[PDF] South Africa-Based Super Group Ltd zaAAA/zaA-1+ Ratings

7958_3Standards_Poor_Rating_20191029.pdf

ResearchUpdate:

SouthAfrica-Based SuperGroupLtd.

'zaAAA/zaA-1+'Ratings AffirmedAmidChallenging

TradingConditions

October28, 2019

Overview

-Transport firmSuperGroup's financialperformanceremained resilientinfiscal year(FY)2019 (endedJune 30,2019)benefitting fromdiversityof itsbusinesssegments andoperating efficiencygains. -However, webelieveSuper Groupwillface difficultymaintainingits profitabilityifchallenging tradingconditions continue,andthis couldweakenits creditqualityover time. -We areaffirmingour 'zaAAA'long-termand 'zaA-1+'short-termSouth Africanationalscale ratingson SuperGroup.The ratingsaresensitive tofurtherweakness intradingconditions over thenext 12months.

RatingAction Rationale

Weexpect thatSuperGroup's earningswillremain underpressuregiven challengingtrading conditionsacross allbusinesssegments. SuperGroup maintainedadjustedEBITDA marginsof about10.9%, whilegrowingadjusted EBITDAtoSouth Africanrand(ZAR)4.1 billioninFY2019 from ZAR3.9billion inFY2018.The companybenefittedfrom businesssegmentdiversification in FY2019,with earningsfromstrong volumesinits commoditysupplychain operationsmorethan offsettingrevenue andprofitabilitypressure inotherbusiness segments,includingindustrial and consumersupply chainoperationsin SouthAfricaand Europe,theSG Fleetdivision,and auto dealerships. Wesee tradingconditionsremaining mutedinFY2020 duetoweak economicgrowthin South Africa,low consumerconfidencein Australia,anduncertain globalmacroeconomicevents related toBrexit andU.S.-Chinatrade tension.Wealso believecommoditytransport volumes,primarily coal,will declinefroma peakinFY2019 ascoalstockpiles improveatSouth Africanpowerutility

Eskom.

Itsindustrial andconsumersupply chainsegmenthas securednewcontracts todate,and we

ResearchUpdate:

SouthAfrica-Based SuperGroupLtd.

