE13: 1 %). With capex to be largely funded
from internal cash flows, debt is not expected to increase materially
from 1H F14 levels over the medium term.
Cash generation has been robust, supported by sound earnings. Debt
serviceability has also been adequate, with net interest cover registering
at x in 1H F14 (F13 x). KAP used cheaper short term funding to
settle part of its shareholder loan early, which elevated liquidity pressure
in 1H F14. Management has advised that the process of refinancing
facilities is well advanced, and is to be finalised by FYE14.
While KAP will fund its operations more autonomously going forward,
Steinhoff has issued guarantees of around R5.8bn in respect of KAP’s
facilities, a large proportion of which will remain in place in the medium
term. It is also deemed unlikely that Steinhoff would enforce its rights
should covenants on loans extended to KAP be breached.
Operations remain susceptible to external shocks originating from the
sluggish domestic economy, particularly rising inflationary pressures,
labour related disruptions and adverse interest rate movements. Note in
this regard is taken of the focus on higher margin regional markets and
the balanced exposure to both cyclical and countercyclical sectors.
Factors that could trigger a rating action may include
Positive change: The timely securing of new facilities is a requirement to
maintaining the current ratings. Successful bedding down of additional
capacity and overhauled structures, ensuring sustainable growth despite
the challenging operating environment would be positively viewed.
Negative change: A material elevation in debt and gearing metrics owing
to aggressive acquisitive growth, or the significant underperformance of
KAP’s subsidiaries relative to budget. The downward migration of parent
Steinhoff’s ratings could also warrant a rating review.
Security class Rating scale Rating Rating outlook Review date
Long term National A-(ZA) Stable
Short term National A2(ZA) Stable
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Business profile
KAP is a diversified logistics and manufacturing group
with a presence in 15 African countries and a 21,400-
strong workforce as of 2013. Its operations consist of
specialist and bespoke logistics supply chain solutions
and passenger transport businesses (under Unitrans), an
integrated timber division (PG Bison) and an industrial
manufacturing segment that produces an array of
automotive components, PET resin, furniture, bedding
components, as well as toweling and footwear.
Table 1: History and recent corporate activity
Incorporation of Kolosus Holdings Limited (“Kolosus”) JSE-listed in
following a share consolidation in Nov 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 The group was renamed KAP International Holdings (“Kap der Guten
Hoffnung”), and was reverse-listed on the JSE.
Reverse acquisition of Steinhoff Industrial assets, reducing the Daun & Cie
shareholding from 45%. The group was renamed KAP Industrial Holdings.
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.
Effective April KAP acquired Steinhoff’s African
industrial assets valued at R8.9bn. These included highly
visible brands, namely Unitrans, PG Bison, Bedding
Component Manufacturers (“BCM”) DesleeMattex and
Vitafoam. The reverse takeover was funded by an issue
of KAP shares (increasing Steinhoff’s stake to 88%,
from 34% previously). Steinhoff subsequently reduced
its stake in KAP to 62% upon the acquisition of JD
Group Limited (“JDG”) partially funded by an exchange
of sixteen KAP shares for every JDG share.
Table : Major shareholders, FYE13 %
Steinhoff Africa Holdings Ltd (a subsidiary of Steinhoff)
Investec Asset Management Allan Gray Asset Management
Steinhoff overview°
Market capitalisation* R110.8bn/US$10,501.1m
P/E ratio (x)*
Other investments/
subsidiaries (% stake)
JDG (56%); PSG Group Ltd (20%); International operations
(100%); Properties ( %)
Major segments (% of
1H F14 revenue)
Retail: furniture, automotive and household goods ( %);
manufacturing, sourcing and logistics ( %)°
Steinhoff financials F12 F13
Revenue
Operating profit
Net finance charge ( ) ( )
NPAT
Operating cash flow
Shareholders interest
Interest-bearing debt
Revenue growth (%)
Operating margin (%)
Net interest cover (x)
Net debt : equity (%)
Net debt : EBITDA (%)
*As at
°Steinhoff is anchored by a strong integrated retail footprint in Europe, where it is ranked
the second largest global furniture retailer, and has a range of other established brands.
Europe and the UK accounted for 61% of 1H F14 turnover, with Africa making up 37%
and the balance derived from the Pacific Rim.
As part of the agreement, a R3.9bn Consideration Loan
Account was established with Steinhoff Africa Holdings
Limited (“Steinhoff Africa”). Both the Consideration
Loan Account and pre-existing facilities that related to
Steinhoff’s former assets were priced at similar rates,
albeit with less onerous covenants than those KAP would
have secured on a standalone basis, as they were
procured under the centralised treasury function of
Steinhoff and on-lent. The former Steinhoff subsidiaries
and Steinhoff Africa provided suretyships, guarantees
and indemnities in respect of the pre-existing liabilities
which were retained as it was considered costly and
impractical to unwind the facilities. KAP’s interest
bearing shareholder loans are in the process of being
refinanced by third party debt, and new facilities are
expected to be secured by the end of June 2014. The
expectation going forward is that KAP will borrow
independently from its parent, in view of its enhanced
scale and stronger balance sheet. Although it may
continue to benefit from the Steinhoff association in
terms of pricing for its issued debt and facilities, the
likelihood of direct financial support from its parent is
considered to be limited. Steinhoff has, however, issued
guarantees, suretyships and indemnities with respect to
certain KAP liabilities, providing added comfort to
creditors. Unsecured shareholder loans have also given
KAP room to bed down its new structures before making
recourse to external debt.
