Scope upgrades Bonafarm Zrt.’s issuer rating to BB from BB- with Stable Outlook
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Scope Ratings GmbH (Scope) has today upgraded the issuer rating of Bonafarm Zrt. to BB/Stable from BB-/Stable. Scope has also upgraded the senior unsecured debt rating to BB from BB-.
The rating action is driven by the group’s exceptional operating performance in 2022 followed by good H1 2023 results, with Scope-adjusted EBITDA up by 80.7% in 2022 compared to 2021 and a related decrease in Scope-adjusted debt/EBITDA to 0.9x from 2.4x. While the performance in 2022 was an outlier due to the volatile input prices (which the company managed well), Scope projects leverage to stay below 2x in the medium-term (excluding M&A), underpinning Scope's view of a better financial risk profile and hence the rating upgrade.
The ratings are driven by i) two of the group’s brands, Pick and Sole-Mizo, being among Hungary’s most valued, as market leaders in processed pork and milk; ii) the group’s high vertical integration and counter-cyclical business units; iii) solid profitability (Scope-adjusted EBITDA margin of 11.3% in 2022, up from 7.8% in 2021); and iv) continuously strong parent support. The rating is held back by the group’s M&A strategy and its slow deployment of capex for a new processed meat plant of subsidiary Pick Szeged. Bond financing was secured in 2019 for the originally budgeted capex. The plant’s construction is not yet fully contracted, making cost overruns likely given the soaring construction costs in Hungary. This may cause Scope-adjusted debt/EBITDA to increase by up to 0.5x, at most, depending on the cost overruns (payable in early 2026) and how these are funded.
The business risk profile (assessed at BB+) reflects Bonafarm’s market leadership in Hungary, good diversification, moderate profitability and brand strength.
Bonafarm is the largest agricultural and fresh food producer in Hungary. Economic growth in Hungary after the Covid-19 pandemic is being challenged by record-high inflation and a possible recession in 2023. In 2022, group revenues increased 24.1% compared to 2021, while food consumer prices increased by 44.8%, the highest in the EU. In 2023, inflation in the first half was around 20% and the Hungarian Statistics Office expects it at around 20% for the full year. The rising inflation has eroded purchase power and decreased retail volumes in H2 2022, which has continued into 2023. For Bonafarm, the shrinking market has led to volume loss as well as lower revenue growth due to more demand for private labels and some of Bonafarm’s cheaper products and less for branded products. As Bonafarm has a high share of branded products and typically is not the cheapest in its category, there is some shift to other lower-priced competitor products, especially in processed meat. Nevertheless, Scope expects low (below-inflation) revenue growth and that Bonafarm will retain its market leadership in Hungary in processed milk and meat products. Scope’s assessment of market share is held back by the group’s lower production output than European competitors’, although the medium-term target of expanding regionally may improve Scope’s assessment.
Customer diversification is broad. The group’s meat and milk products are present in all Hungarian retail chains. In addition, export markets make up more than 20% of group revenues (HUF 71.4bn in 2022; mainly to Germany and Romania). Third-party suppliers are well diversified. Strategic partnerships are strong such as with the group owner’s asset MCS Slaughterhouse, one of the largest such establishments in the region. However, the product offering, while improving, remains limited. Processed meats focus on salami (around 50% of Pick Szeged’s revenues), with a low share of high-protein products such as premium ham. This could somewhat hinder long-term growth as consumer preferences are shifting towards protein-rich products. The milk processing segment can leverage on its good brand, wide product portfolio and controlled vertical integration but still lags European competitors on high protein-based products and plant-based alternatives.
In 2022, the extraordinary level of Scope-adjusted EBITDA of HUF 36.1bn with a margin of 11.3% (up from HUF 20.0bn in 2021 with a margin of 7.8%) was due to i) the group’s high integration in the agriculture segment, with own agricultural output in 2021 at low prices used as inputs for the group’s food segment in 2022; ii) a weak Hungarian forint allowing Bonafarm to undercut imported milk products and increase volumes and generate good profitability on price-capped milk; iii) strong actions to combat the rising energy prices combined with an ability to set prices (the group’s volumes are high enough to be system relevant). Scope expects Scope-adjusted EBITDA margin to normalise around historical levels to 7.5%-8.0%.
The financial risk profile (assessed at BB-) is based on the reasonable leverage metrics, with the Scope-adjusted debt/EBITDA ratio projected at below 2x despite ongoing capex. Scope has taken a more conservative view on the financial risk profile instead of adjusting separately for financial policy as credit metrics are volatile, affected by M&A and uncertainties regarding capex cost overruns and how these will be funded.
Leverage measured by Scope-adjusted debt/EBITDA has been decreasing since 2017 from 3.7x to 0.9x as of 2022. This was due to 62% sales growth while the EBITDA margin increased from 5.7% to 11.3% and EBITDA from HUF 11.3bn to HUF 36.1bn. In H1 2023 EBITDA was HUF 15.3bn, while Scope estimates full year EBITDA in 2023 at around HUF 25bn taking into consideration normalisation of prices, excluding one-off items and factoring in demand shocks. Based on these assumptions Scope expects Scope-adjusted/EBITDA to reach below 2x in the medium term, excluding the effect of any potential M&A.
Owners and management remain committed to keep net debt/EBITDA below 3.5x while bank financing has the covenant at 4.0x, creating a very comfortable headroom. This commitment is rather loose compared with the actual leverage, which Scope reflects in the financial risk profile assessment.
