Scope Ratings has today affirmed the BB+ issuer rating (CICR) of the French group Capelli S.A. with a stable outlook.

The affirmation of the BB+ CICR is supported by the 2014 financial results closely matching Capelli’s business plan. The company increased its core market share to 3% from 2% in 2013 and its market share in France to 1.1% from 0.7% in 2013. Assets and revenues increased to EUR 117m and EUR 55m respectively from EUR 103m and EUR 50m in 2013. The company’s solid order backlog of EUR 161.6m (62% yoy) illustrates greater geographical and product diversification. Profitability decreased slightly with the EBITDA margin down to 9% in 2014 from 12% in 2014. Return on asset decreased to 3% in 2014 from 4% in 2013.

Negative rating factors include Capelli’s relatively small size and volatile cash flow generation, strained by the group’s growth ambitions. A key man risk exists due to the essential contribution of the Capelli brothers as CEO and co-director.

KEY RATING DRIVERS
Niche market player with a unique selling point perceived positively by social housing agencies: French social housing requirements have been increased by the government, as well as the applicable fines for not adhering to them. Capelli shows agility in grasping this opportunity with the VillaDuplex® concept as a unique selling point. Scope expects the total revenue share of social housing to increase to 60% in the next two years, thus improving product diversification.

Developer of a limited size: Capelli’s size remains a negative rating driver, despite strong growth in both assets and revenues. The group’s total revenues were only of EUR 55m in 2014, while its total assets of EUR 117m in 2014 are small. This small size implies a greater sensitivity to unforeseen shocks, greater volatility in the cash flows as well as a greater key man risk.

Solid order backlog of 2.9x: Capelli’s solid order backlog of EUR 161.6m at end March 2015 provides good visibility of revenue growth expected for the next few years. In addition, with 20% of its order backlog stemming from new markets, the company has proven its ability to successfully implement its business plan.

Increasing geographical diversification in growing markets: Capelli will fuel growth with its expansion in the Swiss and Luxembourgish markets, which are growing faster than the French one. Capelli’s expansion plans in these two markets are realistic as the group expects to generate 20% of its revenues outside of France by 2016.

Stable and comparably higher profitability, but volatile cash flow generation: Capelli’s gross margin was 26% in 2014 with an EBITDA margin at 9%, which is comparably high for a real estate developer focusing on residential units. Scope believes Capelli will retain its gross margin above of 25% and its EBITDA margin to increase to over 10% by 2016. These are driven by an increasing share of revenues stemming from the block sale of social housing (sale of multiple housing units to a single buyer) and related lower operating expenses. However, cash flow generation is low and volatile, especially from operations, which fluctuate between EUR 11m in 2011 and EUR -12m in 2014.

Comparably low leverage with a loan/value ratio (LTV) of 30% and Debt/EBITDA of 7.2x in 2014: Capelli shows a very low LTV and an adequate Debt/EBITDA that limits the group’s credit risk. The LTV is expected to remain stable while we see the Debt/EBITDA decreasing to around 5.0x in the next few years.

A comparably high fixed charge cover of 3.8x in 2014 is expected to increase above 4.0x in the next few years: an increase in the fixed charge cover would provide creditors with greater protection with respect to interest payments.

Liquidity and debt repayments: the company’s Liquidity stood at an adequate 1.0x in 2014 (2013: 0.9x; 2012: 0.9x). Liquidity is expected to be stretched due to Capelli’s short-term debt positions and credit lines of EUR 11.3m financing its project special purpose vehicles (SPVs). However, Scope expects these credit lines to be extended, if projects delay, or will be repaid by the proceeds after projects exit.

All bank debt is related to Capelli’s project SPVs, but the company guarantees the full repayment of each project loan. Given the high pre-sale rates of 50% demanded by the lenders, Capelli’s risk related to the guarantees is considered to be partially mitigated.

OUTLOOK
The Outlook is Stable. It is supported by Scope’s expectation of strong company growth, greater diversification and improving financials, while disregarding the overall weak market environment in its French core home markets.

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 AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs.
The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Guillaume Jolivet, Committee Chair

Rating history of Groupe Capelli S.A.
20.04.2015 I Affirmation I BB+ I Stable
17.04.2014 I Downgrade I BB+ I Stable
08.04.2014 I Review for possible downgrade I BBB I n/a
09.11.2012 I Initial Rating I BBB I Stable

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
As at the time of the analysis, neither Scope Ratings AG 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 AG 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
Valuation reports, other opinions; Annual reports/semi-annual reports of the rated entity/issuer; Detailed information provided on request; Annual financial statements; Data provided by external data providers; Interview with the rated entity; External market reports; Website of the rated entity/issuer; Press reports / other public information
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
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodologies applicable for this rating (Corporate Rating Methodology, Rating Methodology European Real Estate Corporates) are 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.

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