Table : Shareholder
loans (R'm) Amount
Balance
FYE Interest Maturity
Amortising term loan JIBAR+310b.p. 15 Dec '18
Revolving term loan JIBAR+285b.p. 15 Dec '16
Med. term loan facility JIBAR+260b.p. 15 Dec '14
Overnight/ST facility Overnight rates On demand
Total
Having repositioned itself as a mid-tier listed company
and one of the largest industrial entities in Africa, the
group rebranded to illustrate its broader industrial
diversification. KAP reflects an enhanced strategic
position, anchored by strongly branded companies with
leading market shares in their respective niches. The
group’s strategy entails focusing on operations with a
significant market share, specifically entities placed first
or second in their respective industries. Accordingly,
food assets (Bull Brands and Brenner Mills) were sold in
1H F14. While still considered to be quality assets, the
scale and positioning of these businesses was misaligned
to the group’s revised objectives KAP’s businesses are
positioned towards emerging African markets, with
application across a range of sectors. The group has a
proven track record in sub-Saharan Africa, largely built
up from partnering its domestic clients into the rest of the
continent. Although the logistics business in particular is
geared towards large, blue chip corporates, no unduly
large customer exposures are evident in terms of
turnover or debtors.
KAP secures long term contracts, particularly in the
logistics and manufacturing divisions, ensuring steady
annuity income and more predictable cash flows. To
ensure stable raw material supply, the group has invested
in backward integration and long term partnerships with
strategic suppliers. An operational overhaul is being
implemented to unlock efficiencies, rationalise costs, and
to ensure more efficient internal structures. Investment in
new technology and infrastructure has also facilitated
product innovation shoring up the group’s margin
headroom in certain product segments and enhancing
productive efficiencies. KAP has retained the strong
management team that has run the Steinhoff assets for
several years, facilitating continuity.
KAP has first mover advantage in many of the African
markets in which it operates. In this regard, the group
benefits from the significant entry barriers created by
regulatory stringency, fuel price inflation and the
sizeable investment in fixed capital formation required to
set up operations in its niche industries (particularly in
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view of exchange rate volatility and the resultant
weakness of emerging market currencies against the
US$). The expertise that KAP has developed over the
years, coupled with its familiarity with the socio-political
terrain, also serve as competitive advantages.
Looking ahead the group’s focus will continue to be on
businesses that generate strong cash flows and returns on
capital employed. In this regard, management is
targeting robust volumes across the group, with
continued focus on the rest of Africa. This will provide
some insulation to the constraining impact of weak
domestic growth on overall performance.
Corporate governance
KAP’s board was partially reconstituted in April 2012,
with five directors retiring. Jo Grové, who was
previously a Steinhoff executive (and was at the helm of
Unitrans for several years), was appointed as CEO, while
four other Steinhoff appointments were made to the
board. The KAP board operates under an independent
charter, with a majority of independent non-executives,
including the chairman. The chair was previously the
lead independent non-executive director of PSG Group
Limited and PSG Financial Services Limited, and
currently chairs various boards. KAP has a decentralised
management structure, and its divisions’ CEOs have the
autonomy to adapt group strategy to their divisions.
Table : Corporate governance summary
Independent non-executive directors
Executive directors
Non-independent, non-executive directors
Separation of the chairman Yes, the chairman is independent
Frequency of meetings Quarterly board meetings, with additional
meetings called as required
Board committees ( )* Audit and Risk; Human Resources and
Remuneration; Nomination
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
*KAP uses the Steinhoff Social and Ethics committee.
Non-compliance in terms of King III in F13 related to:
Annual independent assessment of the board and its
committees: This began in August 2013, subsequent to
a full year of trading by the enlarged group and
operation of restructured board committees.
Equitable treatment of shareholders: While Steinhoff
receives information more regularly than other
shareholders, the flow of information is well-regulated.
Independent assurance of sustainable reporting and
disclosure: Processes are being implemented to ensure
full compliance.
Earnings diversification
Following the procurement of Steinhoff assets and the
concomitant strategic realignment, KAP was reorganised
into four divisions housed in three reporting segments.
F11 numbers in the ensuing analysis are based on former
Steinhoff assets’ performance.