Scope-adjusted funds from operations/debt has improved since 2017 from 25% to 41% in 2021 and 117% in 2022, due to improving EBITDA margins and low agricultural input prices thanks to the group’s well-integrated operations. Some strong pricing actions will also benefit cash flow and lead to a strong ratio in the medium term of above 60%.
The financing structure features low amortisation and high balloon or bullet facilities with rates fixed between 0% and 2%. This has led to a very strong Scope-adjusted EBITDA interest cover ratio and the possibility to generate finance income on excess cash in Hungarian forint as deposit rates are well above 10%. The issued HUF 27bn bond is repayable only at maturity in 2029, which provides great cash flow headroom.
The main rating constraint, however, is Scope-adjusted free operating cash flow/debt. Scope expects very negative values once the Pick Szeged brownfield investment is contracted and executed, though this will not cause a hike in leverage.
Liquidity coverage is volatile and rather low in 2024-25 but adequate because there are no large upcoming debt repayments. The low expected coverage of 1.8x in 2024 is caused by negative free operating cash flow due to capex, some of which can be delayed or financed for the long term. Historically Bonafarm had a strong liquidity coverage above 6x. The company has a HUF 7.3bn overdraft facility, currently mainly unused, and a large cash balance of HUF 35.9bn at YE 2022, some of which is invested in liquid Hungarian sovereign bonds until needed. Scope has included the overdraft in its liquidity calculation. Cash pooling is in place across Bonafarm and its subsidiaries. MCS Slaughterhouse (not a group entity) has had limited access to the cash pool since 2022 but its debt is not guaranteed by Bonafarm or its subsidiaries.
The issuer rating also reflects a one-notch supplementary rating driver for parent support, reinforced by recent capital increases and the planned HUF 8.8bn in capital increases (and/or subordinated owner’s loan with the intention to be converted into equity) in the next three years in the base case as well as the no-dividend policy.
Bonafarm is fully controlled by renowned businessman and banker dr. Sándor Csányi through his holding company Bonitás 2002 Zrt. In June 2023 the shares of Bonitás 2002 Zrt. were transferred to a family trust named Unity Asset Manager Foundation for generation change purposes. Ownership interests can be only inherited within the Csányi family. Therefore, the family’s support and the family-run nature of the group remain supportive to the rating.
Bonafarm is Hungary’s largest vertically integrated consumer products and agricultural company, which contributes to the circular economy. Group entities have started developing and implementing ESG principles, which is visible in the group’s environmental footprint. Scope views Bonafarm’s ESG strategy as credit neutral.
Outlook and rating-change drivers
The Outlook is Stable, reflecting good management of both inflation and the volatile market, the further rescheduled capex, and the group’s flexible financial and investment strategies and, hence, some expected volatility in credit metrics. The Stable Outlook reflects Scope’s expectation that Bonafarm can tackle inflation and maintain margins as well as execute capex plans while keeping Scope-adjusted debt/EBITDA below 3.5x.
A positive rating action is possible if Scope-adjusted free operating cash flow/debt can be sustained above 5% following the execution of the capex plan and production ramp-up while keeping Scope-adjusted debt/EBITDA below 3.0x.
A negative rating action could be warranted by i) Scope-adjusted funds from operations/debt decreasing towards 15%; and/or ii) Scope-adjusted debt/EBITDA increasing towards 4x. The latter could be caused by more debt taken on due to i) higher construction costs; ii) a slow production ramp-up; iii) a significant change in market input prices; iv) weaker pricing power in main segments due to further delays in modernisation that weaken market share; and/or v) M&A.
Long-term debt ratings
Scope has upgraded the rating on Bonafarm’s senior unsecured debt, consisting of a bond issued by subsidiary Pick Szeged and payables at Bonafarm group level, to BB from BB-, which is in line with the issuer rating.
Pick Szeged Zrt. issued a HUF 27.0bn senior unsecured bond unconditionally and irrevocably guaranteed by the parent company, Bonafarm Zrt. (ISIN: HU0000359336, issued in December 2019), through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The only bond issuance within Bonafarm Group was done at the Pick Szeged level, while Bonafarm Group has other senior unsecured debt ranking pari passu in the form of payables.
The senior unsecured bonds issued by Pick Szeged rank below the HUF 23bn senior secured bank debt of Bonafarm Group. Bonafarm Group has a strong asset base, but due to the old meat processed products plant and assets under construction to replace it, Scope has applied a high discount. As a result, Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2025.
The bond proceeds are earmarked for the new meat processed products plant, which is in preparatory phase, and for general group financing purposes. The bond proceeds have been set aside as cash and in Hungarian sovereign bonds until construction starts. The bond has a tenor of 10 years and a fixed coupon of 2.0%. Bonds have bullet repayment. Scope notes that Pick Szeged’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has accelerated repayment clauses. The clauses require Pick Szeged to repay the nominal amount (HUF 27.0bn) in case of rating deterioration (two-year cure period for a B/B- rating, immediate repayment after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, soft covenants include those addressing cross default (with the senior secured club facilities agreement having a net debt/EBITDA covenant of 4.0x, mitigated by the large headroom to actual levels) and a change of control (initially limited to dr. Sándor Csányi as final beneficial owner; in 2023 bondholders agreed to a change of control to a Csányi family trust).
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; Consumer Products Rating Methodology, 4 November 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: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 6 September 2019. The Credit Ratings/Outlooks were last updated on 23 August 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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