Scope affirms Duna Aszfalt Zrt.’s BB-/Stable issuer rating
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Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer rating of Duna Aszfalt Zrt. Scope has also affirmed the BB rating for the senior unsecured debt category.
The rating affirmation is driven by Duna Aszfalt’s stable performance in 2022 despite weaker-than-expected earnings, and a robust backlog that provides some cash flow visibility. The company generated a revenue of HUF 242.6bn (20% below the exceptional 2021 performance) and Scope-adjusted EBITDA of HUF 32bn (respectively 4% and 17% below Scope’s forecast). Duna Aszfalt’s profitability – as measured by its Scope-adjusted EBITDA margin – has been impacted by increased material prices and stood at 13% in 2022, lower than in previous years (22% in 2021, adjusted for provisions and impairments).
The construction sector in Hungary faces heightened uncertainty due to a shrinking pool of public construction projects, a result of general budget restrictions and uncertainty surrounding EU funds. However, Scope acknowledges that Duna Aszfalt continues to source new projects, with 56% of the pipeline signed in H1 2023. The group’s backlog of projects totalled HUF 489bn as of August 2023 (compared to HUF 424bn as of September 2022). Two main projects were signed early this year: i) the construction of a section of M4 expressway; and ii) the completion of construction on the section between the M49 expressway, the M3 highway and Ököritófülpös; to be implemented by 2025 and 2026 respectively. Although these projects strengthen the backlog, they reinforce the group’s high dependency on state tenders (through Hungarian state-owned companies).
Duna Aszfalt’s business risk profile (assessed at B) continues to be held back by its relatively small scale in a European context, which weakens its ability to mitigate economic cycles. Weak diversification is a further constraint, as Duna Aszfalt mostly focuses on the Hungarian construction sector. Within the sector, the group has a high exposure to motorway construction, where it generated more than 67% of revenue in H1 2023 (71% in 2022). The group also remains largely dependent on governmental demand and funding sources (around 50% of Duna Aszfalt’s revenue in 2022 came from Hungarian state-owned companies).
As Scope had anticipated, increasing raw material prices have negatively impacted profitability in 2022. Profitability, as measured by the Scope-adjusted EBITDA margin, reached 13% for FY 2022 (2 pp below Scope’s forecast). Scope expects the margin to remain below 15% in the next few years. The order book as of August 2023 amounts to HUF 489bn, resulting in a backlog of 1.8x and providing top line visibility for the next two years.
Duna Aszfalt’s financial risk profile (assessed at BB+) supports its issuer rating. However, Scope anticipates that credit metrics will deteriorate in the coming years, as they are heavily influenced by the expected additional debt to finance the company’s business plan. Scope-adjusted debt/EBITDA was 1.1x as of YE 2022, below Scope’s previous expectations. Scope-adjusted EBITDA and Scope-adjusted debt were respectively 17% and 49% lower than expected. Scope anticipates that Scope-adjusted debt/EBITDA will increase to above 2x in 2023 and remains cautious about the sustainability of current leverage metrics. In previous years, Duna Aszfalt had reduced long-term financial assets and increased cash balances to prepare for large projects and acquisitions. In 2022, the company acquired Dömper Kft, a Hungarian construction company, among other investments. It is financing the investment through its own resources. In addition, the company is negotiating two potential acquisitions in Central and Eastern European (CEE) countries and further geographic expansion outside the CEE region. The company intends to take on HUF 15bn of financial debt in 2024. This investment phase would likely have a strong impact on gross and net debt (with lower cash balances foreseen in the coming years). Scope expects overall leverage to increase to above 3x by YE 2024.
Debt protection, as measured by Scope-adjusted EBITDA interest cover, remained strong and stood at 21.7x in 2022. In 2022, financial expenses increased significantly due to interest payments corresponding to a shareholder loan (subject to a yearly variable interest rate). Scope expects higher financial expenses amid its partially debt-funded investment phase over the next few years. Scope anticipates Scope-adjusted EBITDA interest cover to decrease to around 5x by the end of 2024 but to remain adequate for the rating category.
