MARC Ratings has affirmed its ratings of MARC-1IS and A+IS on George Kent (Malaysia) Berhad’s RM100.0 million Islamic Commercial Papers Programme and RM500.0 million Islamic Medium-Term Notes Programme, subject to a combined limit of RM500.0 million. The rating outlook is stable.
The affirmed ratings continue to reflect George Kent’s strong liquidity position and healthy balance sheet. These strengths are moderated by the susceptibility of its engineering business to construction contract flows and cost pressures that could weigh on margins and cash flow generation, and the weakening of its metering business.
George Kent has an established market position in the water meter industry, having been in operation for over 80 years. The meter segment’s revenue and margins have historically been steady although results for the financial year ended March 31, 2024 (FY2024) were somewhat weaker, with revenue decreasing by 8.2% to RM131.8 million and profit reducing to RM20.4 million (FY2023: RM143.6 million; RM33.6 million). Segment profit margin also narrowed but to a still healthy 15.5% in FY2024 (FY2023: 23.4%), partly due to higher material costs and a weak ringgit. While cost pressures are likely to continue at least in the near term, meter operating margins are expected to hover around the mid-teens, supported by sales growth, some pricing adjustments, and focus on cost control and higher-margin products. Segment revenue is also expected to grow from FY2025 onwards, primarily driven by exports through business expansion in Vietnam and other areas. Export sales, largely denominated in US dollars, should also provide some buffer against margin compression.
Notwithstanding the lower profitability in its meter business in fiscal year 2024, George Kent’s cash flow from operations increased to RM41.4 million (FY2023: RM27.2 million) due to lower working capital requirements following the completion of its two hospital projects, Putrajaya Hospital Endocrine Institute and Tanjung Karang Hospital, in FY2023. George Kent also maintains a strong cash position; it had RM250.0 million in cash as at end-March 2024 and has been in a net cash position over the past nine years. MARC Ratings expects the company to maintain this position over the medium term. Other than the RM132 million sukuk initially issued in March 2021, borrowings mainly consist of short-term working capital lines, which MARC Ratings believes George Kent will be able to roll over in the normal course of business. Overall, the rating agency views George Kent’s strong balance sheet and ample liquidity positively, providing the company with meaningful financial flexibility in times of market stress.
George Kent’s leverage remained stable in fiscal year 2024, with a debt-to-equity ratio of 0.41x as at end-March 2024, absent new debt-funded transactions and organic business growth. As mentioned in MARC Ratings’ previous review, George Kent will continue to look for growth opportunities and may consider opportunistic acquisitions which would most likely be achieved via strategic partnerships or debt-funded mergers and acquisitions (M&A). While the ratings incorporate some room for M&A activities considering George Kent’s growth strategy, MARC Ratings assumes any M&A will be value accretive and aligned with the company’s current conservative capital structure.