MARC Ratings has affirmed its MARC-1_IS 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. As of end-June 2023, total outstanding stood at RM132.0 million. 

The affirmed ratings continue to reflect George Kent’s strong liquidity position, healthy balance sheet, and steady water metering business profile, underpinned by its longstanding client relationships, strong brand recognition and geographical diversification. These strengths are moderated by the susceptibility of its engineering business to construction contract flows, 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 business has been fairly resilient through time with steady operating results. For financial year ended March 31, 2023 (FY2023), the segment’s revenue and profit were relatively flat at about RM143.6 million and RM33.4 million (excluding a one-year contract won in FY2022). We continue to view its geographic diversification positively; stronger demand from Singapore and Hong Kong offset some weakness in the domestic market. Nonetheless, operating profit margin is anticipated to be broadly flat, hovering around the low to mid 20% in 2023-2024 with the weaker ringgit partially offset by increasing prices and a downtrend in copper/brass prices. Export sales, denominated in US dollars, should also provide some headroom against margin compression.  

In respect of its engineering business, contract flows have continued to decline. Construction revenue and profit sharply declined to RM103.4 million and RM8.9 million in FY2023. With the completion of two hospital projects, the Putrajaya Hospital Endocrine Institute and Tanjong Karang Hospital in April and July 2022, its only remaining construction project is the rubber glove manufacturing facility for 40%-associate Dynacare Sdn Bhd. This project is expected to be completed by 3Q2023. With no contract wins, there is a lack of near-term revenue visibility for the engineering segment. However, we understand George Kent is continuing its pursuit of bidding opportunities, though these are still in their preliminary stages.  

Cash flow from operations (CFO) turned positive in FY2023 after two consecutive years in the red CFO due to working capital flows. This was also due to the limited project diversification to effectively manage 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, supported by a healthy RM250.2 million of cash at end-March 2023 relative to its debt of approximately RM200 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. 

Debt-to-equity (DE) ratio remained stable y-o-y at around 0.38x in FY2023. As highlighted previously, George Kent is looking to increase its scale, and may consider opportunistic acquisitions which would most likely be achieved via strategic partnerships or debt-funded mergers and acquisitions (M&A). While the rating incorporates some room for M&A activities considering George Kent's growth strategy, we assume any M&A will be value accretive and aligned with its current conservative capital structure. 

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.

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 and maintains a stronger liquidity buffer.

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.