RATING RATIONALE
Today´s rating action is driven by Scope´s revision of its Corporate Rating Methodology published on 28 March 2014. In this context, the rating reflects the negative impact of a higher weight given to future risks related to the business risk exposure and the market dynamics of Capelli’s core business lines, despite the company’s recent efforts to diversify its customer base and geographical exposure. It also factors in the more conservative framework applied by Scope when assessing the financial risk profile of the company.

The reason for this revision of Scope´s rating methodology lies in the growing interest of investors in the SME segment across Europe and the need for more forward-looking credit risk analysis of corporate issuers. Forward-looking assessments include an in-depth analysis of the issuer´s future capacity to manage business risks in a changing market environment. The evolution of this rating methodology also reflects Scope´s commitment to providing consistent ratings and rating methodologies across all of its rating activities, including Financial Institutions, Structured Finance and SME Corporates across Europe

BUSINESS RISK PROFILE

Business Risks Exposure
While Scope recognizes the significant progress made by the group to diversify its customer base and geographical exposure, to date Capelli’s revenue source still remains largely exposed to the single segment of first-time buyers of residential homes in France. This concentration increases the risks of losing market share if consumer preferences or environment change.

Since the financial year 2012/2013 Capelli has expanded its business activities outside its home market to Switzerland and Luxembourg. Capelli also entered into new business lines to diversify its customer base and, for instance, has started refurbishing buildings for residential use for first-time home buyers but also for investors. These activities should start to diversify and increase the company’s turnover in 2013/2014. However, such developments are recent and Scope will closely follow whether the company successfully implements its diversification strategy.

Market Dynamics
Capelli’s residential home-building business remains highly cyclical and the rating takes into account the deteriorating macroeconomic environment in France, illustrated by a steady decline in residential building permits since the beginning of 2012. The rating also factors in the impact of a potential regulatory change for the “Taux zero” or interest-free financing scheme for French home buyers. Over the past years, Capelli has benefited from these favourable financing conditions offered by the French government to Capelli’s targeted customers. This scheme has been extended until year-end 2014. Scope anticipates a non-negligible risk of declining turnover for Capelli in the mid term, should this customer support scheme end. However, the historically low interest rates (French OATs) are favorable for the company’s business.

Moreover, Capelli benefits from limited competition at the local level and in its segment.

Management & Structure
The BB+ rating incorporates Scope’s generally positive opinion of Capelli’s management and structure. Operational and organizational risk is low, due to a granular customer base and a very well established and detailed reporting system, which allows for a solid steering of the company. Management’s track record is convincing as seen in the company’s resilient performance in 2012 and 2013 despite a challenging environment. In addition, Scope recognises the strength of Capelli’s Unique Selling Point (USP) with a well designed offer of low-cost housing for first time buyers in France

FINANCIAL RISK PROFILE

In 2013, Scope notes the positive impact of an equity ratio at 34%, a relatively high gross operating margin of 28% and an acceptable cash position illustrated by a Quick ratio of 91%. However Scope’s action reflects the more conservative ratio calibration of its revised rating methodology.

Capelli’s performance has been stable over the past twelve months with a moderate increase in turnover of 10% and net profits comparable with those of financial year 2012/2013. Scope considers that this performance is satisfactory given the slowdown in the French home-building market. Furthermore, Scope believes that the diversification to Switzerland and Luxembourg should help grow revenues in the near term.

However, although Capelli’s gross margin of 28% is slightly above those of its competitors (19% - 27%), it relatively small size makes it more difficult to absorb fixed costs and achieve the same economies of scale as its competitors. However, its wage structure gives it some flexibility in controlling overheads.

Capelli’s equity ratio of 34% provides it with a solid balance sheet structure considering the cyclical nature of its business and compares favourably with its main competitors who exhibit lower levels in general.

Regarding financial liquidity, the company maintains a substantial position of cash and liquid assets, amounting to EUR 43m at the end of the first half of FY 2013/2014. In addition, Capelli minimizes its risks by preselling at least 50% of the properties before starting the procurement of the land for construction. However, Scope notes the relatively volatile level of free cash flow to debt, which rose from a negative level in 2012/2013 to 11.5% in 2013/2014 based on semi-annual figures. In addition, Scope takes into account the negative impact on creditors of Capelli’s recent change of dividend pay-out policy, with payouts of EUR 1.1m in 2012, representing 27% of FY 2011/2012 EBIT, and EUR 1.2m in 2013, representing 23% of 2012/2013 EBIT.

OUTLOOK

The stable outlook is driven mainly by Capelli’s forecast of FY 2013/2014 results, which should be in line with last year. In addition, at April 1, 2014 the company had EUR 60m in billable revenues on projects already bought and being marketed, which should support turnover and profit in FY 2014/2015.

About Capelli S.A.
The company Capelli was founded in 1976 in Lyon, specializing in land development and parcelling out. Capelli is a limited company as a “société anonyme” with a board of directors. Capelli was listed on the OTC market in 2004 and transferred to the NYSE Euronext stock exchange in 2005. In 2010, Capelli changed its strategic focus to become a property developer as well.

More information about Scope on www.scoperatings.com.

REGULATORY DISCLOSURES

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings GmbH, Berlin, District Court for Berlin (Charlottenburg) HRB 145472, directors: Thomas Morgenstern, Florian Schoeller.

The rating has been prepared by Philipp Wass, Lead Analyst.
Responsible for approving the rating: Thomas Morgenstern, Managing Director.

Rating history
17.04.2014 BB+ outlook stable
08.04.2014 BBB under review for downgrade
09.11.2012 BBB outlook stable

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings GmbH nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings GmbH or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
Annual financial statements, annual reports/semi-annual reports of the rated entity/issuer, external market reports, external market reports, data provided by the issuer or/and external data providers, website of the rated entity/issuer, research Scope Group.
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
The rated entities have been given the opportunity to examine the rating action prior to publication. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology published in March 2014) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on 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’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

Conditions of use / exclusion of liability
© 2014 Scope Corporation AG and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Capital Services GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope cannot, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided “as is” without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or otherwise damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party, as opinions on relative credit risk and not as a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

Rating Agency
Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin

Competent supervisory authority
European Securities and Markets Authority (ESMA)
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