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Rating action

Scope Ratings assigns an initial issuer rating of BB-/Stable to Hungary-based 4iG Nyrt. Scope also assigns a BB- instrument rating for senior unsecured debt.

Rating rationale

The issuer rating mainly reflects 4iG’s solid position in key segments of the Hungarian IT market. The company has recently seen rapid growth, both in terms of size and expertise. Scope highlights the dynamic development of 4iG following the ownership change in 2018, with Gellert Jaszai becoming the main shareholder, chairman of the board of directors and subsequently CEO. The new management has revised 4iG’s business strategy and reshaped its organisational structure. The company has focused on large, primarily public sector contracts, streamlined sales organisation and made selective acquisitions. The total number of employees grew from 376 at YE 2018 to around 1,000 at YE 2020.

After an initial growth slowdown in Q2 2020 triggered by the Covid-19 pandemic, the company introduced a number of measures to adapt to the new operating environment and changing clients’ needs, which resulted in strong growth rates in H2 2020. Scope expects the IT market to grow at low single-digit percentage points per year in the medium term, providing sufficient opportunities for the companies in the industry. 4iG’s business risk profile further benefits from its solid product portfolio and sector expertise.

Challenges include fierce competition from national and international players in the fragmented Hungarian IT market as well as a relatively low share of recurring revenues of less than 20% in the past couple of years. Performance volatility may also arise from weak geographical diversification as more than 95% of revenues are generated in Hungary. 4iG is strongly exposed to public sector customers (governmental, educational and healthcare organisations), which account for more than 60% of revenues. While the public sector plays an important role in IT spending in Hungary, Scope believes that the company is strongly exposed to the spending cycles of local and EU authorities. 4iG’s business risk profile is further restricted by execution risk related to the planned acquisitions and relatively low but improving profitability.

4iG’s financial risk profile is relatively strong compared to its business risk profile. It is supported by a robust interest cover ratio but restricted by volatile cash flow cover. Scope expects leverage, as measured by Scope-adjusted debt (SaD)/EBITDA, to increase considerably from below 1x in the recent past, but to remain under 3x. This is based on the HUF 15bn bond placement and subsequent business acquisitions in a similar amount. Pressure from acquisition-related bond financing is partly offset by expected EBITDA growth. The company has a comfortable interest cover ratio of above 7x, which is mainly supported by the ongoing low interest rate environment. Scope expects free operating cash flow/SaD to remain below 20% in the next two years, mainly driven by expected cash outflows for working capital as a result of the growing scale of operations. 4iG’s debt maturity is backend-loaded. Financial liabilities mainly include the prospective MNB bond, bank loans and lease liabilities recognised from 2019.

The company’s liquidity is highly dependent on working capital movements. Scope deems liquidity to be adequate going forward. Nevertheless, it could become an issue, e.g. in the event of very sharp working capital swings as a result of delayed payments from customers. For 2021, Scope expects short-term financial debt to be covered more than 1x by a combination of available cash and cash equivalents of about HUF 3.1bn as of YE 2020E and positive expected free operating cash flows.

Outlook and rating-change drivers

The Outlook is Stable and reflects: i) the successful placement of a HUF 15bn bond in H1 2021; ii) the execution of the announced M&A strategy; and iii) SaD/EBITDA of below 3x in the next few years.

A positive rating action is remote at this point and would require 4iG to significantly expand in terms of market shares and geographical outreach while maintaining financial metrics in line with Scope’s expectations. It could also result from stronger credit metrics, with SaD/EBITDA of below 1x on a sustained basis.

A negative rating action could be triggered by a deterioration in credit metrics as indicated by SaD/EBITDA of above 4x on a sustained basis, e.g. due to an inability to generate sufficient new business or if execution risk around targeted acquisitions materialises. A negative rating action could also result from liquidity issues, e.g. caused by very sharp working capital swings.

Long-term and short-term debt ratings

Scope’s base case financial forecast assumes the successful placement in H1 2021 of a HUF 15bn senior unsecured bond with a fixed annual coupon under the Hungarian National Bank’s Bond Funding for Growth Scheme. Scope expects the bond to have a 10-year tenor, with 10% annual amortisation commencing in 2027 and a 60% bullet maturity in 2031. The proceeds are earmarked for the acquisition of companies.

Scope’s recovery analysis indicates an ‘average recovery’ for senior unsecured debt such as the prospective bond. This expectation translates into a BB- rating for this debt category. The recovery is based on an expected distressed enterprise value as a going concern in a hypothetical default scenario in 2023.

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

Methodology
The methodology used for these credit ratings and/or rating outlook (Corporate Rating Methodology, 26 February 2020) is available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity and Scope Ratings internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the rated entity or instrument to be satisfactory. The information and data supporting Scope Ratings’ credit ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the credit rating or outlook action, the rated entity was given the opportunity to review the credit rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the credit rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The credit rating and/or outlook is UK endorsed.
Lead analyst: Marlen Shokhitbayev, Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The credit ratings/outlooks were first released by Scope Ratings on 8 February 2021.

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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