Announcements Corporate Rating Alerts

GCR places H. Young and Company’s BBB-(KE)/A3(KE) ratings on Positive Outlook due to improvement in gearing metrics

Rating Action

Johannesburg, 23 October 2020 – GCR Ratings (“GCR”) has affirmed H. Young and Company (East Africa) Limited’s national scale long and short term issuer ratings of BBB-(KE) and A3(KE) respectively. The Outlook has been revised to Positive.

Rated Entity / Issuer Rating class Rating scale Rating Outlook / Watch
H. Young and Company (East Africa) Limited Long Term issuer National BBB-(KE) Positive Outlook
Short Term issuer National A3(KE)

Rating Rationale

The positive outlook on H. Young and Company (East Africa) Limited (“H. Young” or “the company”) reflects the reduction in gross debt to 30 September 2020 and improvement in key gearing ratios, which are expected to strengthen further over the rating horizon. Additionally, H. Young’s strong competitive position serves to balance the challenging operating environment.

Gross debt reduced to KES3.7bn at FY20 (FY19: KES4.0bn) following the receipt of outstanding debtors towards the end of the year, and further shrunk to a historical low of KES2.3bn at 30 September 2020, as the Government of Kenya (the ultimate client for most projects) undertook to settle outstanding payments to companies in an effort to shore up their financial strength during the COVID-19 disruption. Accordingly, net debt to EBITDA registered at a lower 245% (FY19: 305%) counteracting somewhat weaker interest coverage of 2.7x (FY19: 3.2x). GCR anticipates that key credit protection metrics will significantly improve through FY21, even if debt utilisation does rise moderately from the current lows reported in 2H FY21, with net debt to EBITDA likely to register below 200%, and interest coverage should improve to around 4x. However, partially tempering this view is the long delays in receiving payments on work completed historically, which could see debt levels again move sharply higher. In addition, the move towards a single banking counterparty does increase funding concentration risk.

The liquidity profile has benefitted from robust operating cash flows and lower debt. Due to debt repayment, H. Young reported around KES2.3bn in unutilised debt facilities at 1H FY21 (excluding the unutilised finance lease facilities), whilst cash flow from operations is expected to exceed the KES947m reported in FY20 due to continued strong cash generation and a large working capital release. This covers the short term debt and moderate capex expectations by over 2.0x on a 12 month outlook, although GCR has limited the rating uplift from liquidity due to the potential rapid deterioration that can materialise in the construction industry if there are challenges completing projects, or collecting payments.

The rating is also supported by H. Young’s established position as a mid-tier construction company in Kenya which has facilitated stable earnings and a strong order book, despite a difficult operating environment and significant competition from Chinese contractors. Thus, on the back of its track record of successfully completing big projects, GCR would expect revenue and EBITDA for FY21 to remain largely in line with FY20, despite some disruptions due to COVID-19. Short to medium term earnings are supported by the c.KES11bn order book, whilst the company continues to tender for some of the large new projects that are being implemented in Kenya. Nevertheless, the lack of geographic diversification and concentration of the order book to a few contracts somewhat constrains the business profile assessment and exposes H. Young to potentially lower project flow if the financial position of the Government of Kenya deteriorates.

Negatively impacting the rating, GCR considers corporate governance structures to be under-established, with the board inadequately constituted to provide independent oversight of management performance and hold management accountable to shareholders and creditors.

Outlook Statement

The positive outlook on H. Young reflects the significant reduction in debt to 30 September 2020 and likelihood that credit protection metrics will materially improve at FY21. Upwards ratings progression could result if GCR assesses the lower debt utilisation and firmer metrics improvement to be sustainable.

Rating Triggers

A positive rating action is likely if H. Young is able to reduce its net debt to EBITDA ratio to between 150% and 200% on a sustainable basis, whilst also reporting interest coverage of 3.5x to 4x or above.

A negative rating action could arise from 1) renewed pressure on debtors payments that results in higher debt and weaker credit protection metrics 2) a slowdown in revenue and earnings due to weakness in the operating environment or a dearth of new contracts.

Analytical Contacts

Primary analyst Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771
Secondary analyst David Mburu Senior Analyst East Africa
Nairobi, KE Davidm@GCRratings.com +254(0)724889339
Committee chair Sheri Morgan Senior Analyst: Corporate Sector
Johannesburg, ZA Mrogan@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Entities, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, May 2020
GCR Kenyan Corporate Sector Risk Scores, April 2020

Ratings History

H. Young and Company (East Africa) Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial National BB+(KE) Stable Outlook October 2014
Short Term Issuer Initial National B(KE)
Long Term Issuer Last National BBB-(KE) Stable Outlook October 2019
Short Term Issuer Last National A3(KE)

RISK SCORE SUMMARY

Rating Components & Factors Risk scores
Operating environment 6.50
Country risk score 4.00
Sector risk score 2.50
Business profile (0.25)
Competitive Position 0.00
Management and governance (0.25)
Financial profile 0.75
Earnings performance 1.50
Leverage and Capital Structure (1.25)
Liquidity 0.50
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00
Total 7.00

Glossary

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.
Income Money received, especially on a regular basis, for work or through investments.
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.
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.
Issuer The party indebted or the person making repayments for its borrowings.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Offset A right (Right of Offset) to set liabilities against assets in any dispute over claims.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.
Upgrade The rating has been raised on its specific scale

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings were 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to H. Young and Company (East Africa) Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

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 information received from H. Young and Company (East Africa) Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial Statements to 31 March 2020 (Plus four years of comparative numbers);
  • Management accounts to 30 September 2020
  • Full details of debt facilities
  • Details of order book
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