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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BBB/Stable issuer rating for Danish industrial conglomerate Schouw & Co (Schouw). Scope has also affirmed the BBB rating on senior unsecured debt, as well as the short-term debt rating of S-2.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB- (unchanged). Scope categorises Schouw as an industrial conglomerate. The group has a portfolio of six wholly owned and fully consolidated companies with operational and financing integration.

Schouw’s overall market position benefits from the strong position of its biggest subsidiary, BioMar, in the global fish feed market. It remains weakened by the significant EBITDA contribution from companies which are largely regional players with less market power.

The main support for Schouw's business risk profile is the highly diversified service and product offering of its six portfolio companies. Diversification is somewhat restrained by the exposure to just two portfolio companies, BioMar and GPV, which together account for around 70% of Schouw's consolidated EBITDA. Exposure to the fish feed business (around 45% of EBITDA) and in particular to salmon feed (around 30% of EBITDA) is relatively high. The heavy dependency on BioMar is somewhat offset by the low cyclicality of the fish feed business. Despite increased cyclicality following the Enics acquisition, Scope notes that around 60% of consolidated EBITDA comes from less cyclical businesses (BioMar, Fibertex Personal Care and Borg Automotive).

Scope considers Schouw's customer structure to be sufficiently granular. Although there is a certain degree of dependence on single customers at the company level, no single customer accounts for more than 5% of the group's consolidated revenue.

Despite a slight improvement in 2023, Schouw’s moderate operating profitability (Scope-adjusted EBITDA margins of 7%-11% in 2007-2023) in a peer group context still restrains its business risk profile. The group’s overall profitability continues to be largely determined by the profitability of BioMar due to its relative size (around 44% EBITDA share in 2023). With an EBITDA share of around 26% in 2023, GPV’s importance for Schouw’s overall profitability has increased following the acquisition of Enics.

Scope-adjusted EBITDA increased from DKK 2.3bn in 2022 to a record DKK 2.9bn in 2023. This was driven by a consolidated revenue rise of 14% YoY to an all-time high of DKK 37.2bn. The rise was, in turn, thanks to acquired revenue of DKK 4.9bn and a slight improvement in the Scope-adjusted EBITDA margin from 7.1% in 2022 to 7.8% in 2023, largely due to BioMar's higher profitability. BioMar's improved profitability in 2023 is thanks to its commercial excellence programme, launched in 2023. The programme aims to improve margins, particularly in the salmon division, by reviewing each contract and exiting unattractive tenders and contracts. As a result, while salmon volumes in 2023 were down by around 4% YoY, reported EBITDA was up by about 26% YoY.

Following the release of the H1 2024 figures, Schouw has lowered its full year 2024 revenue guidance from DKK 34.8-37.3bn to DKK 34.2-36.4bn, in particular due to reduced expectations for BioMar and GPV. Scope has factored in revenue of around DKK 34.7bn in 2024 (down 6.8% YoY), at the lower end of the guidance range. For 2025, the agency has assumed a slight increase in revenue to around DKK 35.3bn (up 1.7%). This is mainly based on the assumption that BioMar's volumes will stabilise during 2024 and that GPV will return to growth. In contrast to revenues, Schouw has raised its 2024 EBITDA guidance for the second consecutive quarter to DKK 2,810-3,060m (previously DKK 2,740-3,040m), mainly due to stronger profitability at BioMar – up from 4.9% in H1 2023 to 8.7% in H1 2024. Scope has assumed a Scope-adjusted EBITDA of around DKK 2.9bn in 2024 (margin: 8.4%) and about DKK 3.0bn in 2025 (margin: 8.5%).

Financial risk profile: BBB+ (unchanged). Schouw’s financial risk profile is underpinned by its disciplined capital allocation. This is reflected in a strong balance sheet despite significant M&A activity, a proven track record of balance sheet recovery following the acquisition of companies, and Scope's expectation of further leverage improvement in 2024-25 on the back of the anticipated improvement in free operating cash flow (FOCF).

As expected, Scope-adjusted debt* increased from DKK 6.1bn at YE 2022 to DKK 6.6bn at YE 2023 due to an increase in working capital, dividend payments and cashouts for acquisitions. Nevertheless, in line with Scope’s expectations, debt/EBITDA improved slightly from a peak of 2.6x in 2022 (following the acquisition of Enics) to 2.3x in 2023, thanks to higher Scope-adjusted EBITDA. Scope continues to expect Schouw to reduce its debt level in 2024-25, supported by the anticipated improvement in cash flow generation. The agency anticipates that Scope-adjusted FOCF will increase to around DKK 935m in 2024 from DKK 662m in 2023 and to about DKK 852m in 2025 on the back of lower net working capital and capex. Overall, Scope expects Scope-adjusted debt to decrease to around DKK 6.3bn at YE 2024 and to roughly DKK 5.9bn at YE 2025, improving debt/EBITDA to about 2.2x in 2024 and 2.0x in 2025.

