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Rating action

Scope Ratings GmbH (Scope) has affirmed the BB- issuer rating to Duna Aszfalt Zrt and revised the Outlook to Positive from Stable. Scope has also affirmed the BB rating for the senior unsecured debt category.

Rating rationale

The rating affirmation of Duna Aszfalt Zrt. (Duna Aszfalt) is driven by its resilient performance in 2020. The group generated revenues of HUF 254bn and Scope-adjusted EBITDA of HUF 62.4bn (6% and 10% below the previous year but 8% and 41% above Scope’s forecast), despite the impact of Covid-19 on the economy. This performance was supported by the group’s construction activities, mostly road construction, which held up well during 2020. The group’s order backlog of projects has also grown, equating around 2.0x 2020 revenues. In spite of the positive development in some of the group’s key metrics, Duna Aszfalt remains a relatively small-sized construction group in the European context and a niche player.

Duna Aszfalt’s business risk profile (assessed at B) continues to be held back by its relatively small size and limited diversification. Geographic diversification is weak in terms of non-domestic projects. The group has slightly delayed its planned international expansion – due to uncertainty in the investment market – which is now expected to be executed from 2022 on. Duna Aszfalt is mostly focused on the construction sector in Hungary (92% of revenues in the first half of 2021, 85% in 2020). Within the sector, it has a high exposure to motorway construction, where it generated more than 67% of revenues in H1 2021 (60% in 2020). The group also remains highly exposed to legislative changes, as projects are largely dependent on governmental demand and strategy (more than 65% of Duna Aszfalt’s revenues in 2020 were generated from Hungarian state-owned companies).

Profitability, as measured by the Scope-adjusted EBITDA margin, continues to support the rating. Duna Aszfalt’s margin has remained over 20% in the last four years (24.7% in 2020, adjusted for provisions) and is higher than that of other construction peers. Scope acknowledges that Duna Aszfalt has continued sourcing new projects in the last couple of years (65% of the current order backlog was signed in 2020 and the first half of 2021). At the same time, there is low visibility for the period after the execution of the existent order backlog and regarding the sustainability of the current profitability level. The group intends to strengthen its business profile and build up its presence in the concession segment. While this could support Duna Aszfalt long-term profitability, the plan is still in an early phase. Therefore, Scope remains cautious in its view on margins until Duna Aszfalt proves its ability to maintain the current profitability level with newly gained tenders.

Duna Aszfalt’s financial risk profile (assessed at BBB-) benefits from its solid credit metrics. Scope-adjusted debt (SaD)/Scope-adjusted EBITDA was 0.8x as of December 2020, slightly below Scope’s expectations. This resulted from higher-than-expected Scope-adjusted EBITDA (41% above Scope’s forecast) as well as lower SaD (15% below), in particular driven by the announced conversion of long-term financial assets into cash in 2020. Scope anticipates that SaD/EBITDA will remain below 2x in the next few years but remains cautious about the sustainability of current credit metrics. Firstly, they are heavily influenced by the profitability of contracts in Duna Aszfalt’s current order backlog, which will be executed over the next few years. Secondly, Duna Aszfalt is reducing long-term financial assets and increasing cash balances to prepare for large projects and future acquisitions. Thus, the cash position at the end of December 2020 (HUF 65bn) is not permanent, in Scope’s view.

Liquidity is adequate and benefits from a backloaded debt maturity profile comprising a HUF 30bn bond with a bullet maturity and no significant amount due in the coming years. In line with Scope expectations, the group’s cash balances increased significantly to HUF 65bn by the end of 2020. Liquidity is enhanced by marketable securities (real estate funds, among others) as well as expected positive free operating cash flow for 2021. All in all, the group has enough cash buffer to finance its investment programme (about HUF 75bn). In line with the group’s plans, Scope assumes that the business plan can be executed without the need for additional bank debt or other external financing.

Scope deems regulatory and reputational risks to be a negative rating driver (ESG factor). Scope believes that Duna Aszfalt’s market position in recent years has been gained by winning state tenders, thanks to the group’s well-established credentials for projects with state owned companies. State tenders accounted for more than 65% of total revenues in 2020, which creates a high dependency.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Positive Outlook reflects Scope’s expectation that the group will maintain the momentum on its order intake and order backlog, with increasing diversification, providing continued visibility on its solid financial profile.

Scope may take a positive rating action, such as a rating upgrade, if Duna Aszfalt’s order backlog strengthens, thereby providing greater visibility on future cash flows and lowering dependency on state orders, paired with an unchanged solid financial risk profile.

A negative rating action (such as a reversion of the rating Outlook to Stable) could result if Scope’s expectations of an increasingly diversified order intake and backlog paired with an unchanged strong financial risk profile do not materialise. Scope recognises that Duna has increased its headroom to a negative rating action. However, a downgrade could be required if Duna Aszfalt’s leverage – as measured by SaD/EBITDA – significatively deteriorates to above 3.5x on a sustained basis.

Long-term debt rating

In line with the group’s plans, Scope assumes that the business plan can be executed without the need for additional bank debt or other senior-ranked financing. Thus, the HUF 30bn unsecured corporate notes issued under the Hungarian National Bank’s Bond Funding for Growth Scheme are the only financial instrument to consider. Further, the recovery rate calculation assumes: i) that payables have a higher seniority than the bond; and ii) the same seniority for advances received in comparison to the bond. This view is based on the legal opinion provided by local legal counsel.

Our recovery analysis is based on a liquidation value in a hypothetical default in 2022 of HUF 96bn. This value is based on a haircut of around 60% on assets and reflects liquidation costs for the assets of 10%. An above average recovery is expected for senior unsecured debt. Thus, Scope affirms the BB rating for the senior unsecured debt category one notch above the issuer rating. The uplift is limited due to the risk and possibility that senior secured debt will potentially increase in the path to default (volatility of capital structure and share of senior unsecured debt).

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Construction Corporates, 15 January 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation YES
With access to internal documents                                    YES
With access to management                                             YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 6 September 2019. The Credit Ratings/Outlook were last updated on 21 October 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.