Johannesburg, 30 November 2018 – Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Kenya Kazi Limited of BBB(KE) and A3(KE) in the long term and short term respectively; with the outlook accorded as Stable. The Issuer ratings for Kenya Kazi Limited are valid until November 2019.
Concurrently, GCR has affirmed GardaWorld Kenya’s medium term note (“MTN”) programme’s national scale long term debt rating of BBB(KE), with a stable outlook. The medium term note programme’s rating is valid until November 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Kenya Kazi Limited (“KK”) and the GardaWorld Kenya Limited (“GWK”) MTN programme based on the following key criteria:
The ratings take cognisance of KK’s entrenched position as a leading integrated security solutions provider in East Africa, servicing a quality client base dominated by embassies, multinational corporates and myriad private institutions in the region. The ratings also factor in the financial, operational and technical support implicit in the relationship with parent company GardaWorld Security Corporation (“GardaWorld”). This has been demonstrated through the provision of loans on friendly terms and equity injections to fund the expansion of operations during FY19.
Following a decline in FY17, revenue increased by 3% to KES9.2bn in FY18, evidencing some of the initial benefits of the Gardaworld investment. This was despite a generally slow economy due to the protracted election period. Going forward, revenue is expected to be supported by the emergent oil and gas industry in East Africa, with several large contracts already under discussion. Securing these high value clients that demand world class competencies and professionalism is critical for KK’s growth as it cannot compete on price with smaller security providers for more generic contracts.
Despite continued upward pressure on wages, a focus on internal operational efficiencies saw the operating margin increase to a review period high of 5.3%. Going forward, improved practices implemented by GardaWorld, as well as increased use of technology is expected to enhance internal efficiencies and sustain robust margins.
Cash generated by operations has generally improved over review period, albeit that sizeable working capital absorptions resulted in erratic discretionary cash flows. Thus, GCR would expect enhanced working capital management, particularly debtors collections, to stabilise free cash flows. Positively, KK has maintained a conservative dividend policy, which partly supports its liquidity management.
Gross debt decreased from a high of KES1.7bn at FY16 to KES1.1bn at FY18, on the back of improved cash flows, as the inter-company loans received from GWK were applied to partially redeem commercial paper. This saw net debt to EBITDA fall to 117% at FY18 (FY17: 161%), while interest coverage improved to 3.7x. However, as GWK’s sole asset is its 100% stake in KK, GCR has adjusted KK’s debt to include inter-company borrowings from GWK. Using this figure, gross debt registered at KES1.7bn at FY18 in line with historical levels, translating to net debt to EBITDA of 218% (FY17: 222%). GCR notes that the credit risk is lessened by the longer debt maturity profile afforded by the friendly GWK loans.
GWK’s financial strength is directly determined by the financial strength of KK. Given this linkage, the GWK MTN programme has the same rating at the KK long term Issuer rating.
Looking ahead, positive rating action is dependent on the ability to secure new high quality contracts, driving a sustained growth in earnings and cash, achieved together with further improvement in credit protection metrics. Conversely, the loss of major contracts could drive depressed earnings and thus impact debt serviceability, and may warrant negative ratings action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating||Last rating|
|Kenya Kazi Ltd (September 2016)||Kenya Kazi Ltd (December 2017)|
|Long term: BBB(KE)||Long term: BBB(KE)|
|Short term: A3(KE)||Short term: A3(KE)|
|Outlook: Positive||Outlook: Stable|
|GardaWorld Kenya (November 2016)||GardaWorld Kenya (December 2017)|
|MTN programme long term: BBB(KE)||MTN programme long term: BBB(KE)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Tavonga Muchemedzi|
|Sector Head: Corporate Ratings||Junior Analyst: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Kenya Kazi Limited rating reports, 2016-17
Gardaworld Kenya Limited Bond Issuance Programme-Indicative Report, November 2016
GardaWorld Kenya Limited’s MTN programme indicative rating announcement, November 2016
RATING LIMITATIONS AND DISCLAIMERS
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|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|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.|
|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 Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Pari Passu||Securities issued with a pari passu clause have rights and privileges that are equivalent to those of existing securities of the same class. Pari passu means ‘with equal step’ in Latin.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|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.|
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.
Kenya Kazi Limited participated in the rating process via 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 Kenya Kazi Limited.
The information received from Kenya Kazi and other reliable third parties to accord the credit ratings included:
- Audited Annual Financial Statements for February 2018
- Four years comparative audited results
- Full details of debt facilities as at 31 July 2018
- Gardaworld Kenya Limited Medium Term Note Programme Memorandum and Pricing Supplements
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 Kenya Kazi Limited’s rating of BBB(KE), Stable Outlook