'zaAAA/zaA-1+'Ratings AffirmedAmidChallenging

TradingConditions

October28, 2019

PRIMARYCREDIT ANALYST

RishavSingh

Johannesburg

(27)11 -214-4856 rishav.singh @spglobal.com

SECONDARYCONTACT

OmegaM Collocott

Johannesburg

(27)11 -214-4854 omega.collocott @spglobal.com

ADDITIONALCONTACT

IndustrialRatings Europe

Corporate_Admin_London

@spglobal.comwww.spglobal.com/ratingsdirectOctober 28, 2019 1 believethere ispotentialto winmorecustomers owingtocompetitor weakness,butwe believe profitabilityin itsSupplyChain Africadivisionwill remainconstrainedby tightconsumerspending andweak growthinSouth Africa,whichwill leadtotighter marginsacrossthe supplychain.The SupplyChain Europedivisioncontinues tofaceseveral issues,relatedto emissionstesting standardsand U.S.-Chinatradewars, whichreducedproduction intheGerman automotivesector. Weexpect thatpoorconsumer sentimentandtough retailconditionsin Australiawillweigh on demandfor neworrenewed leasecontractsat SGFleet.We alsoexpectit willbeimpacted bya changeto regulationinAustralia, whichspreadsinsurance productrevenueacross thelifeof the lease,rather thanbeingrealized upfront. TheSouth AfricanDealershipssegment islikelyto facefurtherrevenue declinesbecauseof macroeconomicweakness andfallingnew carsalesin SouthAfrica.Although thebusiness managedcosts welltomaintain itsprofitabilityin FY2019,webelieve decliningsalesvolumes will inevitablyweigh onprofitability.The U.K.Dealershipssegment willcontinueto beaffectedby emissionsstandards testingandBrexit uncertainty,albeitwe expectperformanceto remain resilientthanks toitsbrands beingindemand. Weforecast thatSuperGroup willmaintainfunds fromoperations(FFO) todebtmarginally above45% onaverage,with growthfrombolt-on acquisitions.SuperGroup hasmaintainedS&P GlobalRatings-adjusted FFOtodebt above45%over thepastthree years.Ourforecast reflects ourexpectation that,despitemacroeconomic challengesinSouth Africa,depressedconsumer sentimentin Australia,andBrexit-related uncertainties,thecompany willkeeppositive free operatingcash flow(FOCF)before acquisitions,whichsupports creditmetricsremaining commensuratewith the'zaAAA'rating. Webelieve SuperGroupwill continueitsselective acquisitionstrategyof buyingentitiesthat can bebolted ontoexisting businesssegments.Although theuncertainmagnitude andtimingof any acquisitionsmeans thatwedo notfactorthem intoourforecasts, weanticipatethat the company'sacquisitive strategywillhelp improveitsearnings diversificationandwill bethemain growthdriver. Weanticipate thatSuperGroup willprioritizeallocation ofexcessFOCF towardorganicgrowth andbolt-on acquisitions,beforeconsidering opportunisticpurchasesof SGFleetor SuperGroup shares. Wecould lowerourrating onSuperGroup inthenext 12months.Intensecompetition, adverse businessconditions, orunexpectedoperational issuesthatleads toadownward revisionofits businessprofile, sustaineddeteriorationof creditmetrics,or weakerliquiditycould leadusto lowerthe rating. Althoughwe forecastFFOto debtwillweaken to40%-45%in FY2020,weanticipate SuperGroup willmaintain thiscoremetric above45%on average,alongsideadequate liquidity.However, weaker-than-anticipatedoperating conditionscouldarise overthenext 12months,which could resultin deteriorationofSuper Group'sbusinessand financialprofiles.As aresult,we believe thereis aone-in-threechance thatwecould lowerourrating onSuperGroup inthenext 12 months. Wecould lowertherating ifweakoperating conditionsresultin amaterialdecline inprofitabilityor margins,or ifS&PGlobal Ratings-adjustedFFOto debtfallssustainably below45%.We could alsolower theratingif SuperGroup'sacquisitive strategyoropportunistic sharerepurchaseslead toweaker creditmetricswithout tangibleprospectsfor recovery.Thiscould alsohappenif, for example,greater-than-expected capitalexpenditure(capex) associatedwithan acquired

companyled tonegativeFOCF formorethan 12months.www.spglobal.com/ratingsdirectOctober 28, 2019 2

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

Stablemargins, FFOtodebt sustainablyabove50%, andadequateliquidity wouldsupportthe currentrating.

CompanyDescription

SuperGroup isaprovider ofsupplychain logistics,commoditytransport, fleetsolutions,and auto dealerships.It isheadquarteredin SouthAfricaand postedrevenueof ZAR37.9billion(US$2.6 billion)in FY2019.

Thecompany's operatingsegmentsconsist of:

-Supply chain(SupplyChain AfricaandSupply ChainEurope); -Fleet solutions(FleetAfrica andSGFleet Ltd.,whichis listedinAustralia and59.2%owned by

SuperGroup); and

-Dealerships (basedinSouth Africaandthe U.K.).

OurBase-Case Scenario

Ourbase-case assumes:

-Real GDPgrowthin SouthAfricaof 1.1%inFY2020 and1.8%in FY2021,withconsumer price index(CPI) inflationof4.6% and4.8%in therespectivefiscal years. -Real GDPgrowthin Australiaof1.7% inFY2020and 1.0%inFY2021, withCPIinflation around

2.9%in bothyears.

-Revenue declinebetween0%-1% inbothFY2020 andFY2021,after acquisitions,primarilydue toreduced commoditytransportand newvehiclesales volumes. -Adjusted EBITDAmarginsbetween 9.8%-10.2%inboth FY2020andFY2021, from10.9%in

FY2019.

-Capex ofaboutZAR2.3 billioninFY2020 andZAR2.1billion inFY2021,from ZAR2.4billionin

FY2019.

-Proceeds fromfleetasset disposalsofaround ZAR600millionin bothFY2020and FY2021. -Working capitaloutflowsof aroundZAR550million inFY2020and ZAR350millionin FY2021. -Announced andcommittedacquisitions ofaboutZAR780 millioninFY2020. Wedonot assume furtheracquisitions inourforecasts. -We donotanticipate anydividendpayments toSuperGroup shareholdersinthe next12 months,based onthecompany's guidance.However,we doexpectSG Fleettopay dividendsof atleast ZAR180milliona yeartoits minorityshareholders. Basedon theseassumptions,we arriveatthe followingS&PGlobal Ratings-adjustedcredit measuresfor thecompany: -FFO todebtbetween 40%-45%inFY2020, improvingto45%-50% inFY2021,from 53%in

FY2019.

