MARC Ratings has affirmed its ratings of MARC-1IS and A+IS 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.
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 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, 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 turned positive in FY2023 after two consecutive years in the red. George Kent’s working capital flow can be quite volatile, primarily due to its 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 with cash and cash equivalents of RM250.2 million as at end-March 2023 relative to its debt of about RM200 million, including the RM132 million issued under the ICP/IMTN Programmes. No new borrowings saw debt-to-equity ratio stable at 0.38x. While the ratings incorporate some room for inorganic growth, we expect any mergers and acquisitions to be value accretive, and that the actions, if realised, would be undertaken in a financially disciplined manner.