CREDIT ANALYSIS REPORT

GEORGE KENT (MALAYSIA) BERHAD - 2021

Report ID 605389 Popularity 578 views 32 downloads 
Report Date Jan 2021 Product  
Company / Issuer George Kent (Malaysia) Bhd Sector Infrastructure & Utilities - Others
Price (RM)
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Rationale
MARC has assigned preliminary ratings of MARC-1IS and A+IS  to George Kent (Malaysia) Berhad’s (George Kent) proposed RM100.0 million Islamic Commercial Papers (ICP) Programme and RM500.0 million Islamic Medium Term Notes (IMTN) Programme  subject to a combined limit of RM500.0 million. The ratings outlook is stable.

The assigned ratings reflect George Kent’s conservative capital structure, strong liquidity position and relatively stable water meter manufacturing business that is well supported by a long-standing relationship network, an extended geographical footprint and brand recognition. These strengths are counterbalanced by the susceptibility of its engineering business to construction contract flows as well as cost pressures on raw materials for its water meter manufacturing business that could dent its healthy operating margin.

George Kent has an established presence in the water metering business that involves the manufacture and sale of water meters for the residential, industrial and commercial sectors and providing metering solutions in Malaysia and abroad for about 84 years. Its exports represented about 48% of the metering segment revenue of RM123.5 million in financial year ended January 31, 2020 (FY2020). Operating one of the largest hot brass-forging plants in Southeast Asia, the company currently produces more than two million water meters per annum in addition to valves, fittings and brass products. Its water meter sales have grown at a six-year compound annual growth rate of 4.2% and are expected to provide a stable revenue base to George Kent. Nonetheless, MARC notes that group performance for 9MFY2021 was impacted by the pandemic that resulted in the closure of its manufacturing plant for approximately one month but is fully operational at present. 

For FY2020, the construction segment under its engineering division contributed a sizeable 60% of group revenue of RM335.8 million. Contribution from this segment has declined to less than 48% in 9MFY2021 partly due to the Light Rail Transit Ampang Line Extension (LRT2) project reaching its tail end. Overall outstanding works of RM348.1 million, of which RM294.7 million is from two ongoing hospital projects and the balance works from the LRT2 project as at end-FY2020, provide earnings visibility up to FY2022. George Kent is also involved in the Light Rail Transit Line 3 (LRT3) project through MRCB George Kent Sdn Bhd, a 50:50 joint-venture company with Malaysian Resources Corporation Bhd (MRCB), but as the project has faced some challenges, MARC has not factored in any contribution from the LRT3 project in its rating assessment.

George Kent’s financial leverage has historically been low with its total debt-to-equity (DE) ratio standing at not more than 0.15x in the last five years.  It had a net cash position of RM123.7 million, with a total debt of RM75.0 million against cash and equivalents of RM198.8 million as at end-October 2020. Its leverage profile could change should the group undertake acquisitions that are largely funded by borrowings to increase its scale. Based on the assumption of a full drawdown of RM500 million under the rated programmes, gearing could increase to around 1.0x and net gearing to about 0.6x (based on the company’s balance sheet as at 9MFY2021). While the rating incorporates some headroom for borrowings to increase given George Kent’s growth strategy, MARC assumes no significant departure from its current leverage profile, and that debt-funded acquisitions will be value accretive and within the group’s core competencies.

Major Rating Factors

Key strengths
  • Low leverage and strong liquidity position; 
  • Lengthy track record in water meter manufacturing business; and
  • Healthy operating margins.
Key risks
  • Construction business segment highly susceptible to external contract flows;
  • Cost pressures from higher raw material prices to weigh on water metering business; and 
  • Debt-funded acquisitions would change leverage profile.


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