-Adjusted debttoEBITDA ofabout1.6x inFY2020,improving to1.5xin FY2021. -Positive FOCFbeforeacquisitions. www.spglobal.com/ratingsdirectOctober 28, 2019 3

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

Liquidity

Theshort-term issuercreditrating onSuperGroup is'zaA-1+',based onthe'zaAAA' long-term issuercredit ratingandour assessmentofthe company'sliquidity. Weassess SuperGroup'sliquidity asadequatebecause weforecastthat sourceswillcover uses byaround 1.6xforthe 12monthsbeginning July1,2019. Weconsiderthat thecompanyhas improvedaccess tothecapital markets,givenits issuanceofZAR750 millioninunsecured notes inOctober 2019,ZAR1billion inJune2019, andZAR450million inSeptember2018. Potential bolt-onacquisitions andopportunisticpurchases ofSGFleet sharesandrepurchases ofSuper Groupshares areapossibility, althoughwebelieve thecompanywill maintainatleast adequate liquidity. Wecalculate thefollowingprincipal liquiditysourcesfor the12months startedJuly1, 2019: -Cash andcashequivalents ofZAR3.6billion. -Available committedbanklines withmaturitiesgreater than12months ofaboutZAR1.3 billion. -Annual forecastcashFFO ofaboutZAR2.5 billion. -Issuance ofbondswith varyingmaturitiestotaling ZAR750millioncompleted inOctober2019. -Annual proceedsfromfleet assetdisposalsof aboutZAR600million. Forthe sameperiod,we calculatethefollowing principalliquidityuses: -Scheduled debtmaturitiesand amortizationofabout ZAR1.65billion. -Capex ofaboutZAR2.3 billion. -Working capitaloutflowsof aroundZAR550million. -Dividends tominorityshareholders, primarilyofSG Fleet,ofat leastZAR180million. -Committed bolt-onacquisitionsof aboutZAR780million.

Covenants

Weunderstand thatthegeneral bankingfacilitydocumentation includesminimumcapital adequacy;net interestcoverageratios; andnetdebt-to-EBITDA covenants,whichare measured quarterlyafter deconsolidatingSGFleet. Weexpectthat headroomunderthese covenantswill remainadequate andthatthe groupwillbe abletomeet itscashneeds frominternallygenerated funds.

OtherCredit Considerations

The'zaAAA' long-termSouthAfrica nationalscalerating incorporatesourview ofSuperGroup's acquisitivestrategy. Weseea riskthatSuper Groupcouldmake largedebt-fundedacquisitions on anopportunistic basis,resultingin ratiosfallingshort ofourbase-case forecastsand rating-commensuratelevels, withlimitedprospects ofimprovingwithin ayearafter the acquisition.www.spglobal.com/ratingsdirectOctober 28, 2019 4

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

RatingsScore Snapshot

SouthAfrica NationalScaleRating: zaAAA/--/zaA-1+

Businessrisk: Fair

Countryrisk: Intermediate

Industryrisk: Intermediate

Competitiveposition: Fair

Financialrisk: Modest

Cashflow/Leverage: Modest

Modifiers:

Diversification/Portfolioeffect: Neutral(noimpact)

Capitalstructure: Neutral(noimpact)

Financialpolicy: Negative(-1 notch)

Liquidity:Adequate(no impact)

Managementand governance:Fair(no impact)

Comparablerating analysis:Neutral(noimpact)

RelatedCriteria

-General Criteria:GroupRating Methodology,July1, 2019 -Criteria |Corporates| General:CorporateMethodology: RatiosAndAdjustments, April1,2019 -General Criteria:MethodologyFor NationalAndRegional ScaleCreditRatings, June25,2018 -Criteria |Corporates| General:MethodologyAnd Assumptions:LiquidityDescriptors ForGlobal

CorporateIssuers, Dec.16,2014

-Criteria |Corporates| Industrials:KeyCredit FactorsForThe RailroadAndPackage Express

Industry,Aug. 12,2014

-Criteria |Corporates| Industrials:KeyCredit FactorsForThe TransportationCyclicalIndustry,

