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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB-/Stable issuer rating on Vasútvill Kft. Scope has also affirmed its BB- rating for the senior unsecured debt category.

Rating rationale

While the company managed to continue its operational construction activities uninterrupted, despite the impact of Covid-19 on the economy, Vasútvill’s revenues were 12.4% lower in 2020 than in the previous year and were also slightly below Scope’s forecast (- 5%). Revenue generation in the year was mainly supported by Vasútvill’s core project, the electrification of the 55 km line section between Szabadbattyán and Balatonfüred, which was completed on time in spite of the pandemic.

However, the crisis has impacted the construction industry as it has led to delays in public procurements and private tenders. This resulted in a weaker backlog of signed projects, totalling HUF 22bn as of May 2021 compared to HUF 32bn in May 2020 and equating 1.8x 2020 revenues (2.2x in the previous year). Profitability, as measured by the Scope-adjusted EBITDA margin, was also below the previous year’s margins and below Scope’s forecast (down to 16% in FY 2020 from 19% in FY 2019). Scope expects profitability to deteriorate as the company has signed projects (about 70% of the contracted pipeline) together with its strategic partners, Homlok Zrt. and R-Kord Kft., in which it will have the role of subcontractor. This role will reduce Vasútvill’s achievable profit margin for the next few years. Scope foresees profitability remaining slightly below 10%, still above that of other construction peers but leaving Vasútvill less room to compete if other players enter the market.

Vasútvill’s business risk profile (assessed at B+) continues to be driven by its position as the leader in its domestic niche market, railway overhead line construction. Vasútvill benefits from its specialisation in this one specific market, in which it has a long track record of over 70 years. The company also benefits from a business model that covers the whole business chain in the railway construction segment, as well as its longstanding relationships. The rating remains constrained by Vasútvill’s small scale in both a European and Hungarian context, which weakens its ability to mitigate economic cycles. Weak diversification is a further constraint, namely: i) a lack of geographical diversification; ii) a high reliance on one end-market; and iii) a concentrated customer portfolio and backlog in a segment where demand is mostly dependent on government demand and strategy. The rating is also negatively impacted by the company’s profitability score given the medium-term trend of deteriorating margins. This translates into a weaker business risk profile.

Vasútvill's financial risk profile (assessed at BB) benefits from a conservative debt strategy, as evidenced by its very low debt levels up to 2020. In the summer of 2020, the company announced the issuance of a HUF 8bn bond to finance its expansion plans via the acquisition of smaller players (HUF 5bn) and also to finance net working capital (HUF 3bn), which was incorporated into Scope’s rating case. By the end of 2020, Vasútvill had reviewed its business plan and decided to reduce the issuance to a HUF 3bn senior unsecured bond to finance net working capital requirements. Although financial debt rose after the bond emission, the increase was less than expected. Vasútvill’s unrestricted cash and cash equivalents currently exceed its limited financial debt, which results in negative Scope-adjusted debt and, ultimately, in strong credit ratios for the next few years. However, as potential expansion remains part of Vasútvill’s business plan – likely to be financed via a new bond issuance – the company’s present net cash position is of a temporary nature in Scope’s view.

On the other hand, Scope notes the large dividend payments in the three last years (HUF 2.2bn in FY 2020), which the company forecasts will continue. Although these are not implemented as an established policy, Scope sees the practice as an aggressive financial policy because it erodes cash flow generation and will not be supportive if profitability declines.

Liquidity is adequate and benefits from the company’s conservative, back-loaded debt maturity profile, with no significant amount due in the coming years. The company has financial leases implying a yearly amortisation of approx. HUF 409m in 2021 and HUF 40m from 2022 on. Given the long maturity of the prospective MNB bond, Scope believes that upcoming short-term maturities are likely to be manageable for the foreseeable future. Scope anticipates that Vasútvill’s low short-term debt levels will be maintained going forward, however, the agency does not see as sustainable the company’s net cash position in the medium term.

Outlook and rating-change drivers

The Outlook for Vasútvill remains Stable despite the expected decrease in profitability, as measured by the Scope-adjusted EBITDA margin. Scope continues to expect the company’s present net cash position to be temporary – and foresees the management returns to its initial aim of making acquisitions in the medium term. However, Scope’s base case still assumes that leverage will not exceed 3.5x in this event.

A positive rating action is unlikely but could be warranted if the company achieves substantial growth, affording better geographical and customer diversification, with a Scope-adjusted EBITDA margin recovering to significantly above 10% on a sustained basis, as a potential consequence of new orders, all this combined with a more supportive dividend policy.

A negative rating action could occur if Vasútvill’s leverage exceeds 3.5x on a sustained basis or its market position weakens, leading to lower revenues and profitability margins than projected in Scope’s base case scenario i.e. significantly below 10%. The latter could occur if no additional projects are won or the company maintains an aggressive dividend policy.

Long-term and short-term debt ratings

The rated entity issued a HUF 3bn senior unsecured corporate bond (ISIN HU0000360151) in Q1 2021, to partially finance future working capital requirements. The bond terms include amortisation of 20% yearly from 2026 until maturity, a fixed annual coupon and a 10-year tenor.

Scope’s recovery analysis is based on a hypothetical default scenario in 2022, factoring in Vasútvill’s liquidation value, and assuming outstanding senior unsecured debt of HUF 3bn. Scope expects an above average recovery for Vasútvill’s senior unsecured debt and therefore affirms the debt class rating of BB- in line with 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/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Construction Corporates, 15 January 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 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 July 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
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