H Young costs hit Sh600m on late payments

Road construction. H Young undertakes major infrastructure projects. PHOTO | FILE 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

Delayed payments by the government have pushed H Young’s interest financing costs to over Sh600 million as at last year.

As such South African Global Credit Rating agency, (GCR), gave the company a rating of BB+(KE) in the long term with a positive outlook.

“While payment delays from government entities have seen the debtors book rise, adding to funding pressure, H Young mitigates the risk by targeting projects that are largely development agency funded or contracts for high credit quality international engineering companies, and private sector industrial companies,” reads part of the report.

The first-time rating done late last year gives a rare glimpse into the private company known for undertaking huge projects in energy and infrastructure development across East African.

The company had revenues of Sh6.65 billion ($70 million) last year and was awarded new contracts valued at Sh11.4 billion ($120 million).

H Young operating profit dropped to Sh612 million from Sh709 million a year earlier attributable to increase in staff and financing costs. The company hired Olkaria Geothermal project staff narrowing its operating margin to 10.3 per cent from 12 per cent.

“Debt pressure has been most evident in high interest charges, which exceeded operating profit between 2011 and 2013 and were only marginally covered by operating profit (1.1 times) in 2014,” said GCR.

Delayed payment by government to contractors has been cited as a major cause of rise in non-performing loans in the banking sector. The industry’s bad loans stood at Sh117.2 billion as at the end of March this year up from Sh70.3 billion two years ago.

READ: IMF says Kenyan banks exposed to bad loans danger

The government had indicated that it used some of the funds raised last year from the international market through a sovereign bond to pay contractors.

Analysts at the rating agency noted that prospects for the regional construction market –including Kenya—remain bright, underpinned by a massive infrastructure development programme, with H Young well positioned to benefit through its road works division and its specialisation in power generation projects.

H Young has indicated it has the capacity to increase its contractual commitment to around Sh20 billion based on the productive assets in place.

The company owns in excess of 1,200 units of plant and equipment including heavy machinery for earthworks such as excavation, drilling, levelling and compaction concrete works and asphalt processing plant.

National Treasury recently entered into a pact with commercial banks to address the challenges of financing the construction works.

Under the partnership model, contractors will access loans guaranteed by the Treasury from banks, enabling them to design, construct and maintain roads.