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Standard Bank Monthly Market Barometer - July 2011

Standard Bank Monthly Market Barometer - July 2011

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Published by LC
Standard Bank's Monthly Market Barometer for July 2011, giving commentary of the state of financial management in the City of Joburg.
Standard Bank's Monthly Market Barometer for July 2011, giving commentary of the state of financial management in the City of Joburg.

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Categories:Types, Business/Law
Published by: LC on Aug 16, 2011
Copyright:Attribution Non-commercial


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Please refer to the disclaimer at the end of this document.
The annual results of the City of Johannesburg (CoJ) were substantially quali-fied
. We therefore view the results as largely unreliable. Revenue totalling R5.2bnwas either incorrect or unverifiable, while debtors of R2.8bn could not be verified. Theunderlying performance of the CoJ is weak; revenue collections are under pressureand 73.9% of the debtors book has been impaired. However, this may not lead to adowngrade; Moody’s has stated that an audit qualification might not have a directimpact on its rating of the CoJ.
Credit metrics weakened in FY:10
. The city’s debt burden remains high, while cashgeneration has fallen. However, the CoJ’s economy is large; if adequate controls areput in place, and its accounting and billings problems are remedied, we believe thatthe financial situation should improve.
Securitisation issuance to remain high into August
. Nitro is expected to return tomarket with a new transaction, aiming to raise up to R4bn. This follows the trend ofJuly, with both Thewini 9 and Blue Granite 2 raising funds (although less than was onoffer). Corporate issuance was robust, with Toyota, Growthpoint and RCS all return-ing to market.
Sources: Standard Bank Research; Annual reports 
Figure 1: CoJ — Interest-bearing liabilities are high, while cash has declined
Research Strategists
Janine Pein* 
 Robyn Clements* 
 Kuvasha Govender* 
-3,0006,0009,00012,000FY:06 FY:07 FY:08 FY:09 FY:10RmCash and cash equivalents Long term interest-bearing debt Short term interest-bearing debt
2Monthly Market Barometer — July 2011Credit Research
City of Johannesburg — audit qualification reveals deeper problemsAudit qualification
The City of Johannesburg (CoJ) released final audited results for FY:10 at the end of July — more than a year late. The audi-tor general has not yet received an annual report;
we have therefore based our analysis on the substantially qualifiedannual results
. Due to the magnitude of the qualification, we highlight the audit findings first:
raised but not billed amounted to R425m
, comprising property rates of R223.4m and service charges ofR201.6m.
A total of
R2.2m was included in revenue but was incorrect due to billing errors
relating to rates and services. Theauditor “could not quantify the full extent of the errors” because of a lack of information.
Revenue amounting to R732.2m was raised in the wrong period
Journal entries totalling
R1.9bn were processed in order to correct billing errors but these entries could not beverified
. Therefore, it appears that
revenue was additionally inflated by R1.9bn
The difficulties in verifying revenue resulted in
unverifiable debtors of R2.8bn
.Due to the size of the qualification,
we believe that considerably less reliance can be placed on the revenue and debtors
as disclosed in the annual results.
Statement of comprehensive income
When analysing municipalities, we calculate revenue by excluding all capital items and government grants. On this basis, wecalculate revenue at R18bn — increasing by 21.8% y/y. However,
we do not believe that this figure is accurate
. The auditorhas highlighted that property rates were potentially overstated by R996.7m, and service charges by R1.6bn, while incorrect journal entries further inflated revenue by R2.6bn. Therefore,
revenue appears to be overstated by R5.2bn
. On this basis,total revenue amounts to R12.8bn, and therefore, revenue actually declined by 13.6% y/y.The bulk of the city’s revenue is earned from property rates and service charges (for the sale of water and electricity). As perthe financial results, total rates and service charges amounted to R16.2bn (FY:09 – R13.1bn). However, if we exclude R5.2bnof incorrect and unverifiable revenue,
this amount decreases to R11bn
; and therefore, revenue from rates and servicecharges fell by 15.5%.
We question why the results are so severely misstated
. The CoJ has stated that the integration of a new SAP computersystem (implemented during FY:10) with the old system was the primary reason for the billing errors. This is troubling; we be-lieve that the
integration of accounting systems is generally unlikely to cause such substantial errors
. The actual costof the new system “Project Phakama” was not disclosed; however, we believe that the cost may be around R449.5m (additionsto computer systems, as part of intangible assets).
Rm FY:10 FY:09 % change
Revenue 18,000 14,776 21.8%EBITDA (1,756) (2,654) 33.9%EBITDA margin -9.8% -18.0% -Operating loss before finance charges (2,941) (3,424) 14.1%Finance costs 1,662 1,232 35.0%Cash interest cover 2.7x 3.5x -
Sources: Standard Bank Research; Annual results 
Table 1: Statement of comprehensive income (as disclosed by the CoJ) — FY:10 highlights
3Monthly Market Barometer — July 2011Credit Research
We would expect that the lower revenue and high impairment of the debtors book would have suppressed collections. We can-not determine a concrete collections rate — the unaudited annual report states that collections were 92.7% for FY:10. We findthis unlikely.
Other reports suggest a collections rate of 86% or 87%,
resulting in an under collection of R600m. We haveused the lower collection rate in our analysis, given the underlying problems with revenue and debt collection(Figure 2). Thecity estimates that its collections rate for FY:11 should be 88% .The muni also receives government grants, which increased by 44% y/y, to R6.8bn (FY:09 – R4.8bn). Part of this funding(R2.3bn) was granted to fund investment for the 2010 Soccer World Cup. The largest single grant of R3.5bn (FY:09 – R3.1bn)was provided to assist in the provision of services to poor community members.
We expect the CoJ to continue to receivegrants from the government
.If we calculate EBITDA using the numbers the CoJ has reported, the city made a loss of -R1.8bn (FY:09 – -R2.7bn). However,once we remove the R5.2bn as determined by the auditor,
this figure deteriorates to a loss of -R8.1bn
(Figure 3).
Figure 2: We have used a lower estimated collections rate of 86% for FY:10
Sources: Standard Bank Research; Annual results 
80.0%83.8%87.5%91.3%95.0%FY:07 FY:08 FY:09 FY:10Collections rate
-7,100-4,737-2,374-102,353FY:06 FY:07 FY:08 FY:09 FY:10 FY:10aRm-60%-40%-20%0%20%EBITDA (LHS) EBITDA margin
Figure 3: EBITDA has become increasingly negative; FY:10a represents the adjusted EBITDA figure
Sources: Standard Bank Research; Annual results 

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