Johannesburg, 24 October 2017 — 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 10/2018.
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:
The ratings factor in H Young’s established position in Kenya’s construction market, evidenced by its increasing success rate in tender participation. To this end, the recent award of some very sizeable government infrastructure contracts (the largest being KES10.9bn), has seen the order book grow substantially to KES22.6bn at July 2017 from KES15bn at FY16.
Nonetheless, as is typical of the sector, H Young has reflected top line variability arising from the complexity and value of contracts executed. The increased work recently secured does provide revenue visibility over the next three years, while the group’s operating margins have shown resilience. GCR expects that the group will continue to apply its prudent risk management policies, which should enable sound project delivery of the very large contracts taken on. However, given that work of this scale has yet to be tested, progress will be monitored in terms of improvements in performance through the growth cycle.
Sound FY17 free cash flows were partly used to reduce debt to KES3.1bn at year-end (FY16: KES3.5bn). Combined with the build-up of cash at year-end FY17, net gearing improved to a review period low of 50.9% (FY16: 77.8%). However, lower operating income saw debt serviceability weaken slightly, with net interest coverage falling to just 1.2x (FY16: 1.5X). Note is also taken of the sizeable debt refinancing requirements over the next 12 months and the likelihood that the large projects will necessitate additional equipment finance leases. Management does, however, remain committed to deleveraging the balance sheet further going forward, although the extent and pace of which will be dependent on stronger cash flow generation.
H Young’s increased exposure to a public sector customer base adds a greater degree of potential counterparty and contract performance risk, whilst the narrow project focus limits earnings diversification. Nonetheless, government’s continued infrastructure investment spend should continue to buoy prospective deal flow, albeit that this segment remains intensely competitive.
Ratings uplift over the medium term could develop if H Young demonstrates an ability to profitability deliver on its large secured projects, supporting earrings growth and solid cash generation, whilst maintaining sufficient liquidity and comfortable gearing metrics. Conversely, negative rating pressure could follow a material and/or protracted earnings deterioration, arising from contractual or execution challenges on planned projects, which adversely impacts liquidity and overall credit protection metrics.
NATIONAL SCALE RATINGS HISTORY
Initial rating (October 2014)
Long term: BB+(KE); Short term: B(KE)
Commercial paper: n.a.
Last rating (October 2016)
Long term: BBB-(KE); Short term: A3(KE)
Commercial paper: A3(KE)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
H Young Issuer rating reports, 2014-16
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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 process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were 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 ratings.
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 2017
• A breakdown of the order book at 31 July 2017
• A breakdown of facilities available and related counterparties
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.
GCR affirms H Young and Company (East Africa) Limited’s rating of BBB-(KE); Outlook Stable.