Scope Ratings (“Scope”) has assigned today an issuer rating of BB to Tecnocom, Telecomunicaciones y Energía, S.A and consolidated companies (hereinafter referred to “Tecnocom Group”, “Tecnocom” or group), Spain. The BB rating reflects Tecnocom’s competitive position in its key markets, its diversification, its high level of recurring income, its reasonably solid funding capacities and its high quality management. The rating is, however, constrained Tecnocom’s sensitivity to economic cycle and its exposure to an existing industry risk. The rating is further constrained by the limited profit generation of the group and its exposure to foreign exchange fluctuations. Scope also notes that Tecnocom still needs to stabilize and consolidate its activities in different markets in Latin America in order to achieve more stable revenues going forward.

In Scope’s view, Tecnocom has a diversified business profile, the group is structured around three business lines and is also geographically diversified covering 10 countries directly, additionally through a partnership with Getronics, is present in more than 70 countries. Geographic diversification has resulted in a higher percentage of revenues generated in Latin America over the last few years. The group offers its services to a wide range of industries both in the private and public sector. Its client’s portfolio is also fairly diversified.

Additionally, Scope positively evaluates Tecnocom’s competitive position in its relevant markets,Tecnocom has focused on improving its position in niche markets and thus establishing long-term business relationships with its clients Even though many of the contracts are negotiated on a yearly basis due to the high degree of customization of the services provided, Scope considers that Tecnocom has a solid recurring revenue base (reported to be 70% of total revenues). At the same time, the group´s investment strategy focuses on increasing its Application Management activities, which would provide them with more stable cash flows.

Scope positively assesses Tecnocom’s management team, which has proved very effective in integrating the newly acquired companies into the existing business.

Notwithstanding the arguments above, in Scope’s view, Tecnocom is still in an early stage of its consolidation and expansion process, thus the group needs to prove its strategy to be effective and profitable in the mid and long run. The financing of the investments in Latin America through proceeds originated in Europe involves a currency risk exposure which will rise if the group continues increasing its revenues in foreign currency. Additionally, the group operates in a highly cyclical sector whose industry risk could potentially impact the stability of its returns over time and limit its earnings generation capacity.

The group has a solid equity ratio (50%) and positive operating cash flows (EUR 21m, as of December 2013) even in the down-cycle. Nevertheless, Tecnocom’s net profit was partially offset by the restructuring costs incurred in the last years (EUR 2.8m in 2013, furthermore an estimated EUR 6.5m is expected in 2014), the financial expenses that created pressure on the cash flow and revenues margin, as well as on the profitability ratios. These margins are below average in a sector that has already suffered from constant margin reductions. Short-term liabilities are high (78% of total) considering that the group faces costs related to seasonal cash flows. Financial expenses accounted for EUR 5.8m as of December 2013, and in Scope’s opinion, no significant reduction is foreseen.

The stable outlook reflects that the group might be able to benefit from increasing margins and market share over the next 12 months, however, the funding required to finance short-term obligations of Tecnocom could limit the company’s profitability and cash flow generation capacity.

Methodology:
Scope applied the corporate rating methodology available on its website (www.scoperatings.com). The rating analysis takes into account the proposed amendments to Scope’s rating approach announced in October 2013. These amendments aims to reinforce the scoring method that becomes more relevant and include in particular i) a weighting change in financial ratio affecting the results of its scoring model, ii) a finest sectorial breakdown with a weighting of the financial ratios better adapted to each industry, and iii) the inclusion of additional forward-looking analysis based on cash-flow forecasting, among other elements. Information used by Scope in its quantitative model includes Tecnocom’s annual accounts consolidated from 2010 to 2013.

About Tecnocom
Tecnocom is an important player in the Spanish information and communication technology (ICT) market. The group, offers a broad portfolio of technology and business solutions that covers a wide range of industries in both the public and the private sector. Its regional presence includes Spain, Portugal as well as countries in Latin America, such as Colombia, Mexico, Chile and Peru. Tecnocom’s turnover reached €376 million in 2013.

About Scope Ratings
Scope was founded as an independent rating agency in Berlin, Germany, in 2002. It specializes in rating and analyzing SMEs, banks, structured finance transactions and asset-based funds across Europe. The rating agency is committed to full transparency and diversity of opinions in the European capital markets. Scope employs analysts in France, Germany and the United Kingdom. The rating agency is registered by ESMA as an official credit rating agency (CRA) to operate in the European Union and has ECAI-status. More information about Scope on www.scoperatings.com

Regulatory Information: Rosana Pfaffe (lead analyst); Rigel Scheller (back-up analyst); Thomas Morgenstern (chairman of rating committee)

Additional information to the rating and to regulatory requirements for ratings are documented in rating report published on the website at www.scoperatings.com