Liquidity is adequate and benefits from a backloaded debt maturity profile comprising a HUF 30bn bond with a bullet maturity in 2029. In 2022, the company received a shareholder loan, due at end-2023. Scope understands that notwithstanding the contractual maturity date of the loan, the owner is committed to having his current financing repaid as cash flow permits and to allow Duna Aszfalt to maintain a strong liquidity position. The group’s cash balances stood at HUF 21bn by end-June 2023. Marketable securities (such as real estate funds) of HUF 53bn as at end-June 2023 enhance the group’s liquidity. Given the long maturity of the bond and no other short-term financial obligations, Scope believes short-term debt and capex coverage will be adequate over the next few years.
Scope considers that regulatory and reputational risks are negative rating drivers (ESG factor). Duna Aszfalt’s market position in recent years has been supported by winning state tenders, thanks to the group’s well-established credentials for projects with state-owned companies. State tenders accounted for around 50% of total revenue in 2022, which creates a high dependency on public procurements.
One or more key drivers of the credit rating action are considered ESG factors.
Outlook and rating-change drivers
The Stable Outlook is based on Scope’s expectations about Duna Aszfalt’s continued operations backed by the current order backlog despite weaker profitability compared to prior years. Scope’s rating case foresees credit metrics will remain robust albeit deteriorating amid potential M&A activity and associated debt funding. In light of the company’s perceived resilience and robust financial setup, the Outlook has also been maintained Stable despite lower visibility on business fundamentals, including a weaker economic environment and slow recovery of public procurements, due to uncertainty surrounding EU funds.
A positive rating action is possible if the group’s order backlog strengthened, providing greater visibility on future cash flow and lowering dependency on state orders, paired with an unchanged solid financial risk profile.
A negative rating action could result from an order backlog dropping below 1x. This could be triggered by a deterioration in market conditions and fewer projects being added to the backlog. Likewise, a negative rating action could be required if Duna Aszfalt’s leverage, as measured by Scope-adjusted debt/EBITDA, significatively deteriorated to above 3.5x on a sustained basis.
Long-term debt rating
The recovery calculation considers the HUF 30bn unsecured corporate bond issued under the Hungarian National Bank’s Bond Funding for Growth Scheme. Further, in line with the group’s plans, Scope assumes that the business plan will be executed with HUF 30bn of additional debt. In addition, Scope assumes that: i) payables have a higher seniority than the bond; and ii) advances received have the same seniority as the bond. This view is based on the legal opinion provided by a local legal expert.
Scope’s recovery analysis is based on a liquidation value of HUF 118bn in a hypothetical default scenario in 2024. This value is based on a reasonable haircut on assets and reflects liquidation costs of 10%. Scope expects an above-average recovery for senior unsecured debt. Thus, Scope affirms the BB rating for the senior unsecured debt category, which is one notch above the issuer rating. The uplift is limited by the risk and possibility of senior secured debt potentially increasing in the path to default (volatility of capital structure and share of senior unsecured debt).
Duna Aszfalt’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Duna Aszfalt to repay the nominal amount (HUF 30bn) in case of a rating deterioration pertaining to the bond rating below B+ (two-year cure period for a B/B- rating, repayment within 90 days after the bond rating falls below B-, which could have default implications). In addition to the rating-related covenant, other covenants include a maximum dividend payment of 30% of the EBITDA if the rating deteriorated to below B+. Pointing to the current BB debt rating, Duna Aszfalt has a comfortable headroom on the rating-related covenant.
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 Outlook, (General Corporate Rating Methodology, 15 July 2022; Construction and Construction Materials Rating Methodology, 25 January 2023), 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 6 September 2019. The Credit Ratings/Outlook were last updated on 14 October 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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