Scope affirms Stavmat’s B+ issuer rating and changes Outlook to Stable from Positive
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Scope Ratings GmbH (Scope) has today affirmed the B+ issuer rating of Hungarian construction products wholesaler Stavmat Építőanyag Kereskedelmi Zrt. (Stavmat) and revised the Outlook to Stable from Positive. Stavmat’s senior unsecured debt rating has also been affirmed at BB-.
The change in Outlook to Stable from Positive reflects Scope’s view that Stavmat’s financial policy has not become less aggressive as expected in the last rating action. Scope’s changed view is based on the new business plan presented after the completion of the Dabas paving plant, which is scheduled to start production in Q2 2023, indicating an overrun of half a year. The new business plan involves the acquisition of three sites during 2023-2025: one for its headquarters and two containing existing stores. The acquisitions will be primarily financed through a HUF 3.2bn loan under the Baross Gabor loan programme that provides favourable rates to SMEs. The company expects the purchase of the sites to reduce rental costs by around HUF 200m a year, but Scope expects the slowdown expected for Stavmat’s underlying market of construction to offset the cost savings.
Stavmat operates on a discretionary retail market, which is characterised by medium cyclicality, low entry barriers and low substitution risk. The business risk profile (assessed at B+) continues to be constrained by the company’s limited size of EUR 130m in sales (preliminary 2022) and low diversification in terms of geography and distribution channels, despite it being one of the leading wholesalers of construction materials for professional customers in Hungary. Furthermore, the company’s high dependency on its underlying market of construction impacts its operating profitability as Stavmat’s wide range of products all belong to this cyclical goods category.
Based on preliminary 2022 figures, profits will reach a record high, with the Scope-adjusted EBITDA margin to increase 96 bp YoY to 9.2%. Reasons for the increase are i) high inflation in Hungary driving up revenues; ii) the ability to pass on price volatility to customers through the daily pricing implemented in H1 2022; and iii) the increased demand for insulation products after the Hungarian government decided to reduce utility price cuts. Profitability going forward will benefit from the completed paving plant’s higher margins for producing private label and premium products and from the reduced rental costs following the acquisition of the three sites. Nevertheless, profitability is still expected to reduce below 7% (Scope adjusted EBITDA margin) from 2023 until 2025 because the company’s key business driver, the construction industry, has been slowing since Q4 2022 due to unfavourable macroeconomic conditions including the Russia-Ukraine war, high inflation in Hungary and the energy crisis. The Scope-adjusted EBITDA return on assets is also forecasted to significantly deteriorate due to the completion of the paving plant. However, the high levels of these profitability metrics means they remain the key drivers of the business risk profile. Stavmat expects demand to return in H2 2023, partially due to the expected launch of the energy modernisation programme.
The financial risk profile (assessed at BB+ revised from BBB-) benefitted from the record-high Scope-adjusted EBITDA in 2022, resulting in the overall improvement of credit metrics. However, this effect will be temporary as the increase in interest-bearing debt due to the new HUF 3.2bn loan and the unfavourable market trends will cause credit metrics to weaken in 2023. By 2025, credit metrics are expected to recover, with Scope-adjusted debt/EBITDA to decrease below 2.5x from the peak of 2.6x induced by the new loan in 2023. This will be due to a reduction in Scope-adjusted debt that will outweigh the expected decline in Scope-adjusted EBITDA, with the decreasing debt a result of lower leasing adjustments following the acquisition of the three sites and the gradual amortisation of the new loan.
Strong interest coverage also benefits the financial risk profile. It is forecasted to reach 8.5x by 2025 after deteriorating in 2023 due to the new loan, as all of Stavmat’s interest-bearing debt has favourable fixed interest rates. However, cash flow coverage is the main constraint of the financial risk profile after it deteriorated due to the new business plan. Although cash flow cover is forecasted to recover to 15% by 2025, Scope deems such a level unsustainable given the new long-term expansionary strategy.
Scope assesses Stavmat’s liquidity adequate, based on the current cash reserves (HUF 2.8bn as of end-December 2022) in combination with expected solid cash flow. Before the issuance of the new debt there were no short-term debt amortisations scheduled until 2026. The new loan starts linearly amortising in 2024, in the amount of HUF 580-640m for which internal liquidity is considered adequate as the company’s cash generation covers more than 200% of cash uses for 2024 and 2025.
Regarding supplementary rating drivers, Stavmat has a negative notch for its aggressive financial policy. The planned acquisitions have re-introduced execution risk that had fallen away with the completed construction of the paving plant. Positively, the company has suspended dividends since 2020 despite including HUF 500m in payouts in its business plan, and Scope has no reason to believe this will change. Nevertheless, Scope would need a longer track record before considering the removal of the negative one-notch adjustment.
Environmental, social and governance (ESG) considerations have no significant effect on the group’s credit quality.
Outlook and rating-change drivers
Stavmat’s Outlook has been revised to Stable and incorporates a financial policy that continues to be aggressive. The company’s growth relies on a market that has been slowing since Q4 2022, which is expected to lead to reduced profitability from 2023. The Outlook also includes the HUF 3.2bn loan to finance the acquisitions from 2023, which will drive up leverage (Scope-adjusted debt/EBITDA) before it recovers to 2.5x-3.0x.
A positive rating action is possible if Stavmat can show i) for an extended period a Scope-adjusted debt/EBITDA of below 2.5x and a less aggressive financial policy, allowing the removal of the negative notch for financial policy and; ii) an improved business risk profile by expanding to neighbouring countries, though is less likely in the near future.
A negative rating action may occur through a Scope-adjusted debt/EBITDA sustained above 3.5x, for example, due to a major decline in the Hungarian construction industry.
Long-term debt rating
Scope has affirmed Stavmat’s senior unsecured debt at BB-, one notch above the issuer rating. The recovery assessment includes the planned secured loan of HUF 3.2bn (six-year term, linear amortisation, 7% fixed rate) in addition to the HUF 5bn bond (ISIN HU0000360714). An ‘excellent recovery’ (91%-100%) is expected for the outstanding senior unsecured debt in a hypothetical default scenario in 2025 based on a liquidation value method. This level of recovery would normally allow a two-notch uplift, but Scope has taken a conservative view due to the execution risk related to the new business plan and limited the uplift to one notch.
In July 2021, Stavmat issued a HUF 5bn senior unsecured green bond (ISIN: HU0000360714) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for the paving plant capex and for working capital financing. The bond has a tenor of 10 years and a fixed coupon of 3%. Bond repayment is in six tranches starting from 2026, with 10% of the face value payable yearly, and 50% balloon payment at maturity. Scope notes that Stavmat’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Stavmat to repay the nominal amount (HUF 5bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 30 days after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, change of control and additional indebtedness covenants.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodologies used for these Credit Ratings and/or Outlooks, (General Corporate Rating Methodology, 15 July 2022; 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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Vivianne Anna Kápolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 21 May 2021. The Credit Ratings/Outlooks were last updated on 27 April 2022.
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
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