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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+/Stable issuer rating on AutoWallis Nyrt. Scope has also affirmed the B+ rating on senior unsecured debt.

Rating rationale

Despite an improved EBITDA margin in 2021, relatively low profitability remains the key constraint for the unchanged business risk profile, assessed at B+. The retail and wholesale segments both operate mostly at low margins and are considered volume-based businesses. The company has contracts with major carmakers to procure a large volume of vehicles and parts, which it then resells to retail customers or its partners (usually independent dealers).

In 2021, Scope-adjusted EBITDA jumped to HUF 8.0bn from HUF 2.4bn in 2020. The increase was due to higher revenues (up 121% YoY to HUF 195bn) driven by higher volume from transactions conducted in 2020 and a higher EBITDA margin of 4.1% (vs 2.7% in 2020), reflecting a successful pass-through of price increases.

AutoWallis is continuing its strong expansion with a goal of increasing its revenues to more than HUF 400m in 2025. It has carried out the following transactions to date in 2022: i) opening a new Jaguar and Land Rover car dealership and service centre in Budapest in January 2022; ii) adding the SsangYong brand to its retail portfolio in Hungary in March 2022; and iii) taking over the vehicle sales and service activities and purchasing the real estate properties of Avto Aktiv in April 2022. Furthermore, AutoWallis and Salvador Caetano Group announced their intent to jointly purchase Renault Hungária Kft.. After the approval of the competition authority, Renault Hungária Kft. will operate through a joint venture and will be not consolidated and therefore will not contribute to AutoWallis' total revenues. AutoWallis expects to receive a dividend from the joint venture from 2024.

AutoWallis has no direct operations in Ukraine or Russia and therefore is not affected by the associated restrictions or expected losses. However, it could be negatively affected by potential delays in planned deliveries of cars as manufacturers may experience issues with the supply of raw materials and/or parts.

Inflation in Hungary has accelerated to exceed 10% in 2022. AutoWallis has demonstrated its pricing power in passing on rising procurement costs to customers, as evidenced by solid gross margins in 2021 (14.1% vs. 12.6% in 2020) and Q1 2022 (15%).

In Q1 2022, the number of vehicles AutoWallis sold increased by 11.1% to 7,410. Total revenues of HUF 57.7bn were 18.5% higher YoY. For the full year 2022, Scope expects revenues to increase to around HUF 217bn. Revenues in 2023 will depend on the market situation, including car production, delivery numbers and the revenue contribution from newly acquired entities. Scope currently expects 2023 revenues to increase by 12% to HUF 242bn. Reported EBITDA increased to HUF 3.1bn (Q1 2021: HUF 1.4bn). This was thanks to higher revenues and a higher margin of 5.4% (vs 3.0% in Q1 2021) from pricing changes. For the full year 2022, Scope expects a Scope-adjusted EBITDA margin of around 4.5% as it anticipates a weaker second half in terms of passing on price increases. In 2023, Scope expects a Scope-adjusted EBITDA margin of around 4%.

The recent transactions have not changed Scope’s view on the company’s weak market positioning and diversification.

The financial risk profile remains unchanged at B+. Scope calculates Scope-adjusted-debt (SaD) of HUF 30.1bn at year-end 2021 (HUF 26.7bn at year-end 2020). According to Scope’s methodology, netting of cash in the calculation of credit metrics is generally only applicable for ratings in the BB category or higher, and only if the cash is permanent and accessible.

To achieve its revenue target, AutoWallis intends to carry out business developments and acquisitions worth HUF 16bn-38bn by 2025. Of this amount, only HUF 5bn has been realised so far. In contrast to previous years, Scope expects AutoWallis to rely more on debt to finance transactions as recent transactions have diluted the stake of its largest shareholder to 57.55% at year-end 2021 from 83% at year-end 2018. Based on discussions with management, Scope understands that the majority shareholder wants to retain a majority stake, limiting the company's ability to use equity. Scope expects SaD to increase to around HUF 32bn at year-end 2022. The increase in 2022 is largely due to the addition of existing loans from C182 (owner of the real estate used by Wallis Motor Ljubljana), which will come to AutoWallis through an acquisition in 2022. Scope expects SaD of around HUF 42bn at year-end 2023. The increase in 2023 is due to the planned real estate development of AW Property.