Feb.12, 2014

-Criteria |Corporates| Industrials:KeyCredit FactorsForThe BusinessAndConsumer Services

Industry,Nov. 19,2013

-Criteria |Corporates| General:CorporateMethodology, Nov.19,2013 -General Criteria:CountryRisk AssessmentMethodologyAnd Assumptions,Nov.19, 2013 -General Criteria:RatingsAbove TheSovereign--CorporateAnd GovernmentRatings:

MethodologyAnd Assumptions,Nov.19, 2013

-General Criteria:Methodology:Industry Risk,Nov.19, 2013 -General Criteria:Methodology:Management AndGovernanceCredit FactorsForCorporate

Entities,Nov. 13,2012

-General Criteria:UseOf CreditWatchAndOutlooks, Sept.14,2009 www.spglobal.com/ratingsdirectOctober 28, 2019 5

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

RatingsList

RatingsAffirmed

SuperGroup Ltd.

SouthAfrica NationalScalezaAAA/--/zaA-1+

RegulatoryDisclosures

SuperGroup Ltd.

-Primary CreditAnalyst:Rishav Singh,Associate -Rating CommitteeChairperson:G.Andrew Stillman -Date initialratingassigned: Aug.20,2013 -Date ofpreviousreview: Oct.25,2018

Disclaimers

Thisrating hasbeendetermined byarating committeebasedsolely onthecommittee's independentevaluation ofthecredit risksandmerits oftheissuer orissuebeing ratedin accordancewith S&PGlobalRatings publishedcriteriaand nopartof thisratingwas influencedby anyother businessactivitiesof S&PGlobalRatings. Thiscredit ratingissolicited. Theratedentity didparticipatein thecreditrating process.S&P GlobalRatings didhaveaccess totheaccounts, financialrecordsand otherrelevantinternal, non-publicdocuments oftherated entityora relatedthirdparty. S&PGlobalRatings hasused informationfrom sourcesbelievedto bereliablebut doesnotguarantee theaccuracy,adequacy, orcompleteness ofanyinformation used. MaterialsUsed InTheCredit RatingProcess:Sufficient informationingeneral consistsofboth (i) financialstatements thatdescribethe Issuer'sfinancialcondition, resultsofoperations and cash-flows,and (ii)adescription oftheactivities andobligationsof theentityincluding ofits governanceand legalstructure. Thiscredit ratingwasdisclosed totherated entityorrelated thirdpartybefore beingissued. S&PGlobal Ratings'regulatorydisclosures (PCRs)arepublished asofa point-in-time,whichis currentas ofthedate aCreditRating Actionwaslast published.S&PGlobal Ratingsupdatesthe PCRfor agivenCredit Ratingtoinclude anychangesto PCRdisclosuresonly whenasubsequent CreditRating Actionispublished. Thus,disclosureinformation inthisPCR maynotreflect changes todata withinPCRdisclosures thatcanoccur overtimesubsequent tothepublication ofaPCR butthat arenototherwise associatedwitha CreditRatingAction.

Glossary

-Business riskprofile:This measurecomprisesthe riskandreturn potentialfora companyinthe

marketin whichitparticipates (itsindustryrisk), thecountryrisks withinthosemarkets, thewww.spglobal.com/ratingsdirectOctober 28, 2019 6

