GEORGE KENT (MALAYSIA) BERHAD - 2022 |
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| Report ID | 6053890046865 | Popularity | 463 views 25 downloads | |||||
| Report Date | Aug 2022 | Product | ||||||
| Company / Issuer | George Kent (Malaysia) Bhd | Sector | Infrastructure & Utilities - Others | |||||
| Price (RM) |
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| Rationale |
Rating action MARC Ratings 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 continue to reflect George Kent’s strong liquidity position, healthy balance sheet, and steady water meter business profile, underpinned by its long standing client relationships, strong brand recognition and geographical diversification. These strengths are moderated by the susceptibility of its engineering business to construction contract flows, its rather volatile working capital movements, and cost pressures that could weigh on cash flow generation. George Kent has an established presence in the water metering business locally and abroad for over 80 years. The division’s steady revenue growth historically demonstrates the resilience of the metering business. Its meter production in FYE March 2022 (FY2022) was somewhat affected by COVID-19-related movement curbs, but volume decline was moderate to 2.16 million units, from 2.33 million the year before. Latest April-May 2022 data showed a steady plant utilisation rate at 71%. Despite the lower production, revenue and profit from sales of water meters and related products increased 5.0% and 17.9% y-o-y in FY2022 (all on an annualised basis) to RM152.8 million and RM42.1 million, supported in part by a price increase implemented in January 2022. The average price for residential water meters, which drive the majority of the division’s revenue, increased by about 8% during the year, with another round of increase implemented in May 2022 to partly offset higher input costs. The price increase, along with a focus on greater efficiency helped to lift segmental profit margin to 27.6% in FY2022, from 24.6% in FY2021 and 17.2% in FY2020. Raw materials make up about 70%-75% of manufacturing costs, of which around 40% comprises brass. Brass prices generally track copper’s (base metal), and these have risen sharply since mid-2020 and are expected to remain high through 2023 amid, inter alia, low inventories, supply tightness in the global copper market and rising demand from China. While the ability to raise prices so far has helped cushion the impact on production costs, a prolonged rise in input costs could erode margins. On the construction side, revenue rose 67.3% y-o-y (annualised basis) to RM202.5 million in FY2022 on higher revenue recognition from projects. George Kent’s outstanding order book as of end-May 2022 stood at about RM486 million from one project from 40%-associate Dynacare Sdn Bhd (Dynacare). The RM624.1 million Dynacare project will be undertaken in phases. Phase 1A (worth RM170 million) is currently ongoing at 81% completion as at end-May 2022, with full completion expected by end-2022. The timing for the implementation of the remaining phases, however, is uncertain at this juncture, and will be subject to the rubber gloves market conditions. This could mean a smaller backlog for George Kent of just around RM33 million (remaining 19% of Phase 1A) than the stated outstanding order book as at end-May 2022. This, and a lack of new work, clouds revenue visibility for the engineering segment. We note, however, George Kent’s continuing pursuit of bidding opportunities, a couple of which are already at the advanced stage of negotiations, according to management. Operating cash flow (CFO) remained negative in FY2022, largely driven by working capital outflows, albeit smaller than the previous base case expectation. For FY2022, CFO was particularly affected by delayed payments related to the Light Rail Transit 2 (LRT2) project that George Kent recently closed; the company attributed this to timing, and expects to receive the final payment of approximately RM79 million from the government in 2QFY2023. With no major projects in the short term, CFO is anticipated to turn positive from FY2023. Working capital can be quite volatile for George Kent due to its limited number of projects to sufficiently smooth out cash inflows and outflows. However, its sustained net cash position provides sufficient buffer to withstand periods of working capital volatility. George Kent’s liquidity profile remained strong, with cash and cash equivalents of RM283.7 million as at end-March 2022 relative to its debt of RM220 million. Other than the RM132 million sukuk initially issued in March 2021, borrowings mainly consist of short-term working capital lines, which we believe George Kent will be able to roll over in the normal course of business given its satisfactory credit profile and longstanding relationships with banks. George Kent’s financial leverage has historically been low, with a debt-to-equity (DE) ratio of not more than 0.15x prior to FY2021. Gearing went up as expected to 0.42x as at end-March 2021 with the issuance of the sukuk. With no additional borrowings, and supported by higher equity, gearing level improved to 0.38x as at end-March 2022. As we highlighted in our previous reports, George Kent is likely to be more acquisitive in the future as it looks to increase its scale, which would most likely be achieved via strategic partnerships or debt-funded mergers and acquisitions (M&A). The company has no specific M&A plans currently after its acquisition of an associate stake in Dynacare. While the rating incorporates some room for M&A activities given George Kent’s growth strategy, MARC Ratings assumes that any M&A will be value accretive and carried out in the context of its current conservative capital structure. We estimate George Kent’s gearing level to be at about 1.1x assuming full drawdown of the remaining sukuk based on the company’s FY2022 capital structure, which we view as still manageable. Rating outlook The stable outlook reflects the generally stable demand characteristics of water meters and our expectation that the metering business will continue to provide a stable revenue base to George Kent. It also reflects George Kent’s strong liquidity and conservatively managed balance sheet to withstand potential working capital swings. Rating trajectory Upside scenario An upgrade is unlikely in the near term, but 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 ratings. Key strengths
Key risks
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