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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of B+/Stable to Stavmat Építőanyag Kereskedelmi Zrt. (Stavmat), along with a senior unsecured debt rating of BB-.

Rating rationale

The issuer rating reflects Stavmat’s limited size, concentration on the domestic market for building materials, high dependency on construction industry cycles, and the volatile cost of materials. The rating also reflects the anticipated worsening in leverage metrics with the upcoming HUF 5.0bn bond issuance and limited cash flow cover in the near term, a result of the higher capex required for the construction of the paving production plant in Dabas. In this context, the recent change in financial policy regarding the distribution of equity reserves and the future dividend plan is credit-negative. This risk is partly mitigated by Stavmat’s leading position as a wholesaler of construction materials for professional customers in Hungary, adequate liquidity with refinancing risk only in the long term, and strong interest cover. Profitability margins have been adequate in the last few years, which were, however, characterised by extremely favourable government policies for the construction industry.

Key constraints for Stavmat’s business risk profile (assessed B+) are its limited size, concentration on the small domestic market for building materials, high dependency on construction industry cycles and the volatile cost of materials (covering over 90% of sales). The construction industry in Hungary experienced robust and rapid growth between 2016 and 2020 on the back of favourable government policies. As the Hungarian government recently extended the effects of the ‘CSOK’ scheme launched in 2015, state subsidies are expected to fuel demand for construction materials for the next few years. Stavmat’s concentration on the local wholesale market for building materials makes it highly vulnerable to shifts in the local economy and the construction business cycle. Export sales are currently negligible, but they may increase amid plans to export to neighbouring countries. Sales are entirely via physical stores, with no online sales. Supportive for the business risk profile is Stavmat’s leading position as a wholesaler of construction materials for professional customers in Hungary, where it holds a 10% market share despite the rather fragmented market. Stavmat’s revenues are still small on an absolute basis with HUF 31bn (approx. EUR 86m) in 2020. Yet, although Stavmat does not operate in a protected industry, the risk of new entrants in its market is only moderate in view of the high level of investment needed. EBITDA margin performance was strong during 2018-20, bolstered by government-driven demand. Before 2018, profitability was lower, even negative. Yet with the new ownership since 2016, the EBITDA margin has been positive and growing. Overall, profitability is highly dependent on material costs. The construction of the paving production plant in Dabas would bring higher marginality from 2022 and reduce the relative weight of the cost of materials, although the impact will be limited initially. The Scope-adjusted EBITDA margin is anticipated to reach close to 7% in 2021, broadly in line with the 2020 level, and will exceed 7% once the production facility in Dabas is operational. All in all, Scope’s profitability assessment reflects the implied volatility the company faces in terms of demand and the cost of materials, which could cause margins to deteriorate rapidly.

The financial risk profile of Stavmat is assessed at BB+. While Stavmat’s operating leases were limited until 2020, the upcoming HUF 5bn bond issuance is expected to increase Scope-adjusted debt (SaD) to EBITDA to around 3x in 2021E before gradually converging towards 2.5x until 2023E. This will be driven by gradually increasing EBITDA amid the broadly stable debt. Funds from operations (FFO) generation has been quite consistent, at between 6%-7% of revenues over the last three years, benefiting from low financial expenses and taxes. Scope forecasts FFO/SaD to remain between 30% and 40% over the medium term. The upcoming bond is expected to bear a 3% coupon, equal to HUF 150m of yearly interest. Despite this, EBITDA interest cover is projected to remain comfortably above 10x. The cash flow cover metric for 2021 and 2022 discounts the higher capex related to the expansionary investment in the production plant, with net capex of HUF 3.3bn in 2021 and HUF 1.0bn in 2022. Afterwards capex will reduce, mostly for maintenance. Therefore, in the medium term, free operating cash flow to SaD will remain below 5% while, in the longer term, Scope expects a higher ratio of above 15%.

