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

01 Nov 2018 In Rating Notifications

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

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.

Outlook: Positive

Last rating (October 2017)

Long term: BBB-(KE)

Short term: A3(KE)

Commercial paper: A3(KE)

Outlook: Stable

 

ANALYTICAL CONTACTS

Primary Analyst Secondary Analyst
Eyal Shevel Tavonga Muchemedzi
Sector Head: Corporate Ratings Junior Analyst: Corporate Ratings
(011) 784-1771 (011) 784-1771
.(JavaScript must be enabled to view this email address) .(JavaScript must be enabled to view this email address)
   
Committee Chairperson  
Sheri Morgan  
Senior Analyst: Corporate Ratings  
(011) 784-1771  
.(JavaScript must be enabled to view this email address)  

 

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.

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2013 Global Credit Rating Co (Pty) Ltd. INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.