Logistics: Unitrans Supply Chain Solutions (“USCS”)
designs, implements and manages supply chain solutions
for large corporates. Its offering includes transportation,
warehousing and distribution, mining and agricultural
services, freight forwarding, clearing, and supply chain
consulting services. It comprises Unitrans Freight
(bespoke distribution and warehousing services for
manufacturing, industrial and allied entities), Unitrans
Fuel and Chemical (tailored transportation and fuel
logistics solutions for the petrochemical and gas
industry) and Unitrans Agriculture and Mining Services
(transport and related logistics for agriculture and
mining, including ground clearing, earth moving, road
maintenance and other civil works). Also reporting under
logistics is Unitrans Passenger, which provides transport
to corporates under contract, tourism services, and caters
for an extensive network of public commuter routes
locally and in the region. Its brands include Mega Bus
and Coach, Magic Bus, Greyhound, Citiliner, Bojanala
Bus (catering for mining personnel) and Mega Express, a
sub-contractor that manages the Gautrain bus service
under a fifteen-year contact. KAP leverages established
relationships with its corporate clients, providing
ancillary services such as staff transportation on the back
of synergies between USCS and Unitrans Passenger.
USCS focuses on niche segments where it has built up
strong expertise to effectively mitigate related risks. Its
businesses do not take on commodity freight contracts,
as its corporate structures make it inefficient to compete
with smaller transporters. Rather, it provides a
comprehensive service to retailers and manufacturers,
managing the entire supply chain and inbound logistics.
This provides substantial value add that can be priced
into contracts. It also enhances efficiencies, minimising
bottlenecks that could arise from engaging a third party
in the process. USCS faces competition in this space
from other large listed logistics groups such as
Barloworld, Imperial and Supergroup. In this regard,
KAP does not have a network of warehouses, but
operates from customer premises, where it installs
infrastructure, enhancing contract renewal prospects. It
also focuses on pockets within the logistics space where
margin enhancement can be derived from providing a
bespoke service, such as solutions for petroleum
companies (where major clients include Engen, Chevron
and Total) With regard to the former Unitrans’ proven
safety record is a key differentiator. Within the mining
and agriculture space, Unitrans also provides a
comprehensive service, transporting both the product and
personnel, and operating moveable equipment.
USCS has aligned its areas of focus in the rest of Africa
to its domestic strategy, and continues to follow existing
corporate customers into the region. Its offering in Africa
now consists of freight and logistics, as well as fuel,
mining and agriculture. In F13, certain structures were
collapsed in order to improve the management of supply
chain costs, while enhancing safety standards and service
delivery. The rest of Africa contributed a higher 27% of
logistics’ turnover in H F (F %) and % of its
operating profit (F13: 38%), reflecting the positive
impact of the recent reorganisation and the resilience of
margins in the face of continued pressure domestically.
In F13, USCS’ profitability was constrained by weak
domestic macroeconomic fundamentals and the road
freight industry strike. Looking ahead, the recent three-
year wage agreement will provide some stability,
although note is taken of volatile domestic labour
relations. Despite the challenges, most contracts that
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were up for renewal were retained, while new business
was secured in petroleum, household goods and
chemicals. Regional operations performed robustly,
boosted by long standing contracts with sugar producers.
While mining returned strong performance in F13,
ongoing labour instability could dampen future
performance. In the passenger division, Mega Coach and
Bus continues to focus on reducing reliance on mining.
Diversification is progressively being achieved through
extended regional routes in the public segment. Despite
pricing pressures, intercity brands have retained their
market share, with new routes contributing strongly.
Table : Logistics (R’m) F11 F1 F13 1H F13 1H F14
Revenue*
Op. profit*
Total assets
Revenue ∆ (%) n.a ( )
Op. margin (%)
Asset turnover (x)
*Revenue is shown before intersegment adjustments, and op. profit before capital items. Note:
F13 numbers were restated due to accounting standard revisions/discontinued operations.
Overall logistics’ revenues have increased steadily,
peaking at R7bn in F13, and reporting double digit
growth YOY in 1H F14. Margins have evidenced some
resilience, on the back of sound crossborder profitability,
continued product differentiation and cost rationalisation.
Looking ahead, opportunities are being identified in sub-
Saharan Africa, with new contracts secured in Namibia
and Zambia in 1H F14. In the passenger division, a new
bus contract in Mozambique is set to commence in 2014
(as the division continues to expand into countries that
USCS has an established presence), while phase I of the
Rustenburg Rapid Transport project is expected to roll
out in June 2015.
Integrated timber: PG Bison owns and manages an
integrated value chain, including , ha of forest
plantations (yielding around 670,000m of wood fibre
annually), sawmills, a modern resin plant, and board
manufacturing and upgrading facilities. This ensures the
sustainable delivery of a price competitive product to the
market. In F13, PG Bison finalised a major restructuring
process for its panel products segment, resulting in a
streamlined product offering and more focused customer
base. Looking ahead, further cost savings are expected to
derive from the optimisation of streamlining initiatives.
Table : Integrated timber (R’m) F11 F12 F13 1H F13 1H F14
Revenue*
Op. profit*
Total assets
Revenue ∆ (%) n.a
Op. margin (%)
Asset turnover (x)
*Revenue is shown before intersegment adjustments, and op. profit before capital items.
