Johannesburg, 1 November 2018 — Global Credit Ratings has today upgraded the long term national scale Issuer rating assigned to H Young and Company (East Africa) Limited to BBB(KE) and affirmed the short term rating at A3(KE); with the outlook accorded as Stable. The ratings are valid until October 2019.
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 reflect H Young’s established position in Kenya’s construction and engineering market, evidenced by its increasing success rate in tender participation. The company has a long history of successful project execution and cost control, supported by modern engineering design facilities and a competent human capital base. The ratings factor in H Young’s growing order book, which increased to KES23bn at July 2018, from KES15bn at FY16. This supported a 44% increase in revenue to a review period high of KES6.8bn in FY18. While note is taken that the company is not always in control of the rate at which the projects progress, the robust pipeline provides a good level of predictability of revenue over the medium term.
Despite the intense bidding competition in the industry, H Young’s profit margins have shown resilience, supported by prudent project selection and a focus on cost control that enables efficient project delivery. Going forward, the larger order book should enable H Young to be selective in its approach to tendering, focusing on high margin projects funded by external development finance agencies.
Cash flow from operations has been robust over the review period, supported by strong working capital management despite the growing order book. Moreover, cash capex spend has been low, resulting in substantial retained cash. This has allowed H Young to steadily repay long term debt over the years under review. The group also continues to refrain from distributing dividends, which supports its liquidity management and growth objectives.
Interest-bearing debt increased to KES3.7bn at FY18 (FY17: KES3.1bn), due to new finance leases for the additional capital equipment necessary for new projects. Nevertheless, GCR has positively considered the strengthening of credit metrics over the review period. Despite rising slightly to 67%, net gearing remains well below historical levels, while net debt to EBITDA continues to trend around the 3x range. Debt serviceability improved, with net interest cover exceeding the 2x mark for the first time over the review period, although GCR would require this to be sustained through the cycle. The high proportion of short-term debt remains a concern, as this suggests higher credit risks if earnings come under sustained pressure. While the company’s liquidity profile is constrained, GCR positively notes the long-standing relationships reputable banks, which reduces refinancing risk.
Global Credit Ratings has withdrawn the rating accorded to H Young and Company (East Africa) Limited’s Commercial Paper, as there is currently no Commercial Paper in issue.
Looking ahead, ratings uplift over the medium term could result from sustained revenue growth, supported by a robust order book and sound margins. This should be achieved together with further improvements in gearing and credit protection metrics. Conversely, negative rating pressure could follow a material and/or protracted earnings deterioration arising from contractual or execution challenges on planned projects, and/or increased debt levels, 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 2017)
Long term: BBB-(KE)
Short term: A3(KE)
Commercial paper: A3(KE)
|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
H Young and Company (East Africa) Limited Issuer rating reports, 2014-17
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
|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.|
|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.|
|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.|
|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.|
|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.
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 2018
• A breakdown of the order book at 31 July 2018
• Details of funding 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 upgrades H Young and Company (East Africa) Limited’s rating to BBB(KE); Outlook Stable.