Announcements

GCR accords an initial rating of BB+(KE) to H Young and Company (East Africa) Limited; Outlook Posit

Johannesburg, 30 Oct 2014 — Global Credit Ratings has today assigned national scale ratings to H Young and Company (East Africa) Limited of BB+(KE) and B(KE) in the long term and short term respectively; with the outlook accorded as Positive. The rating(s) are valid until 10/2014.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to H Young and Company (East Africa) Limited (“H Young”) based on the following key criteria:

With a 60-year history, H Young has developed into one of the largest engineering and construction companies in East Africa. The company’s key competitive advantage is being able to deliver turnkey projects to clients, while ensuring quality and cost control by retaining core functions in-house. This is underpinned by a modern engineering design facility and steel fabrication plant.

H Young has evidenced strong growth in revenue over the review period to just under KShs6bn in F13 and F14. Given the operational leverage and economies of scale inherent in the business, the operating margin widened from 7.3% in F11 to 12% in F13. However, a much higher staff count in F14 (related to the Olkaria geothermal project) saw the operating margin narrow to 10.3%, with operating profit declining to KShs612m, from the review period high of KShs709m in F13.

While payment delays from government entities have seen the debtors book rise, adding to funding pressure, H Young mitigates the risk by targeting projects that are largely development agency funded or contracts for high credit quality international engineering companies, and private sector industrial companies. Accordingly, after climbing to KShs4.3bn at FYE13, gross debt declined to KShs4.1bn at FYE14 and is projected to reduce by between KShs800m and KShs1bn by FYE15. The reduction saw net gearing reduce to 91% at FYE14 (FYE13: 137%), although net debt to EBITDA rose to 408% (FYE13: 375%) due to weaker earnings. Nevertheless, debt pressure has been most evident in high interest charges, which exceeded operating profit between F11 and F13 and were only marginally covered by operating profit (1.1x) in F14.

Prospects for the Kenyan and regional construction market remain robust, underpinned by a massive infrastructure development programme, with H Young well positioned to benefit through its roadworks division and its specialisation in power generation projects. At June 2014, H Young’s order book stood at over KShs13bn, equating to around 2 years’ worth of work. However, management indicated that the company had the capacity to increase this to around KShs20bn based on the productive assets already in place.

A reduction in debt to more sustainable levels is critical to a rating uplift. Revenue growth, combined with margin enhancement, should result in earnings growth and robust cash flows, which could also lead to an upgrade. However, non-payment by debtors would likely result in working capital pressure and require higher short term funding to cover the cash flow deficit. Unforeseen problems on large projects could lead to delays and cost overruns, putting pressure on earnings, potentially leading to a rating downgrade.

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Committee Chairperson
Richard Hoffman
Senior Analyst
(011) 784-1771
hoffman@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, August 2014

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

SALIENT FEATURES 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.

H Young and Company (East Africa) 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 H Young and Company (East Africa) Limited with no contestation of the rating.

The information received from H Young and Company (East Africa) Limited and other reliable third parties to accord the credit rating(s) included the 2014 audited annual financial statements (plus four years of comparative numbers), cash flow projection to F16, details of current projects and debtors, internal and/or external management reports, year to date management accounts for the 3 months to June 2014, corporate governance and enterprise risk framework, industry comparative data and regulatory framework

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

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.

EBITDA

Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.

Economies Of Scale

Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.

Fixed Costs

Company costs such as rent, administrative overheads and depreciation, which do not vary with the level of production or sales.

Leverage

See Gearing.

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

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.

Order Book

This refers to the portfolio of confirmed contracts/orders that a corporate entity has at any point in time, and is jargon typically associated with construction and manufacturing companies in reference to their prospective business.

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.

Working Capital

Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.

GCR accords an initial rating of BB+(KE) to H Young and Company (East Africa) Ltd; Outlook Positive

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