Johannesburg, 31 October 2016 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to H Young and Company (East Africa) Limited of BBB-(KE) and A3(KE) in the long term and short term respectively; with the outlook accorded as Stable. Concurrently, a Commercial Paper rating of A3(KE) has also been accorded. The ratings are valid until 10/2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to H Young and Company (East Africa) Limited (“H Young”) based on the following key criteria:
H Young’s ratings are supported by its long track record in the construction industry spanning nearly six decades, whilst demonstrating efficient project execution capabilities and an increasing success rate in tender participation. Its key competitive advantage is the ability 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.
The ratings factor in the strong order book position indicating medium term revenue visibility. H Young’s order book increased to KES14bn over the 18 months to September 2016 (FYE15: KES11bn), on the back of new road contract wins, whilst note is also taken of the significant individual KES10.8bn road project awarded in Q3 F17. However, this has resulted in the overall contract mix being heavily exposed to roads, and the company’s execution of a project of this scope is yet to be tested.
Whilst revenues have been curtailed over recent years, GCR notes the improved EBITDA and operating margins reported. In this regard, overall profitability has been supported by the group’s flexibility in rightsizing costs to workflow, lower interest expenses, and the careful selection of projects based on a comprehensive return and cash flow analysis, focussing on projects for which a large portion is funded by external donors. Despite the considerable pipeline of infrastructure projects that could potentially take place in Kenya, there is still a high risk of project delays or cancelations due to anticipated fiscal challenges and macroeconomic uncertainties. Furthermore, competition is high for international tenders, resulting in pricing pressures.
Gross borrowings declined by 5% to KES3.5bn, as H Young amortised long term debt. However, working capital pressure saw the cash balance fall to just KES8m (FYE15: KES399m) and short term debt rise marginally, resulting in an increase in net debt for the year. Nonetheless, H Young’s leverage metrics continue to trend down, with gross gearing reported at a review low of 78% at FYE16 (FYE12: 167%), while net debt to EBITDA improved to 299% (FYE15: 271%), from historical levels around 400%. Management remains committed to deleveraging and reducing financing costs, although once the new KES10.8bn project commences, this is likely to necessitate working capital funding. It is noted that the group has sizeable refinancing requirements over the next twelve months, as a result of its short-term funding profile. Liquidity is, however, backed by sufficient undrawn bank facilities.
Rating uplift could develop if increased contract flow translated into higher-than-anticipated revenue and earnings growth. A positive outlook would also require H Young to successfully manage down gearing and control its working capital needs in view of the large contracts in the pipeline. Conversely, a return to high gearing could place H Young under renewed liquidity strain. This could be driven, inter alia, by unforeseen problems and cost overruns on large projects or rising debtors.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2014)|
|Long term: BB+(KE); Short term: B(KE)|
|Commercial paper: n.a.|
|Last rating (October 2015)|
|Long term: BBB-(KE); Short term: A3(KE)|
|Commercial paper: A3(KE)|
|Senior Credit Analyst|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
H Young rating reports, 2014-2015
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 CORPORATE GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commercial Paper||Commercial paper is a negotiable instrument with a maturity of less than one year.|
|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.|
|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.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|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.|
|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.|
|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.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|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.|
|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.|
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 ratings have 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 ratings included;
- Audited financial results of Company per 31 March 2016
- A breakdown of the order book at 30 September 2016
- A breakdown of facilities available and related counterparties
GCR affirms H Young and Company (East Africa) Limited’s rating of BBB-(KE); Outlook Stable.