Global Credit Ratings has accorded the above credit rating(s) on Car and General (Kenya) Limited based on the following key criteria:
Cargen’s operations are underpinned by its dominant market share in the two/three wheel motorcycle market in Kenya. While the move towards a more comprehensive after-sales service offering has supported this position, the motor cycle industry has become highly competitive regionally, weighing on Cargen’s growth prospects. Accordingly, Cargen is extending its Engineering offering, introducing new brands with the strategic focus on construction equipment and its after-sales service. Cargen’s operations are such that they require critical mass to be self-financing in the longer term, and this will only derive from a broader product base. A rebound in volumes is expected, on the back of improved business confidence, robust economic growth prospects and product diversification, although revenue is unlikely to show notable growth in F13.
Following robust top line performance over most of the review period, revenue declined 6% to KShs5.7bn in F12, constrained by lower margin headroom and reduced demand in the face of currency volatility and rising interest rates. Volumes were also impacted by political uncertainty in the run up to the elections. The introduction of new engineering brands supported some margin enhancement, with the operating margin widening to 7.2% in F12 (F11: 5.4%). This saw operating profit rise to KShs410m (F11: KShs328m), approximating the F10 high. However, operating profits have been largely consumed by onerous finance charges in line with increasing debt levels. This has markedly constrained interest coverage, declining below 2x in both F11 and F12.
Working capital pressures have persisted, which combined with funding requirements for land acquisitions, saw debt reach a high of KShs1.9bn at FYE11, before subsiding to KShs1.7bn at FYE12. The decline saw net gearing subside to 71% at FYE12 (FYE11: 88%), while net debt to EBITDA fell to 332% (FYE11: 451%). Nevertheless, credit metrics remained above forecast and continue to constrain the rating.
Positive rating action may be driven by land sales, which would assist in paying down debt, hence reducing the burden of finance costs. Stringent working capital management to lower inventory levels would also be positively viewed. Negative movement factors include increased competition that suppresses volume growth and squeeze margins, limiting Cargen’s internal financing and thus debt reduction prospects. Currency and interest rate volatility would also be negatively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Aug/2002)|
|Long term: BBB(KE);|
|Outlook: Rating watch|
|Last rating (Oct/2012)|
|Long term: BBB-(KE); Short term: A3(KE)|
|Outlook: Adverse outlook|
|Sector Head: Corporates|
|+27 11 784 1771|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
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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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.
Car and General (Kenya) 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 and contested by Car and General (Kenya) Limited, with further information provided by the entity. However, no amendment to the rating was made.
The information received from Car and General (Kenya) Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.