Scope assesses liquidity as adequate, based on the current cash reserves (HUF 2.9bn as of YE 2020) in combination with the expected solid cash flow generation, which is sufficient to cover moderate short-term (off-balance-sheet) debt, entirely represented by operating leases (around HUF 450m in 2021). The company has no credit facilities but relies on a credit insurance agreement with Atradius on over 90% of its receivables. The liquidity ratio is above 110% over the entire forecasted period.

With regard to supplementary rating drivers, Stavmat is constrained by its financial policy. Its business approach so far has been prudent, with a high share of own stores and no dividends. However, the distribution of HUF 1.8bn in committed reserves to shareholders in 2020 and the planned dividend distribution of around HUF 500m per year from 2021 deviate from this. A more cautious approach would have been to compensate shareholders after the completion of the expansionary capex plan. By doing this, the company could still use a portion of the planned dividends (estimated payout ratio of around 30% of net profits) to build higher cash reserves. This would ensure timely servicing of the bond over the long term (bond amortisation would start in 2026), taking into consideration potential negative swings in the business cycle as well as potential execution risk in the building of the paving production plant.
Stavmat has been owned since 2016 by IN Group, a Slovakian investment holding company with diversified interests within the construction industries of Slovakia, the Czech Republic, and Hungary, including the wholesaling and production of building materials, construction, and real estate development. The ultimate beneficial owner is Mr Pavol Kollar (67% share in IN Group). Stavmat’s issuer rating has been prepared on a standalone basis because Scope assesses parent support as neutral.

Outlook and rating-change drivers

The Outlook for Stavmat is Stable and incorporates Scope’s view that business growth will benefit from recently introduced government policies that are favourable for the construction industry. They will support a continuation of the positive construction cycle and thus stable operational cash flow. The Outlook further includes a HUF 5bn bond issuance with proceeds used to construct a new paving production line, which is anticipated to become fully operational in 2022. Increased indebtedness will drive up leverage, with a SaD/Scope-adjusted EBITDA of between 2.5-3.5x going forward.

A positive rating action could occur if Stavmat were to improve its business risk profile by significantly increasing its size and/or expanding geographically, which is less likely in the near future. Similarly, a positive action could be warranted by a SaD/Scope-adjusted EBITDA sustained at significantly below 2.5x, affording the company the headroom to maintain its financial policy.

A negative rating action may occur in the case of a SaD/Scope-adjusted EBITDA of above 3.5x on a sustained basis. This could be triggered by a reversal of the current positive multi-year business cycle in Hungarian construction, more specifically, through an interruption of current government subsidies, which would materially affect demand for construction materials.

Long-term and short-term debt ratings

The issuer plans to issue a HUF 5bn (approximately EUR 14m) bond in mid-2021 under the Bond Funding for Growth Scheme of the Hungarian National Bank. The bond’s tenor is 10 years with 10% of its face value subject to amortisation in 2026, 10% in 2027, 10% in 2028, 10% in 2029, 10% in 2030 and the remaining 50% in 2031. The coupon will be fixed and payable on an annual basis. Funds from the bond will be used for capex (HUF 4.3bn) for the partial financing of the construction of a paving production plant in Dabas, and related working capital needs (HUF 0.7bn). The bond will rank as senior unsecured, and the annual coupon is expected at 3% per year. There is no guarantee from the parent.

Scope has assigned a BB- rating to the senior unsecured debt of Stavmat, one notch above the issuer rating. The recovery assessment includes the planned HUF 5bn senior unsecured bond issuance. An ‘above average recovery’ (50%-70%) is expected for outstanding senior unsecured debt in a hypothetical default scenario based on a liquidation value method.

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

Methodology
The methodologies used for these Credit Ratings and Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: Retail and Wholesale Corporates, 17 March 2021), are available on https://www.scoperatings.com/#!methodology/list
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: 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 the 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 action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Eugenio Piliego, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 May 2021.

Potential conflicts
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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