The affirmation of Capelli’s BB+ CICR is supported by the 2015 financial results closely matching its business plan. The company increased its core market share to above 4% from 3% in 2014, and its market share in France to 3.0% from 1.5% in 2013. Assets and revenues increased to EUR 133m and EUR 65m, respectively, from EUR 117m and EUR 55m in 2014. Its solid order backlog of EUR 226m as at 31 March 2016 (40% YoY) illustrates the greater geographical and product diversification. Profitability remained stable, with the EBITDA margin at 9% and return on assets of 3%, both in 2015.

Negative rating factors include Capelli’s relatively small size and negative free cash flow generation, which is strained by its growth ambitions. Key person risk exists due to the essential contribution of the Capelli brothers as chairman of the board and director.

KEY RATING DRIVERS

Niche market player with a unique selling point perceived positively by social housing agencies. The government has tightened French social housing requirements, as well as 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 50% by the end of the current financial year, 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. Total revenues were EUR 65m in 2015, while total assets of EUR 133m in 2015 are also considered small. This small size implies a greater sensitivity to unforeseen shocks, greater volatility in the cash flows as well as a greater key person risk.

Solid order backlog of 3.5x. Capelli’s solid order backlog of EUR 226m at end-March 2016 provides good visibility of the revenue growth expected for the next few years. In addition, with 20% of its order backlog stemming from new markets, it 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 Luxembourg markets, which are growing faster than the French one. Capelli’s expansion plans in these two markets are deemed realistic, underpinned by the 20% order backlog from these two markets.

Stable and comparatively high profitability, but negative free cash flow generation. Gross margin was 26% in 2015 with an EBITDA margin at 9%, which is comparatively high for a real estate developer focusing on residential units. Scope believes Capelli will maintain gross margin above 25% and increase EBITDA margin to over 10% for FY 2015/16. Both 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, free cash flow generation (2014: -EUR 10m; 2013: -EUR 19m) is expected to remain negative going forward due to its growth ambitions.

Comparatively low but increasing leverage with a loan/value ratio (LTV) of 38% and debt/EBITDA of 8.4x in 2015. Capelli shows a low LTV and an adequate debt/EBITDA, which limits its credit risk. LTV is expected to remain stable while we see debt/EBITDA decreasing to around 6.0x in the next few years.

Relatively high fixed-charge cover of 3.7x in 2015 set to increase above 4.0x in next few years. An increase in the fixed-charge cover would give creditors greater protection over interest payments.

LIQUIDITY AND DEBT REPAYMENTS

Liquidity was a weak -0.1x in 2015 (2014: 0.6x; 2013: 0.9x), and is expected to remain weak due to its short-term debt positions and credit lines of EUR 25.7m financing its projects’ special purpose vehicles (SPVs). However, Scope expects these credit lines to be extended, if projects are delayed, or repaid by instalment payments due under VEFA, at the latest after exiting the project.

All bank debt is related to the projects’ SPVs, but the company has guaranteed to fully repay each project loan. While liquidity is below par, we believe this is mitigated by the (i) high pre-sale rates of 50% demanded by the lenders and (ii) well-diversified development pipeline of more than 40 projects, financed by more than 10 reputable banks, as both reduce project-related refinancing risks.

OUTLOOK

The Outlook is Stable. This is supported by Scope’s expectation of strong company growth, greater diversification and stable financials, while disregarding the still-weak overall market environment in its core home markets in France. The rating is valid given our understanding that Capelli will maintain pre-sale rates of more than 50% and that management can secure access to bank funding.

A positive rating action in the foreseeable future is remote given the company’s limited size.

A negative rating action would be considered if debt/EBITDA persists above 8.0x or if FFO fixed-charge cover fell below 2.0x.
 

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, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund, Dr. Sven Janssen.

The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

Rating history - Groupe Capelli S.A.
(Date | Rating action | Rating)
21 April 2016 I Affirmation I BB+ I Stable
20 April 2015 I Affirmation I BB+ I Stable
17 April 2014 | Downgrade | BB+ I Stable
08 April 2014 I Review for possible downgrade I BBB I n/a
09 November 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
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 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
• Website of the rated entity
• Annual financial statements
• Annual reports/semi-annual reports of the rated entity
• Current performance record
• Information provided on request
• Data provided by external data providers
• External market reports
• Press reports / other public information
• Interview with the rated entity

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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