Volume growth should accrue from the new 0m /day
medium density fibreboard (“MDF”) press (built at a
cost of R m) that was commissioned in October 2013
at the Boksburg plant. MDF has reflected strong demand
as a complimentary product for regular particleboard, as
it has a wider range of higher value applications. The
MDF line is also more energy efficient and highly
mechanised compared to the old plant, providing vital
cost savings. In November 2013, the first phase of a new
melamine-faced board press was commissioned at the
Ugie plant. The Ugie particleboard plant is fairly
modern, having been built in 2008 at a cost of R1.2bn. A
new foil press was also commissioned in Piet Retief, in
line with the group’s continued focus on modernising
operations and technological advancement.
Subdued consumer spend has curtailed demand from the
retail, packaging and construction industries. Further
pressure has derived from imported competitor products.
Although a weaker Rand has countered some of this
pressure, it has inflated the landed cost of certain
imported components. PG Bison’s profits have, however,
shown some resilience, with further margin accretion to
derive from streamlining and scale enhancement.
Manufacturing: Operations span 26 facilities in
Southern Africa and 25 highly visible brands. To
enhance the scale of its manufacturing division, KAP is
targeting growth in industries where it has an established
presence or unique expertise.
Table 7: Division
snapshot PET resin
Automotive
components Footwear Other
Companies/
major brands Hosaf Feltex
Mossop Western
Leathers, Fram,
Jordan & Co,
Wayne Plastics
Vitafoam, BCM,
DesleeMattex,
Glodina
Revenue %: 1H F14
(F13) ( ) ( ) ( ) ( )
Product range
Resin with
extensive
downstream
application
Moulded foam
seats, floor carpets
& acoustic
products
Industrial and
fashion footwear,
leather
Foam, mattresses,
springs, towelling
Production p.a. 130,000t 530,000 units 5m pairs of shoes 4,800t of foam
Due to the reverse acquisition of Steinhoff assets
(notably furniture and bedding), F12 financials include
results for traditional KAP assets for three months and
the acquired businesses for the full year. As such, a YOY
comparison for the division would be superficial. The
division’s 1H F14 performance, however, reflected
steady revenue growth, underlined by robust PET resin
volumes. This is in turn underpinned by PET’s extensive
application in packaging, mainly in bottling. Feltex’s
performance in 1H F14 was curtailed by the industry
strike and a temporary closure to accommodate an
equipment change-over after it secured a contract to
assemble a new car model for a major car manufacturer.
This followed strong F13 performance, driven by robust
demand for new vehicles.
Table : Manufacturing (R’m) F13 1H F13 1H F14
Revenue*
Op. profit*
Total assets
Revenue ∆ (%) ( )
Op. margin (%)
Asset turnover (x)
*Revenue is shown before intersegment adjustments, and op. profit before capital items.
Continuous improvement programmes have helped to
sustain margins in the rigorously quality-oriented market
segment. Operating conditions for fashion footwear and
towelling remain challenging, as demand continues to
slow in the face of rising margin pressure from imports.
The recently concluded restructuring should, however,
improve the competitiveness of its footwear products
going forward. BCM and DesleeMattex showed
improved performance, indicating sound baseline
demand for certain durables. The dip in the overall
division’s margin from F is partially attributable to the
full inclusion of traditional KAP assets, which are
inherently low margin, high volume businesses. On a
like-for-like basis the division’s F operating income
rose by 20% to R291m, underpinned by Hosaf and
Feltex’s performance Feltex volumes are expected to
stabilise for the full year. Note is taken of slowing
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domestic consumer spend on new vehicles, although it is
anticipated that this will be partially compensated for by
exports. Hosaf reflects sound prospects, with strong
growth to be underlined by increasing product reliability
(on the back of improved processes, limited plant
downtime and enhanced quality control). Furniture and
bedding has been streamlined, and according to
management, is well positioned to effectively compete
for market share.
Operating environment
Real domestic GDP growth weakened to 1.9% in 2013,
below the initial 2.8% forecast (2012: 2.5%). This was
driven by several factors, including instability in the
labour force, infrastructure backlogs and continued
weakness in key trading partners. Rising inflationary
pressures, exacerbated by the severe depreciation of the
Rand have worsened consumer indebtedness and reduced
levels of disposable income. In response, the SARB
raised the repo rate by 50 basis points to 5.5% in January
2014, the first rate movement since July 2012.
Local industrial output has been relatively stagnant in
recent years, as Asian imports continue to undermine the
global competitiveness of South African manufacturers.
Moreover, weak domestic growth has curtailed pricing
even where manufacturers remain profitable. The cost
base has been increasing rapidly, with industry highly
reliant on labour, electricity and US$-priced raw
materials. Disruptions due to strikes and transportation
bottlenecks have further reduced efficiency and impacted
manufacturers’ ability to reliably cater to downstream
customers. Sales volumes have also dropped due to weak
demand from the mining sector (which is grappling to
maintain viability amidst sharply escalating costs) and
beneficiation industries. Despite these challenges, KAP’s
performance has shown some resilience. This is partially
due to balanced exposure to both cyclical and defensive
sectors and investment in world class manufacturing
facilities. The latter has enabled the group to produce and
price its products competitively, and ensured enough
capacity to dominate key markets. The substantial
depreciation of the Rand has improved its competitive
position by making imports more expensive and the
construction of new plants uneconomical (as the
machinery is generally priced in Euro or US$).
