MARC has affirmed its ratings of MARC-1IS and A+IS on George Kent (Malaysia) Berhad’s (George Kent) RM100.0 million Islamic Commercial Papers Programme and RM500.0 million Islamic Medium-Term Notes Programme (collectively Sukuk Programmes), subject to a combined limit of RM500.0 million. The ratings outlook is stable.
The rating affirmation mainly reflects George Kent’s stable water metering business and our expectation that the company’s 85 years of involvement in this business will continue to generate steady yields. Production was somewhat affected by a temporary plant closure from March to April 2020 due to the COVID-19 pandemic but rebounded with strong 14-month results to March 2021 (FY2021), pointing to a healthy underlying demand for water meters. Annualised, sales volume picked up 32.5% y-o-y while revenue rose 17% y-o-y and segment profit margin gained 7.5 percentage points to 24.6% in FY2021. Sales volume and value in FY2021 (annualised) were also higher than in FY2019, up by 18.1% and 9.2% to 3.64 million units and RM145.4 million.
Conversely, results from the company’s construction activities have been weak over the past couple of years, reflecting vulnerability and dependence of the business on contract flows. Revenue and profit from construction were down 40.3% and 39.6% in FY2021 (annualised) from fiscal 2020. However, a recent sizeable undertaking worth about RM624 million to design and build a glove manufacturing plant in Lumut, Perak, will expand George Kent’s order book to around RM780 million which will provide revenue visibility through FY2024.
We note that the arbitration decision on the dispute with a joint-venture partner Malaysian Resources Corporation Bhd on the Light Rail Transit Line 3 project was deadlocked, with both parties currently going through the deadlock resolution process. However, we continue to view that the outcome of the decision will have no bearing on George Kent’s ratings as we have not factored in any contribution from this venture.
The group’s working capital requirement, particularly for its construction business and related effects on cash flow from operations remains a rating factor. We consider George Kent’s strong liquidity position with cash and cash equivalents of about RM340.6 million as at end-March 2021 to be supportive of its working capital needs.
Financial leverage has historically been low, with a debt-to-equity (DE) ratio of not more than 0.15x prior to FY2021. The DE ratio rose to 0.42x as at end-FY2021 following the first RM132 million issuance of the sukuk in March 2021 but remained within the 1.0x we had projected previously assuming a full drawdown of the Sukuk Programmes. We highlighted in our previous report that George Kent could embark on strategic partnerships or debt-funded mergers and acquisitions (M&A) as it looks to grow its business. Here, we continue to expect that any M&A will be value accretive and will not compromise the company’s capital structure.