Announcements

GCR upgrades H Young and Company (East Africa) Ltd’s rating to BBB-(KE); Outlook Stable.

Johannesburg, 9 Oct 2015 — Global Credit Ratings has today upgraded the national scale ratings assigned to H Young and Company (East Africa) Limited to 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 rating(s) are valid until 10/2016.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to H Young and Company (East Africa) Limited (“H Young”) based on the following key criteria:

H Young is one of the largest engineering and construction companies in East Africa, with its key competitive advantage being 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. Being a private company, however, H Young’s corporate governance structures do not meet the standards required for public companies although the company complies with industry regulations and has attained ISO certification for its fabrication plant.

H Young maintains a conservative approach to tendering, focussing on projects for which a large portion is funded by external donors, as well as requiring a comprehensive return and cash flow analysis. Such high internal hurdle rates have limited the contracts available to the company, with revenue remaining largely flat at around KES6bn since F13, and not expected to increase in the short term. Nevertheless, H Young significantly increased its profitability in F15, with the gross margin increasing to 45.9% and the operating margin to 15.8% (F14: 41.3%; 10.3%), while NPBT rose almost 3-fold to KES246m, contrasting the losses reported prior to F13. The inherent earnings leverage in the business is underpinned by a close focus on cost control, a declining depreciation charge, expected reduced interest costs and the utilisation of tax credits. Accordingly, even if revenue remains flat, strong net profit growth is projected going forward.

Gross debt decreased by KES450m to KES3.7bn at FYE15, whilst cash on hand rose to KES399m (FYE14: KES287m). Thus, net gearing declined from a review period high 166% at FYE12 to 75.5% at FYE15, while net debt to EBITDA improved to 271.3% (FYE14: 407.8%), from historical levels of around 400%. Given the stronger earnings post FYE15, a further KES500m in debt had been repaid, reducing the gross balance to around KES3.1bn in September 2015. H Young evidences good funding flexibility, with credit lines held with three banks and various types of facilities maintained to ensure the most appropriate financing options are available. Given the recent debt reductions, the company had substantial unutilised capacity if needed, but the focus remains on reductions.

Although 1H 2015 has evidenced a slowdown in construction activity from the high levels in 2014, growth in the sector remains well above that for the economy as a whole. Nevertheless, competition is high and pricing has been constrained by Chinese contractors. The lack of suitable new contracts saw H Young’s order book decline to KES11bn at FYE15 (FYE14: KES13bn).

Further ratings uplift will be dependent on the ability to increase contract flow and profitability, whilst maintaining moderate gearing metrics. This in turn is dependent on the ability to secure new large contracts to replace completed work. Conversely, a return to high gearing levels would place the group under renewed liquidity strain. This could be driven, inter alia, by unforeseen problems and cost overruns on large projects and/or rising debtors due to non-payment.

NATIONAL SCALE RATINGS HISTORY  
   
Initial/last rating (Oct/2014)  
Long term: BB+(KE); Short term: B(KE)  
Outlook: Positive  
   

ANALYTICAL CONTACTS

Primary Analyst    
Eyal Shevel    
Sector Head: Corporate & Public Sector Debt Ratings    
(011) 784-1771    
shevel@globalratings.net    
     
Committee Chairperson    
Richard Hoffman    
Senior Analyst    
(011) 784-1771    
hoffman@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015

H Young rating report 2014

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. 
Corporate Governance Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
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.
Credit Rating Agency An entity that provides credit rating services.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
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 Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
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. 
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
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.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
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.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.

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.

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 rating/s has 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 rating(s) included;

  • Audited financial results of Company per 31/03/2015
  • Four years comparative audited financial statements
  • A breakdown of facilities available and related counterparties
  • Detailed list of the contracting order book, as well as the amount of work outstanding and the expected timing thereof

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.

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