September 25, 2017

Basil Read remains on Stable outlook by GCR due to benefits achieved from the revised strategy

Global Credit Ratings (GCR) has affirmed the national scale issuer ratings assigned to Basil Read Holdings Limited of BBB-(ZA) and A3(ZA), in the long term and short term respectively; with the outlook accorded as Stable.

Sheri Few, Senior Analyst at GCR, says the ratings acknowledge Basil Read’s comprehensive review and restructuring of operations that were initiated from mid-2014. The changes have focused on cost containment, the integration of systems to enhance project delivery and quality, as well as an overhaul of risk protocols.

The positive effects of the corrective measures have started to materialise, with the group reporting a turnaround to financial profitability in the financial year of 2015, although the full impact will likely only be evident when industry volumes normalise. In this regard, as current market conditions will continue to challenge the company’s operating performance, Basil Read’s ability to demonstrate sustainable core profitability through the cycle is only likely to impact positively on GCR’s view of the company’s ratings over future reporting periods.

Few explains, “Basil Read operates in a highly cyclical and competitive industry, with considerable project and operational risks. In this regard, large loss-making contracts have significantly impeded past performance. We note that only two distressed legacy contracts remain and are expected to be closed out shortly. Coupled with strict delivery guidelines and project oversight, this should support future earnings stability.”

The group’s total order book was reported at a slightly higher R10.7 billion at financial year end 2015, covering about 1.9 times of revenue, which should mitigate material top line variability. This notwithstanding, the closing of two significant contracts could materially curtail medium-term performance unless the order book can be replenished timeously despite the challenging domestic conditions.

“We expect gearing metrics to remain conservative, with Basil Read sustaining a net ungeared position given the uncertainty in contract execution. In view of the execution risk in respect of the medium-term strategy amidst the challenging environment, ratings uplift will be premised on management’s successful delivery of its business plan Year on Year. A ratings downgrade could arise if Basil Read’s overall financial profile is weaker than expectations, causing ongoing cash outflows to increase and the liquidity profile to deteriorate as a result,” concludes Few.

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