Source: Council for Scientific and Industrial Research (“CSIR”)
Logistics costs rose to an estimated 46% of transportable
(primary and secondary sector) GDP in 2012, from 44%
previously. This is reflective of significant pressure
deriving from escalating transportation costs. Driven by
rising fuel prices, transportation expenses have risen
sharply to represent an estimated % of total logistics
costs in 2012, well above the global average. While
inland freight volumes rose by 4.9% (by tonnage) in
2011, growth slowed to 1.8% in 2012. With these trends
having continued in 2013 (and likely to persist in the
medium term), logistics sector margins are under
considerable pressure. As their customers are seeking to
further rationalise costs, industry players continue to re-
evaluate their products, targeting tailored, holistic
solutions in order to protect their market share.
Financial performance
A five-year financial synopsis, including the historical
performance of the former Steinhoff assets in F09 and
F10 is appended to this report, with brief commentary
hereafter. In addition, a summary based on KAP’s
audited results is shown on page 8. Unless otherwise
stated, the ensuing analysis is focused on performance
subsequent to the reverse acquisition of Steinhoff assets.
Table : Operating
performance (R’m) F11 F12 F13 1H F13 1H F14 %∆
Revenue
EBITDA*
Op. profit*
Net finance charge ( ) ( ) ( ) ( ) ( ) ( )
NPAT ( )
Annualised revenue ∆ (%) n.a
EBITDA margin (%)
Op. margin (%)
Net profit margin (%)
*1H F13 EBITDA is shown before estimated amortisation of R6m. Note: Interim EBITDA and
operating income numbers are inclusive of unrealised gains/losses.
Following the inclusion of the original KAP assets for
the full year, the group reported a 37% rise in turnover to
R14.4bn in F13. Organic revenue growth was stable at
9% in F13 and 1H F14, underlined by steady demand
across the group’s core operations Notably, Logistics
gained further traction on the back of new domestic and
regional contracts, while Hosaf and Feltex registered
sound volume growth. Performance in 1H F14 was,
however, impacted by labour disruptions and a scheduled
Feltex stoppage. Growth is still anticipated for the full
year, due to a ramp up in production in 2H F14.
The inclusion of traditional KAP assets for the full year
had a deflationary impact on group margins from F13.
Note is also taken of rising raw material prices,
particularly for timber and oil & natural gas derivatives
(which constitute at least 75% of the PET resin and foam
production costs), as well as higher utility and fuel costs.
This downward margin pressure was partially countered
by the optimisation of production processes across
several product lines and the more efficient new
facilities. Overall, the normalised gross margin decreased
by 5 percentage points to 23.4% in F13. Stated after
depreciation, the margin registered at 19.5% in F13 (F12:
24.2%; F11: 25.2%). Volume growth nonetheless drove
an 11% uptick in gross profit to a high of R2.8bn.
Efficiency optimisation, customer rationalisation and the
consolidation of certain businesses alleviated margin
pressure at the operating income line somewhat in F13.
While personnel costs rose by 22% to R3.2bn in F13,
due to the inclusion of traditional KAP assets for the full
year, they equated to a lower 22% of turnover (F12:
%) Most of the underlying businesses reported steady
operating margins, with the dip in KAP’s overall margin
to % (F12: 9.2%) partly attributable to the inclusion
of low margin original KAP assets for the full year.
Operating profit nonetheless rose by % to a new high
0
10
20
30
40
50
0
50
100
150
200
250
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e
% R/tonne Deflated logistics cost contribution
Transport AdminW/housing Stock carrying costLogistics: transportable GDP (RS)
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of R1.2bn in F13, with 10% of this increase attributed to
organic growth. While the operating margin remained
fairly static in 1H F14 (versus 1H F13), operating profit
before capital items rose by % YOY to R717m. Note is
taken of the seasonality of certain businesses, whose
volumes and earnings are stronger in the second half.
Net interest costs eased to R368m in F13 (F12: R381m),
as KAP decided to reduce its reliance on shareholder
loans by utilising cheaper short term funding. The net
finance charge declined by an annualised 5% to R174m
in 1H F14 despite the sizeable draw down on short term
facilities. In view of the variable interest rate applicable
to its interest bearing debt, management estimated that a
100b.p. increase in interest rates would have reduced F13
net income by R35m (F12: R38m). Normalised net
interest cover as per GCR’s standard methodology rose
to 3.2x in F13 (F12: 2.5x). In 1H F14, the ratio registered
at x, up from 3.5x in 1H F13.
Unrealised movements largely result from changes in the
value of PG Bison’s plantations, which are valued at fair
value less estimated costs to sell. In F13, the fair value
gains on these biological assets amounted to R m
(F12: R m). A further R 0m related to capital items
and foreign exchange gains (F12: R92m). To mitigate
currency risk, KAP hedges foreign exchange cash flows
using forward contracts. Overall, and after accounting
for a taxation charge of R274m (at a 27.5% effective tax
rate, from 27% previously), NPAT rose by 20% to a high
of R702m in F13, translating to a net profit margin of
% (F12: 5.6%). In 1H F14, net income eased by 4%
YOY to R366m, reflecting slight margin compression to
4.7%, from 5.3% previously.
