GEORGE KENT (MALAYSIA) BERHAD - 2021 |
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| Report ID | 60538900365 | Popularity | 838 views 31 downloads | |||||
| Report Date | Oct 2021 | Product | ||||||
| Company / Issuer | George Kent (Malaysia) Bhd | Sector | Infrastructure & Utilities - Others | |||||
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| Rationale |
Rating action MARC has affirmed its MARC-1IS and A+IS ratings on George Kent (Malaysia) Berhad’s (George Kent) 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. Rationale The ratings reflect George Kent’s conservative capital structure, strong liquidity position and 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 moderated by the susceptibility of its engineering business to construction contract flows and its rather volatile working capital needs that could weigh on cash flow generation. 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 85 years. The COVID-19 pandemic and a temporary plant closure between March-April 2020 had somewhat dampened production in the early part of 2020, but strong FY2021 performance points to a healthy underlying demand for water meters. For the 14-month period to March 2021 (FY2021), sales volume picked up 32.5% y-o-y, revenue rose 17% y-o-y and segment profit margin gained 7.5 percentage points to 24.6%, all on an annualised basis. Sales volume and value in FY2021 were also higher than in FY2019, up by 18.1% and 9.2% to 3.64 million units and RM145.4 million. On the other hand, on a 12-month y-o-y performance, the company’s construction segment reported sharply lower revenue and profit, down 40.3% to RM121.1 million and 39.6% to RM31.6 million in FY2021. Its existing two hospital projects are nearing completion, with the balance of work standing at just about RM143 million as at end-June 2021. However, a new undertaking to design and build a glove manufacturing plant in Lumut, Perak for Dynacare Sdn Bhd worth approximately RM624.1 million plus or minus 10% (excluding sales and service tax) would bolster George Kent’s order book to around RM780 million to provide revenue visibility through FY2024. The order book excludes the Light Rail Transit Line 3 (LRT3) project undertaken through MRCB George Kent Sdn Bhd, a 50:50 joint-venture company with Malaysian Resources Corporation Bhd (MRCB). MARC has not factored in any contribution from this project in its rating assessment. As highlighted in our previous report, there were some conflicts between the two shareholders on certain interpretations of their agreement. Further to the recent arbitration decision wherein it was decided that a deadlock is deemed to have occurred, George Kent will decide whether to stay or to exit the venture upon resolution of the deadlock, which is currently being worked on by the two parties. George Kent’s working capital can be quite volatile due to the limited number of projects to sufficiently smooth out cash inflows and outflows. The company projects its cash flow from operations (CFO) to be negative in FY2022–FY2023, as it commences work on the Dynacare contract. As working capital outflows subside and receivables are realised, CFO is anticipated to turn positive from FY2024. Nevertheless, liquidity position is strong to support operations; at end-March 2021, George Kent held cash and cash equivalents of RM340.6 million. Financial leverage has historically been low, with a debt-to-equity (DE) ratio of not more than 0.15x prior to FY2021. However, as expected, debt went up to near RM220 million as at end-March 2021 with the first RM132 million issuance of the sukuk in March 2021. We highlighted in our previous report that George Kent looks to increase its scale, which would most likely be achieved via strategic partnerships or debt-funded mergers and acquisitions (M&A). In this regard, it has acquired a 40% stake for RM40 million in Dynacare, which has interest in glove manufacturing. As a result, DE ratio as at end-FY2021 stood higher at 0.42x, but within the 1.0x we had anticipated previously assuming a full drawdown of the sukuk programmes. We estimate George Kent’s gearing to be at about 1.1x assuming drawdown of the balance sukuk based on the company’s balance sheet as at FY2021, which we view as still manageable. Rating outlook The stable outlook reflects the strong demand conditions of the water meter business and our expectation that it will continue to provide a stable revenue base to George Kent. It also reflects George Kent’s comfortable liquidity and conservatively managed balance sheet. Rating trajectory Upside scenario We do not envisage a ratings upgrade in the near term. However, the ratings could be improved if the company demonstrates a consistent track record of strong operating performance as well as builds up and maintains a stronger liquidity buffer. Downside scenario There could be downward pressure on the ratings if performance falls substantially below expectations such that George Kent’s credit metrics are considerably impacted. Debt-funded acquisition for non-earnings accretive investments could also pressure the ratings. Key strengths
Key risks
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