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

competitiveclimate, thecompany'scompetitive advantagesanddisadvantages (itscompetitive position). -Comparable ratinganalysis:This involvestakinga holisticreviewof acompany'sstand-alone creditrisk profile(SACP),because eachofthe subfactorsthatultimately generatetheSACP can beat theupperor lowerend,or atthemidpoint, ofsucha range.Itmay alsotouchupon the overallcomparative assessmentofan issuerinrelation toitspeers acrossindustryand jurisdictionand maycapturesome factorsnot(fully) covered,suchas ashortoperating track record,entities intransition,unusual structures,orcontingent riskexposures. -Competitive advantage:Thestrategic positioningandattractiveness tocustomersof the company'sproducts orservices,and thefragilityor sustainabilityofits businessmodel. -Competitive position:Ourassessment ofacompany's: competitiveadvantage;operating efficiency;scale, scope,anddiversity; andprofitability. -Country risk:Thismeasures acountry'sinfluence ontheoverall creditrisksfor aratedcompany withregards toacountry's economic,institutionaland governanceeffectiveness,financial system,and paymentculture/ruleof lawrisks. -Creditworthiness: Abilityandwillingness ofacompany tomeetits debtanddebt-like obligations;measured byassessingthe levelcurrentand futureresourcesrelative tothesize andtiming ofitscommitments. -Diversification/portfolio effect:Applicableto conglomerates.Anassessment oftheextent to whichan entity'smultiplecore businesslinesare correlatedandwhether eachcontributesa materialsource ofearningsand cashflow. -Earnings: Proxyforprofit orsurplusyielded byanentity afterproductionand overheadcosts havebeen accountedforin agivenperiod. -EBITDA margin:Thisis EBITDAasa fractionofrevenues. -EBITDA: Thisisearnings beforeinterest,tax, depreciation,andamortization. -Efficiency gains:Costimprovements. -Financial headroom:Measureof deviationtoleratedin financialmetricswithout movingoutside orabove apredesignatedband orlimittypically foundinloan covenants(asin a debt-to-EBITDAmultiple thatplacesa constraintonleverage) orsetfor therespectiverating level.Significant headroomwouldallow forlargerdeviations. -Financial riskprofile:This measurecomprisesour assessmentofa company'scash flow/leverageanalysis. Italsotakes intoaccountthe relationshipofthe cashflowsthe organizationcan achievegivenits businessriskprofile. Themeasureis beforeassessingother financialdrivers suchascapital structure,financialpolicy, orliquidity. -Free operatingcashflow (FOCF):Cashflow fromoperationsminus capitalexpenditure. -Funds fromoperations(FFO): EBITDAminusinterest expenseminuscurrent tax. -Group ratingmethodology:The assessmentofthe likelihoodofextraordinary groupsupport(or conversely,negative groupintervention)that isfactoredinto theratingon anentitythat isa memberof agroup. -Industry risk:Thisaddresses themajorfactors thataffectthe risksthatcompanies faceintheir respectiveindustries. -Issuer creditrating:This isaforward-looking opinionofan obligor'soverallcreditworthiness (A

nationalscale ratingisalso anissuercredit rating).www.spglobal.com/ratingsdirectOctober 28, 2019 7

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

-Leverage: Thelevelof acompany'sdebt inrelationto itsearningsbefore interest,tax, depreciation,and amortization. -Liquidity: Thisisthe assessmentofa company'smonetaryflows, assessedovera 12to24 monthperiod. Italsoassesses theriskand potentialconsequencesof acompany'sbreach of covenanttest, typicallytiedto declinesinEBITDA. -Management andgovernance:This addresseshowmanagement's strategiccompetence, organizationaleffectiveness, riskmanagement,and governancepracticesshape theissuer's competitivenessin themarketplace,the strengthofits financialriskmanagement, andthe robustnessof itsgovernance. -Operating efficiency:Thequality andflexibilityof thecompany'sasset baseandits cost managementand structure. -Profitability ratio:Commonlymeasured usingreturnon capitalandEBITDA margins,butcan be measuredusing sector-specificratios. -Scale, scope,anddiversity: Theconcentrationor diversificationofbusiness activities.

Certainterms usedinthis report,particularlycertain adjectivesusedto expressourview onratingrelevant factors,

havespecific meaningsascribedto theminour criteria,andshould thereforeberead inconjunctionwith such criteria.Please seeRatingsCriteria atwww.standardandpoors.comfor furtherinformation.Complete ratings

informationis availabletosubscribers ofRatingsDirectat www.capitaliq.com.Allratings affectedbythis rating

actioncan befoundon S&PGlobalRatings' publicwebsiteat www.standardandpoors.com.Usethe Ratingssearch

boxlocated intheleft column.Alternatively,call oneofthe followingS&PGlobal Ratingsnumbers:Client Support

Europe(44) 20-7176-7176;LondonPress Office(44)20-7176-3605; Paris(33)1-4420-6708; Frankfurt(49)

69-33-999-225;Stockholm (46)8-440-5914;or Moscow7(495) 783-4009.www.spglobal.com/ratingsdirectOctober 28, 2019 8

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

www.spglobal.com/ratingsdirectOctober 28, 2019 9

Research Update: South Africa-Based Super Group Ltd. 'zaAAA/zaA-1+' Ratings Affirmed Amid Challenging Trading Conditions

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