*Movements from F09 to F11 are based on former Steinhoff businesses only.
Operations have been robustly cash generative over the
overhauled group’s short track record Cash derived from
group activities rose by 25% to a high of R2bn in F13,
and by an annualised 6% to R1.1bn in 1H F14. The
group reported fairly sizeable working capital releases in
F12 and F13, which further boosted cash flows. Working
capital pressure largely derives from the manufacturing
operations, which reflect large absorptions at the interim.
This usually normalises by year end, as debtors unwind
and inventories are used up or sold. 1H F14 saw added
pressure due to restructuring and product rationalisation,
which is expected to abate as the year progresses. After
accounting for interest and a nominal tax outlay KAP’s
operating cash flows rose by 20% to R1.7bn in F13,
declining by an annualised 85% to R133m in 1H F14.
A portion of cash generated in recent years has been used
to fund capex, which increased by 37% to a high of
R1.3bn in F13. Fixed capital formation has been driven
both by enhancements and the expansion of existing
capacity. Proceeds from the disposal of ancillary
operations and investments have contributed a
cumulative R807m to cash flows since F11, and partially
funded recent capex. Net debt declined sharply, falling
by R843m in F12, and by a further R425m in F13.
Underlying these movements was a strong build-up of
liquid assets from free cash flows in F11 and F12, which
has seen cash and equivalents close at around R1.3bn
since FYE12. While cash reduced slightly in F13 and 1H
F14, recourse to additional borrowings was moderate,
and this saw net debt rise by R320m in 1H F14.
Table 1 : Capex (R'm) F13 Expansion° Replacement* 1H F14
Supply chain solutions
Passenger
Integrated timber
Manufacturing
Total ,
°Excludes amounts related to intangibles.
*Net of government grants.
Funding, gearing and liquidity
Table : Balance sheet
composition* FYE11 FYE12 FYE13 1H F14
Non-current assets
Fixed assets
Biological assets
Investments/loans in associates
Current assets
Inventory
Trade receivables
Cash & equiv.
*Excludes goodwill, patents, trademarks, software and other nominal intangibles.
KAP’s balance sheet was considerably enhanced by the
reverse acquisition of Steinhoff businesses, with assets
totalling R15.2bn as at 1H F14 (FYE13: R15.1bn).
Excluding goodwill and other intangibles (as per GCR’s
standard methodology), the balance sheet expanded to
R13.9bn at 1H F14 (FYE13: R13.8bn), from an FYE10
low of R2.4bn (prior to the reverse acquisition of
Steinhoff assets). The business is anchored by an
extensive fixed asset base, which at FYE13 was largely
made up of a vehicle fleet (R3.1bn), plant and equipment
(R1.5bn), and land and buildings (R1.4bn). Inventory
and debtors made up a large portion of the balance.
Debtors mainly relate to the logistics and manufacturing
divisions (at 49% and 34% of FYE13 trade debtors). As
at FYE13, 84% of the total book was fully performing
(FYE12: 85%), with a further 14% up to 90 days past
due and unimpaired. KAP has liens over goods sold until
payment is received. Risk is also mitigated by credit
insurance and collateral over assets of certain customers.
Equity accounted for a marginally higher % of total
liabilities at 1H F14, from % at FYE13. An adjustment
of R5.2bn has been made to shareholders interest to
reflect the equity impact of the acquisition of Steinhoff
assets, while 1.9bn additional shares were issued. Debt
represented a further % of funding at 1H F14 (FYE13:
%), with creditors contributing an unchanged %.
Former Steinhoff assets historically reflected large inter-
company loans (FYE10: R3.7bn; FYE09: R5.2bn). The
loans were unsecured, had no fixed tenor and from time
to time carried concessionary interest rates. Treating
these loans as equity, net gearing would have reflected at
a low 11% at FYE10 (FYE09: 18%). These obligations
were consolidated into one loan and formed the basis for
the Consideration Loan Account. Steinhoff has retained
close operational oversight of KAP, with the broader
(900)
(600)
(300)
0
300
600
900
F09 F10 F11 F12 1H F13 F13 1H F14
R'm Working capital movements*
Debtors Creditors Inventory Other Net ∆
South Africa Corporate Analysis | Public Rating Page
group’s treasury monitoring its exposures and mandating
strict debt covenants. Debt has fluctuated moderately
since F11, peaking at R4.9bn at FYE12, before easing to
R4.7bn at 1H F14 (FYE13: R4.4bn). Its composition has,
however, shifted materially following the Steinhoff
transaction, with further changes expected in the short
term as maturing obligations are refinanced. KAP’s debt
is predominantly unsecured (FYE13: 79%; FYE12:
%) Apart from shareholder loans, unsecured debt
mainly consisted of overdrafts at FYE13 (R743m). These
spiked to R1.9bn at 1H F14, largely to finance the early
settlement of a portion of the shareholder loans and to
fund rising working capital requirements. Borrowings
are almost entirely Rand denominated, while a nominal
portion of cash is in US$ and in Euros (FYE13: R51m).
