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

patricia@globalratings.net

Committee Chairperson

Eyal Shevel

Sector Head: Corporate Ratings

shevel@globalratings.net

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.

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