Eqstra is a nonoperational holding company; however, the ratings are the same
as those on the group as there is no structural subordination, and also due to
revenue diversity from the operating group and limited regulation.
Eqstra is a South Africa-based operating lease specialist, with total assets
of South African rand (ZAR) 12.03 billion ($1.5 billion at ZAR8.08 to $1) at
Dec. 31, 2011. Compared with many specialist lenders limited to a particular
geographic area, Eqstra’s business diversification and franchise stability are
good, in our opinion. The contribution from international subsidiaries has
increased significantly throughout 2011. Nondomestic operations accounted for
18% of operating assets and 17% of operating profits in the first half of
fiscal 2012. Operational assets and revenues are spread across the Passenger
Commercial Vehicle (PCV) leasing, Industrial Equipment leasing (IE), Contract
Mining and Plant Rental, (CM), and Construction and Mining Equipment
Distributorships (CMED) business lines. Eqstra holds a leading domestic market
position in the first three of these business units.
Strong asset quality, supported by high intrinsic collateralization and what
we consider to be capable risk management support the ratings on Eqstra. The
cost of risk (loan loss provisions to average lease receivables) has performed
strongly over the past two years and reached over 0.69% at Dec. 31, 2011. We
understand that all exposures for trade receivables that are 90 days overdue
are fully provided for (trade receivables are typically short-term financial
obligations of the debtors as per lease contractors). Recovery prospects are
good, in our view, given the intrinsically high collateral levels and the
company’s ability to move leased assets away from one lessee to another if
there is a payment delay.
We view Eqstra’s capitalization as good and consider that it remains a
positive rating factor. Capital adequacy (total equity to assets) deteriorated
to 23% at Dec. 31, 2011, from 26.3% one year earlier–still comfortably above
Eqstra’s funding covenant guideline of 20%. Eqstra’s profitability continued
to improve in 2011, with return on assets increasing to 3.5% at Dec. 31, 2011.
The increase in profitability reflected an 11% year-on-year revenue increase
and flat real operating cost growth. As a result, the EBITDA margin improved
to 33% during the first half of 2012, the highest in three years. In the short
term, we expect profits to continue rising following the successful completion
of the Bucyrus distribution agreement sale, which will provide some goodwill
profit. In our view, the company’s opencast mining project in Mozambique
(Benga) will provide a greater proportion of revenues.
Eqstra’s funding and liquidity matrices deteriorated somewhat in the 12 months
to Dec. 31, 2011, mainly due to strong capital expenditure as a result of the
quick growth of leased assets at the Benga project. However, we expect that
the Bucyrus distribution agreement sale will remove inventory and provide some
goodwill, which the company will use to pay down debt. We also factor into our
ratings an expectation that revenues from the Benga project will reduce total
debt as a percentage of revenues and cash flow going forward. Cash flow from
operations remains the most significant source of liquidity for Eqstra, as the
company doesn’t hold a cash cushion for liquidity management purposes. At Dec.
31, 2011, funds from operations deteriorated to 33% of net debt; free
operating cash flow as capital expenditure (in which we include acquisition of
leasing assets) was strong throughout the first half.
