The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed its B/Stable issuer rating on DVM Group Kft. (in December 2020, three DVM entities – D.V.M. Construction Kft., DVM Fővállalkozás Kft. and DVM Design Kft. – merged to form DVM Group Kft., the legal successor to D.V.M. Construction Kft.). Scope has also affirmed the B+ rating for the senior unsecured debt category.

Rating rationale

The rating affirmation of DVM Group Kft. (DVM) is driven by its strong performance in 2020. The company generated revenues of HUF 27bn (38% more revenue than in 2019 and 52% more than Scope’s forecast), despite the impact of Covid-19 on the economy. This performance was mainly supported by DVM’s base-building activities, which held up well during the pandemic (135% growth YoY). DVM’s backlog of projects has also grown, totalling HUF 75bn as of May 2021 significantly above the HUF 45bn of April 2020 and equating 2.7x 2020 revenues. While top-line figures have improved considerably, the crisis has impacted the company’s profitability. This was mainly due to: i) postponements in several fit-out projects – activities which have higher profitability margins; and ii) increased material prices, with base-building projects subject to fixed contracts. Nonetheless, Scope believes the improved backlog and a higher expected contribution from fit-out activities will help the company to protect revenues and profitability in the next few years.

In H2 2020, DVM issued a senior unsecured bond for a total of HUF 8bn to finance its business plan and secure the pipeline for the group. As part of this plan, the company has set up a joint venture with MV Development Limited for a new 6,000 sqm office development and has contributed a HUF 6.4bn to finance the acquisition and development cost of this project. In addition, DVM has acquired a plot (HUF 500m) to develop a logistics building with a total cost of HUF 4.3bn.

DVM’s business risk profile, assessed at B, continues to benefit from its good vertical integration. This includes a wide range of services in the different stages of the construction chain (design, project management, contracting, base building, and fit-out services). DVM also has a good domestic network and long-standing relationships with its main clients. The rating remains constrained by the company’s small scale in both a European and Hungarian context. Weak diversification is a further constraint, namely: i) a lack of geographical diversification; ii) a high reliance on one segment (building activities); iii) a strong reliance on some key customers; and iv) a concentrated backlog.

The company’s financial risk profile (assessed at B+) reflects moderate leverage. Scope-adjusted debt (SaD)/Scope-adjusted EBITDA was 3.7x as of December 2020 and Scope foresees it to decrease to 3x as company does not intend to add additional debt in the next few years. Free operating cash flow was negative in 2020, driven primarily by the company’s investment activities, mainly co-development projects. However, Scope expects free operating cash flow to remain positive in the next few years as the HUF 3.7bn of capex planned in the period to 2022 can be mostly covered by operational cash flows. Regarding contingent obligations, DVM and Horizon Development are the second range guarantor in the Unicredit loan (about EUR 54.5m) used to finance the development of Szervita Square, an office building in Budapest, while the property (asset market value of EUR 63.2m as of March 2021) is the collateral. The probability that the guarantee will be called upon is remote.

DVM’s liquidity is adequate. Liquidity benefits from a backloaded debt maturity profile comprising a HUF 8bn bond maturing in 2030, with a first instalment (HUF 2.4bn) due in 2026 and no significant amount due in the coming years. Scope expects the company’s low short-term debt levels to be maintained going forward and to be sufficiently covered by available financing sources. 

Outlook and rating-change drivers

The Outlook for DVM remains Stable and incorporates Scope’s view that the company will continue to produce positive operational cash flows based on its current backlog. It also reflects the agency’s expectations of a successful execution of current co-development projects as well as a decrease in SaD/Scope-adjusted EBITDA to below 3x. While Scope believes that credit metrics will improve, especially leverage, the company’s small size and low diversification significantly threaten cash flow stability. Thus, Scope expects a tangible improvement in cash flow diversification going forward, which could be driven by a higher EBITDA share of the more granular fit-out business.

A positive rating action might occur if Scope’s rating scenario materialises, including the sustained maintenance of a backlog above 2.5x, combined with higher diversification (customers and projects) while keeping SaD/Scope-adjusted EBITDA below 3.5x on a sustained basis.

A negative rating action could occur if projects suffered significant delays or cost overruns, or if liquidity worsened. The latter could happen if, for example: i) customers delay payments significantly; or ii) the company becomes exposed to the non-recoverable cost overruns of its projects.

Long-term and short-term debt ratings

The rated entity issued a HUF 8bn senior unsecured corporate bond (ISIN HU0000359781) under the MNB Bond Funding for Growth Scheme in the second half of 2020. The bond has a 3% coupon and is amortising, starting in 2026, with a tenor until 2030.

Scope’s recovery analysis was based on a hypothetical default scenario occurring at year-end 2022, in which the rating agency assumed outstanding senior unsecured debt of HUF 8.0bn and no additional secured bank debt. The result was an ‘above average recovery’ for the company’s unsecured debt. Scope therefore affirms the B+ rating for this debt category (one notch above the issuer rating).

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, (Construction Corporates Methodology, 15 January 2021; Corporate Rating Methodology, 26 February 2020), 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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the 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 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: Rigel Patricia Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 26 May 2020.

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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.