Stronger deleveraging will be prevented by the new share buyback programme of up to DKK 200m in the period from 4 March 2024 to 31 December 2024, which was initiated in March 2024. Scope understands that this new share buyback programme does not represent a change in Schouw's capital allocation strategy and has not factored in any further share repurchases in 2025.

As expected, the interest coverage ratio has deteriorated from approx. 14x in 2022 to approx. 7x in 2023, as cash interest payments rose, partly due to higher interest rates and partly due to higher debt. Scope notes that all debt is floating rate except for leases and part of the 2019 Schuldschein. Schouw does not use interest rate hedging; instead, the company rolls over its financing costs to its pricing over time. Scope expects cash interest payments to rise further in 2024 due to higher debt levels during the year, and anticipates that interest cover will reach a low of around 5.5x in 2024. After the completion of the refinancing in 2024, the agency expects a reduction in cash interest and an improvement in interest cover to around 8x for 2025.

At 33% in 2023, FFO/debt remained significantly below 45% for the second year in a row (31% in 2022) due to higher cash taxes and cash interest and elevated Scope-adjusted debt. In 2024-25, Scope expects FFO/debt to remain in the 30%-40% range. Cash flow cover proved to be volatile amid the significant fluctuations in net working capital and is still the weakest credit metric. In 2023, cash flow coverage increased to 10% on the back of the positive Scope-adjusted FOCF. Scope sees cash flow cover at around 15% in 2024-25, based on its expectation for Scope-adjusted FOCF in the same period.

Liquidity: adequate. Schouw’s liquidity profile is supported by available cash sources, such as cash on the balance sheet, funds available under the syndicated bank facility, and the expected positive Scope-adjusted FOCF in 2024-25. It is also supported by the completed refinancing of around DKK 2.3bn in debt in H1 2024, partly using a new five-year bond of NOK 1.3bn (DKK 850m) issued in June 2024 and tapped by NOK 500m (DKK 315m) in early September, and the syndicated bank facility. Scope quantified liquidity risk by looking at BioMar’s reverse factoring debt of DKK 764m at YE 2023, which is recognised in the balance sheet under trade payables.

Schouw has three financial covenants. In 2023, the group remained below the covenant thresholds and Scope’s base case foresees that this will continue to be the case.

Supplementary rating drivers: credit-neutral. Scope has a neutral view of Schouw’s capital allocation policy. Capital allocation is relatively disciplined, as reflected in a historically solid balance sheet.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s expectation that pressure from lower revenue and increased interest costs, in particular in 2024, will be offset by higher profitability, lower net working capital and lower capex. As a result, consolidated Scope-adjusted FOCF in 2024-25 should be above the level in 2023. Scope also expects debt/EBITDA to further improve to around 2.2x in 2024 and 2.0x in 2025. The Outlook further reflects the full execution of the recently launched share buyback programme in 2024 and no further share buybacks in 2025. Scope has not included M&A in its forecast due to a lack of information.

The upside scenario for the ratings and Outlook is:

1. Debt/EBITDA sustained at around 1.5x

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA sustained at around 2.5x

Debt ratings

The group’s debt is managed centrally apart from leasing debt and other credit lines. Subsidiaries are mostly financed at holding company level by way of a structure of intra-group loans through cash pools. There are cross-guarantees (Schouw and six companies) for the centrally managed debt.

Scope has affirmed the BBB rating on Schouw's senior unsecured debt, in line with the issuer rating.

Scope has also affirmed the S-2 short-term debt rating, based on adequate liquidity and the BBB/Stable issuer rating. Scope considers Schouw's standing, particularly in the Nordic capital market, to be adequate given its long-term presence on the capital market. The agency also views Schouw's banking relationships as adequate. Schouw mainly raises funds from four major banks, Danske Bank, DNB, Nordea, and the Nordic Investment Bank.

Environmental, social and governance (ESG) factors

Schouw introduced an ESG strategy in 2021 related to: i) efficient and responsible production; ii) workers’ protection and workplace attractiveness; and iii) innovation and governance. However, no drivers of the credit rating are considered ESG-related factors with a substantial impact on the overall assessment of credit risk.

Scope sees moderate governance risk arising from the management of a very diverse portfolio of companies. This risk is mitigated by the fact that the day-to-day business of each portfolio company is not managed centrally, but at the level of the individual company. Schouw's Board of Directors consists of six directors elected by the shareholders. Scope notes that four of the directors cannot be considered independent: Kenneth Skov Eskildsen and Søren Stæhr are affiliated with the main shareholder Givesco A/S. In addition, Søren Stæhr has an affiliation with a law firm that acts as an advisor to Schouw.

All rating actions and rated entities

Schouw & Co.

Issuer rating: BBB/Stable, affirmation

Senior unsecured debt rating: BBB, affirmation

Short-term debt rating: S-2, affirmation

*All credit metrics refer to Scope-adjusted figures.

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

Methodology
The methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 16 October 2023), is 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 these 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 and/or Outlook 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 5 September 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
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