Table 1 : Net debt profile (R'm) FYE12 FYE13 1H F14*
Opening balance
Repayment of Steinhoff loan ( ) ( ) ( )
Net debt raised/(repaid) ( ) ( )
Closing balance
Shareholder loans
Other ( ) ( )
*Discrepancy in the opening balance from FYE13 is due to discontinued operations, which were
separately disclosed as at 1H F14.
Secured debt (FYE13: R932m; FYE12: R395m) largely
relates to Phaello Finance Company’s (“Phaello”) senior
notes (FYE13: R877m), with the balance consisting of
term loans and capitalised finance leases. Phaello has
master lease agreements with Unitrans (holding the
general notarial bond and other agreements on behalf of
lenders) guaranteed by Steinhoff Africa. Encumbered
assets amounted to R837m at FYE13 (FYE12: R519m).
Steinhoff Africa indicated that its contingent exposure in
respect of any guarantees, suretyships and indemnities
provided on behalf of KAP does not exceed R5.8bn.
Table : Funding profile (R’m) FYE11 FYE12 FYE13 1H F14
Shareholders interest
Goodwill and other ( ) ( ) ( ) ( )
Patents and trademarks ( ) ( ) ( ) ( )
Revised equity
Short term debt
Long term debt
Total debt
Net gearing (%)
Adjusted net gearing (%)*
Net debt: EBITDA (%)
EBITDA: net interest (x)
Net interest cover (x)
Cash: ST debt (x)
*Assuming that equity is only adjusted for goodwill and ancillary intangibles.
From a high of % as at FYE11, net gearing improved
to more comfortable levels, registering at a new low of
% at FYE13 (1H F14: %). Inclusive of the group’s
key revenue generating intangibles (specifically patents
and trademarks), net gearing declined to 51% at FYE13,
from a review period high of 98% at FYE11, before
rising moderately to 55% at 1H F14. Net earnings based
gearing shed 95 percentage points from the FYE11 level,
to 1 % as at 1H F14 (FYE13: 1 %). It is also noted
that the exclusion of the original KAP assets in F11 and
most of F12 led to some distortion in the gearing metrics.
The sharp rise in overdrafts saw debt split fairly evenly
between current and long term obligations at 1H F14.
While some comfort derives from the medium term tenor
of non-current debt, KAP is evaluating cost effective
options to refinance maturing obligations. Heightened
liquidity pressure at 1H F14 (evidenced by the materially
reduced cash coverage of current debt) is mainly deemed
to be a timing issue, with new facilities expected to be in
place by FYE14. At FYE KAP’s facilities amounted
to R7.6bn, of which R2.2bn was unutilised. A portion of
the shareholder loan that was repaid to minimise finance
costs (R1.2bn) remains available to KAP. According to
management, certain local banks have agreed in principle
to replace KAP with Steinhoff as the principal debtor on
the loans originally procured by the parent on its behalf
(with the same terms and covenants). In addition, two
external lenders have agreed to convert the short term
facilities extended to KAP, with tenors of between three
to five years planned. Management is also mooting the
possibility of tapping capital markets through a DMTN
programme to further diversify sources of funding.
Outlook and rating rationale
Management anticipates stable top line performance
going forward, to be derived from enhanced capacity and
the improved price competitiveness of its offering. In
this regard, cost containment and operating efficiency
remain an area of focus. In addition, integration across
aligned businesses is expected to continue, while product
rationalisation and innovation are considered important
to securing additional business from an increasingly cost
conscious customer base The group’s operations are
anchored by strongly competitive, integrated businesses
with highly visible brands and extensive track records.
GCR has assessed the performance of the former
Steinhoff assets over a five-year period to ascertain the
stability of the underlying entities and to review the
robustness of their cash flows, as they anchor the new
balance sheet. In this respect, the retention of the strong
management teams that have successfully run these
operations should ensure sustainable profitability.
Nonetheless, the domestic operating environment is
expected to remain tenuous going forward, reflecting
trends that will adversely impact all sectors, even groups
with fairly defensive operating models over time. In this
regard, KAP plans to further strengthen its footprint in
the region by leveraging existing client relationships.
While the build-up of capacity is set to continue, this will
be largely funded from internal cash flows, with minimal
recourse to debt. KAP is also considering the possibility
of bolt-on acquisitions to enhance the scale of its
manufacturing division. While this may be partially
funded by debt over the medium term, management does
not plan to unduly gear the balance sheet. As such, the
stance on acquisitive growth remains cautious, with net
gearing to remain within management’s comfort levels
of between % and % in the medium term. The
dividend policy is not expected to change materially, and
management plans to maintain a headline earnings cover
of 4x. Note is taken of the financial support provided by
Steinhoff and the advantages that have been derived
from its centralised treasury function. Nonetheless, KAP
has elected to fund its operations more autonomously
going forward, using its enhanced balance sheet strength
to procure cost effective financing from third party
funders. This will mainly be used to refinance maturing
obligations and to support financial flexibility.
