Rating action

Scope has affirmed Aranynektár Kft’s issuer rating of B and changed the Outlook to Positive from Stable. Aranynektár senior unsecured bond is affirmed at B+.

Rating rationale

The rating of Aranynektár continues to be determined by the credit quality of its sister company FHB. Aranynektár is an integrated business service to FHB, which not only owns all the assets used by the issuer but is also its sole customer. Management has not indicated any willingness to develop the activities of Aranynektár outside the scope of FHB. Scope therefore considers Aranynektár to be fully dependant on the relationship between the two entities, with a severance of their business links leading to the immediate bankruptcy of Aranynektár.

FHB has benefitted greatly from the Covid-19 pandemic, which has significantly increased sales and profitability, due to a shift in consumer preferences towards healthy produce. That said, FHB remains a small player on the international European scene, where it is constrained by its size and low market share, within a geographical region pressured by a large number of imports. The group’s development of branded labels (stagnating at close to 26% of total sales) was hindered by the cancelation of fairs last year due to the pandemic. However, Scope expects the development of this line of produce to resume once lockdowns are lifted. This would improve the group’s diversification and brand strength, which remain weaknesses – together with the high exposure to international sales.

FHB has improved its profitability from 12.9% in 2019 to 17.7% in May 2020, supported by a comparable increase in the gross margin from 12.7% to 23.2% (in the same period). Scope expects this growth in profitability to slow down and decrease towards historical levels as demand normalises. FHB has changed the end of its reporting year from December to May. Scope believes this will support the group’s performance because it increases cash generation in May 2020 due to a positive effect on net working capital.

FHB’s financial risk profile has benefitted considerably from the above-mentioned growth in Scope-adjusted EBITDA, which has translated into an overall improvement in metrics. FHB has also increased its cash position to a historically high level and is waiting for a state subsidy to launch a new capex programme. Scope expects the group’s cash position to decrease significantly in the coming years. Despite a lack of information on the upcoming grant/subsidy, Scope believes 2021 and 2022 metrics should benefit from a comfortable cash position. Scope-adjusted debt (SaD)/EBITDA is expected to fall below 1.5x in the coming two years, before deteriorating to levels above 2x the following year. Scope expects cash flow cover to come under pressure given the expansions plans of the group. FHB has announced its intention to invest in production and storage facilities in the coming years. Scope anticipates that this will considerably increase capex levels, leading to negative free operating cash flow/SaD going forward.

Liquidity is adequate. The bond issuance has allowed FHB to repay the majority of short-term debt, limiting any repayment walls in the coming years. The improvement in metrics last year could warrant a higher issuer rating. However, Scope has maintained a relatively conservative stance, overweighting the free operating cash flow/SaD ratio in its financial risk profile assessment, given the expectation of a high investment phase. In the overall rating, Scope has overweighted the business risk profile subrating. This is because of the group’s small size, which makes it more vulnerable to external factors.

Scope also applies a negative notch for governance and structure, due to the complexity of the bond issuance and intercompany loan structure. A lack of transparency regarding forecasts, the impact of the state subsidy and potentially high capex are also detrimental to the rating (ESG: credit-negative governance factor).

Outlook and rating-change drivers

The Outlook is Positive, based on the improvement in credit metrics and growth of the group over the last few months, which have exceeded Scope’s expectations. Scope believes FHB will be able to deploy a considerable capex programme while maintaining an acceptable financial risk profile, partly financed with a state subsidy. The Outlook also includes Scope’s expectation that Aranynektár will remain unaffected by external events – beyond the agency’s assessment of the credit quality of FHB – which could have a negative impact on the issuer.

A positive rating action may be taken if FHB successfully maintains a high EBITDA margin, which would result in SaD/EBITDA remaining at low levels, while simultaneously improving transparency and the scale of its activities. This could be achieved via the development of branded goods, which could increase the group’s recognition and ability to charge a premium.

A negative rating action (including the return to a Stable Outlook) may be taken if SaD/EBITDA increases above 3x on a sustained basis, e.g. due to a greater than expected drop in profitability and a larger than anticipated net capex investment programme.

Long-term and short-term debt ratings

Scope has affirmed the rating of B+ to senior unsecured bond (HU0000359559). Scope calculated an above-average recovery level following a hypothetical default in 2022 – and therefore maintains one notch of uplift to the assigned issuer rating.
 
One or more key drivers for the credit rating action are considered ESG factors.

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

Methodology
The methodologies used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology, 26 February 2020; Rating Methodology: Consumer Products, 30 Septemeber 2020) are 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 Ratings’ 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 credit rating was not requested by the rated entity or its agents. The rating process was conducted:
With Rated Entity or Related Third Party Participation    YES 
With Access to Internal Documents                                 YES
With Access to Management                                           YES
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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The credit rating and/or outlook is UK endorsed.
Lead analyst Adrien Guerin, Senior Analyst
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 30 January 2020.

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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