The SaD/Scope-adjusted EBITDA ratio improved to 3.7x at year-end 2021 (2020: 11.2x) driven by higher Scope-adjusted EBITDA. Scope previously expected a significant increase in Scope-adjusted EBITDA to lead to another improvement in the SaD/Scope-adjusted EBITDA ratio in 2022. But Scope now expects the anticipated increase in SaD in 2023 due to the planned real estate development of AW Property to worsen the SaD/Scope-adjusted EBITDA ratio to around 4.5x.

Operating cash flow improved slightly to HUF 13.6bn (HUF 13.0bn in 2020 and negative HUF 35m in 2018) driven by higher EBITDA. Free operating cash flow was HUF 9.4bn (2020: HUF 10.7bn). Scope expects OCF to turn negative in 2022 due to the anticipated increase in net working capital and negative developments in other liabilities, which are mainly attributable to the payment of the contingent purchase price of HUF 2bn for the Opel distribution netwotk. In 2022, Scope expects net capex of HUF 2.7bn and free operating cash flow of around negative HUF 9.2bn. While Scope expects operating cash flow to turn positive in 2023, it also expects net capex to increase to around HUF 13bn primarily due to real estate investment (multi-brand retail locations and offices) planned for a new construction plot, resulting in negative free operating cash flow of around HUF 10.1bn.

Scope views AutoWallis’ liquidity and financial flexibility as adequate. This view is supported by around HUF 17bn of cash raised during 2021 through an equity increase and the issuance of bonds, which resulted in a cash balance of HUF 24.7bn at the end of December 2021. Scope’s liquidity view is also supported by the substantial amount of inventories (around HUF 22bn at year-end 2020). Scope notes that AutoWallis’ short-term debt consists mostly of inventory loans and reverse factoring. Both are repaid when inventory is sold.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectations of higher revenues in 2022 and an improved EBITDA margin in 2022 compared to 2021, resulting in an improved SaD/EBITDA ratio at year-end 2022. It also reflects the expected deterioration in the SaD/Scope-adjusted EBITDA ratio to around 4.5x at year-end 2023 due to the anticipated increase in SaD driven by the planned real estate development of AW Property. The Stable Outlook assumes no dividend payouts during the ongoing growth phase, a renegotiation of the Stellantis dealership contract and a reorganisation of SsangYong Motor Company.

A negative rating action could occur if the SaD/EBITDA ratio increased to above 5.0x on a sustained basis. This could be due to lower-than-expected profitability and/or higher-than-expected debt after the transactions are finalised. A negative rating action could be also triggered by the loss of important dealership or importer contracts.

Scope could upgrade the rating if profitability increased due, for instance, to a higher revenue share from services, or if the SaD/EBITDA ratio fell to 3.5x on a sustained basis.

Long-term debt rating

Scope has affirmed the B+ rating of senior unsecured debt to reflect an average recovery rate. Since issuing a second bond under Hungary’s Funding for Growth scheme in 2021, AutoWallis now has two bonds issued under the scheme. Their total amount is HUF 9.7bn (a HUF 6.7bn green bond issued in 2021 and a HUF 3.0bn bond issued in 2020).

The recovery analysis used a liquidation value of HUF 62bn in a hypothetical default scenario in 2023. This value is based on a haircut of around 25% on the assets and reflects asset liquidation costs of 10%.

The recovery analysis assumes an increase in the value of property, plant and equipment due to the purchase of the real estate and equipment of AvtoAktiv, property of C182 and the planned development of AW Property (complex development of multi-brand dealership, service facility and office block). The recovery analysis also assumes that, in a hypothetical default, all financial debt except bonds would be secured with stocks (stock financing loans, reversed factoring) or real estate. In addition, Scope has assumed higher seniority for the balance of trade payables covered by banks. This is because Scope believes payables would have a first-ranking pledge (assignment) by automakers in a hypothetical default. 

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; Retail and Wholesale Rating Methodology, 27 April 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 18 September 2019. The Credit Ratings/Outlook were last updated on 16 July 2021.

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
© 2022 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.