South Africa Corporate Analysis | Public Rating Page
KAP Industrial Holdings Limited (Rand in millions except as noted)
Pre-Steinhoff transaction Post-Steinhoff asset reverse acquisition
Income Statement Year end : 30 June ° ° 1H 2014ˣ
Turnover EBITDA Depreciation Operating income Net finance charge Amortisation Abnormal/Exceptional items Capital items, foreign exchange and fair value gains (losses) NPBT Taxation charge/(credit) NPAT Equity accounted earnings Attributable earnings
Cash Flow Statement
Cash generated by operations Utilised to increase working capital Net interest paid Taxation paid Cash flow from operations Maintenance capex* Discretionary cash flow from operations Dividends paid Retained cash flow Net expansionary capex Investments and other Proceeds on sale of assets/investments Shares issued Cash movement: (increase)/decrease Borrowings: increase/(decrease) Net increase/(decrease) in debt
Balance Sheet
Ordinary shareholders interest Outside shareholders interest Total shareholders interest Short term debt Long term debt Total interest-bearing debt Interest-free liabilities Total liabilities Fixed assets Investments and other non-current assets Cash and cash equivalent Other current assets Total assets
Ratios
Cash flow:
Operating cash flow: total debt (%) Discretionary cash flow: net debt (%) neg neg Profitability:
Turnover growth (%) n.a Gross profit margin-incl. depreciation (%) n.a EBITDA: revenues (%) Operating profit margin (%) EBITDA: average total assets (%) Return on equity (%) Coverage:
Operating income : gross interest (x) n.a Operating income : net interest (x) n.a EBITDA : net interest (x) Activity and liquidity: Trading assets turnover (x) Days receivable outstanding (days) Current ratio (:1) Capitalisation:
Net debt: equity (%) Total debt: equity (%) Net debt: equity-incl. patents and trademarks (%) Total debt: equity - incl. patents and trademarks (%) Total debt: EBITDA (%) Net debt: EBITDA (%)
ˣ1H 2014 numbers are based on the unaudited financial results for the six months to December 2013. EBITDA and op. income for 1H F14 include unrealised gains related to biological assets and forex movements. ° In April 2012, KAP reverse-acquired Steinhoff’s industrial assets. Accordingly, - 11 numbers relate only to former Steinhoff assets, while includes the original KAP assets’ performance for months *Depreciation is used as a proxy for maintenance capex for the years 2009 to 2013.
South Africa Corporate Analysis | Public Rating Page
KAP Industrial Holdings Limited (based on audited financials) (Rand in millions except as noted)
Pre-Steinhoff transaction Post-Steinhoff asset reverse acquisition
Income Statement Year end : 30 June 2011° 2012° 1H 2014ˣ Turnover EBITDA Depreciation Operating income Net finance charge Amortisation ) Abnormal/Exceptional items Capital items, foreign exchange and fair value gains (losses) NPBT Taxation charge/(credit) NPAT Equity accounted earnings Attributable earnings
Cash Flow Statement
Cash generated by operations Utilised to increase working capital Net interest paid Taxation paid Cash flow from operations Maintenance capex* Discretionary cash flow from operations Dividends paid Retained cash flow Net expansionary capex Investments and other Proceeds on sale of assets/investments Shares issued Cash movement: (increase)/decrease Borrowings: increase/(decrease) Net increase/(decrease) in debt
Balance Sheet
Ordinary shareholders interest Outside shareholders interest Total shareholders' interest Short term debt Long term debt Total interest-bearing debt Interest-free liabilities Total liabilities Fixed assets Investments and other non-current assets Cash and cash equivalent Other current assets Total assets
Ratios
Cash flow:
Operating cash flow: total debt (%) Discretionary cash flow: net debt (%) neg Profitability: Turnover growth (%) n.a Gross profit margin-incl. depreciation (%) n.a EBITDA: revenues (%) Operating profit margin (%) EBITDA: average total assets (%) Return on equity (%) neg Coverage:
Operating income : gross interest (x) n.a Operating income : net interest (x) EBITDA: net interest (x) Activity and liquidity:
Trading assets turnover (x) Days receivable outstanding (days) Current ratio (:1) Capitalisation:
Net debt: equity (%) Total debt: equity (%) Net debt: equity-incl. patents and trademarks (%) Total debt: equity - incl. patents and trademarks (%) Total debt: EBITDA (%) Net debt: EBITDA (%)
ˣ H numbers are based on the unaudited financial results for the six months to December EBITDA and op. income for 1H F14 include unrealised gains related to biological assets and forex movements. ° The 11 numbers relate only to former Steinhoff assets, while includes the original KAP assets’ performance for months The 2009- financials reflect the original KAP assets’ standalone performance *Depreciation is used as a proxy for maintenance capex for the years 2009 to 2013.
South Africa Corporate Analysis | Public Rating Page
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