Johannesburg, 16 September 2016 — Global Credit Ratings has today accorded Kenya Kazi Limited a first time national scale long term debt rating of BBB(KE) and a national scale short term debt rating of A3(KE). The ratings have been accorded a Positive outlook, and are valid until September 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Kenya Kazi Limited (“KK”) based on the following key criteria:
KK is an established and strongly regarded East Africa security services provider, reporting one of the largest operating infrastructures for such firms in the region and contracts with many prominent embassies, NGOs, blue chip corporates and private institutions. KK recently announced that it is being acquired by GardaWorld International (“GardaWorld”), the largest private security company in the world. The acquisition is considered in support of the rating, as it has the potential to offer substantial operational and financial support to the group. Nevertheless, only once the transaction is bedded down can the full rating uplift be considered. This is reflected in the Positive Outlook accorded.
KK has reported steady growth in revenue and operating profit over the 5-year review period, reflecting the benefits of the restructuring of the group and economies of scale. Nevertheless, profitability has been curtailed by several write-offs and other charges, which combined with weak pricing power due to tight competition in the industry, has resulted in constrained NPBT and retained income, below budgeted levels. KK’s liquidity position has also remained relatively tight, due to high mobilisation costs for new contracts and a growing debtors book. In addition, restrictions on repatriating foreign cash have also hampered efficient cash management. Nevertheless, with several large contracts turning cash flow positive, liquidity pressure appears to be easing.
KK’s debt has risen steadily to KES1.7bn at FYE16, from KES591m at FYE12. While key gearing metrics have remained fairly stable over the review period, they are somewhat elevated with both net gearing and net debt to EBITDA above 200%. Interest coverage of between 2.5x and 3.9x over the past three years is considered to offer adequate protection, albeit GCR notes that coverage may fall below 2x in F17 (based on YTD17 accounts). Accordingly, there is little leeway for further debt raising without prejudicing credit protection, until profitability improves.
The introduction of legislation to govern the private security industry is likely to benefit the larger, more reputable companies, as they already comply with most of the proposed regulations, and the smaller operators who are unable or unwilling to comply are forced out. Nevertheless, there remains significant competition amongst the top-tier security companies for new contracts, which will likely constrain industry margins.
Positive rating action is dependent on successfully bedding down the acquisition by GardaWorld, and demonstrated benefits from the transaction. Sustained growth in net profits and cash, driving improved debt serviceability and reduced debt levels, would also bode positively. Conversely, the loss of major contracts could drive depressed earnings and cash flows, and thus impact debt serviceability and liquidity. Material reputational damage could negatively impact the ratings, as trustworthiness and credibility are key elements of the security industry.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2016)|
|Long term: BBB(KE); Short term: A3(KE)|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S Corporates GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
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.
The credit ratings have been disclosed to Kenya Kazi Limited with no contestation of the ratings.
The information received from Kenya Kazi Limited and other reliable third parties to accord the credit ratings included:
- Audited financial statements for F16, and four years comparative numbers
- Management accounts for five months to 30 July 2016
- Full details of funding facilities
- Financial forecasts for F16 and F17
- Select industry statistics
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.
GCR accords Kenya Kazi Limited a first time rating of BBB(KE), Outlook Positive.