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Rating action

Scope Ratings has assigned a BB- issuer rating to Hungary-based consumer goods company Cerbona Élelmiszergyártó Kft. The Outlook is Stable and senior unsecured debt has been rated BB-.

Rating rationale

The BB- issuer rating is driven by Cerbona’s adequate financials but small scale as a producer of cereal-related products and its focus on Hungary, with overall sales of HUF 4bn in 2018.

In terms of its business risk profile, Cerbona is a market leader in Hungary, holding one of the top five positions in nearly every product category it offers. Business is constrained by the company’s small scale. While Cerbona has grown at a good pace since 2011 (HUF 1bn in sales versus HUF 4bn today), it remains vulnerable to stiff competition. The company is working on diversification by producing different cereal-related products and following the trend for gluten-free, high-protein and sugar-free products. However, Cerbona is mainly concentrated in Hungary. The brand is largely recognised domestically and exporting to other European countries remains challenging. To increase its revenue, Cerbona is using different sales channels and selling a small proportion of products as private labels to retailers at affordable prices for consumers. Cerbona’s profitability is low compared to fast moving consumer goods peers but stable (EBITDA margin of around 12% in 2018 and projected for the future). While it is in a growth phase, the company faces the challenge of cost increases related to personnel and raw materials.

As regards its financial risk profile, Cerbona has adequate credit ratio for a relatively new company focusing on the generation of positive cash flow and depending mainly on bank loans. While the company’s leverage – as measured by Scope-adjusted debt/EBITDA – is expected to rise following the planned bond issuance, it is likely to remain equal to or below 2x going forward. The 9 years bond is planned for 2020 in the amount of HUF 1bn under the Hungarian central bank’s Bond Funding for Growth Scheme. The bond proceeds will be used to refinance maturing debt but also to invest in some expansionary projects. Scope therefore expects capital expenditure to increase in the next few years, affecting free operating cash flow. As the company remains in a growth phase, credit ratios are sensitive to events such as a drop in EBITDA or a sizeable acquisition.

Scope assesses Cerbona’s liquidity profile as neutral to the rating. There will be enough cash available to cover upcoming debt maturities.

There are no supplementary rating drivers for Cerbona. Its financial policy encourages growth that may come from an acquisition at some point. Cerbona’s dividend policy is stable, at 50%-60% of the previous year’s earnings after tax.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Cerbona’s EBITDA margin will remain stable and that the projected bond issuance will put relatively limited pressure on credit metrics. Scope anticipates that leverage, as measured by Scope-adjusted debt/EBITDA, will reach a maximum of 2x for the next few years.

A positive rating action could be triggered by improvements in the company’s business through increasing sales or diversification.

A negative rating action could be triggered by a deterioration in credit metrics exemplified by the SaD/EBITDA ratio reaching 3.5x for a prolonged period of time, potentially as a consequence of a large debt-funded acquisition or by significantly higher dividend payments in future, if part of the bond proceeds are used to completely pay back existing bank loans thereby dispensing with the covenants which presently restrict the dividend payout.

Senior unsecured debt: BB-

Scope’s recovery analysis indicates an ‘average recovery’ for senior unsecured debt such as the prospective HUF 1bn bond to be issued at the beginning of 2020. Such average recovery expectations translate into a BB- rating for senior unsecured debt instruments. Recovery is based on an expected liquidation value in a hypothetical default scenario in 2020 and the application of 10% haircut on that value for administrative claims. The planned unsecured debt ranks inferior to the secured bank debt.

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

Methodology
The methodology used for this rating and rating outlook (Corporate Rating Methodology) is available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please 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’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity or its agents participated in the rating process. Scope had access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Azza Chammem, Analyst
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 20 December 2019.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions 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 does not, 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 other 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 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.

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