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Rating action

Scope Ratings GmbH (Scope) has upgraded the issuer rating of Masterplast Nyrt. to BB-/Stable from B+/Positive. Concurrently the senior unsecured debt rating has been upgraded to BB- from B+.

Rating rationale

The upgrade of the ratings is driven by Masterplast’s strong business performance in the last 18 months thanks to its broadened segmental setup (healthcare equipment) and a positive market environment (insulation materials) that will help to keep business afloat going forward. More importantly, corresponding investments in production capacities have been heavily subsidised (40%-80% of investment costs), maintaining credit metrics on track with gradual deleveraging.

Masterplast’s business risk profile (assessed at B+) is supported by its investments in production capacities focussing on the healthcare industry (medical fleece, multilayer membranes and personal protective equipment), slowly broadening the company’s industry setup. Scope estimates that the EBITDA contribution from the healthcare devices industry¹ (industry risk: A) will reach around 40% by 2023. Masterplast’s market entrance was kickstarted by the subsidised build-up of a modern production facility at the company’s headquarters in Sárszentmihály as well as a contract with the National Institute for Health Services Hungary to supply protective overalls for the coronavirus epidemic in April 2021 (contract value: around EUR 13m). The broadened industry setup will help to loosen the dependence on the construction cycle and its seasonality, stabilising intra- and year-on-year cash flow generation.

Business soared in the last twelve months to end-March 2021 as a consequence of investments made in recent years, with revenues and Scope-adjusted EBITDA up by 24% (EUR 136m) and 87% (EUR 14m) respectively. Additional investments in production capacities earmarked for 2021 and 2022 (insulation and medical equipment) will support further growth as well as Masterplast’s market positioning, especially in comparison to regional peers. However, Scope does not expect Masterplast to reach a critical size in the coming years, which would enable it to defend its foothold if larger competitors enter the niche markets in which it operates.

The company’s geographical setup has remained focussed on Europe. It has, however, slowly shifted away from CEE countries, with other markets contributing 22% of revenues for the twelve months to end-March 2021. This is a strong boost (+7pp YoY), benefitting from the expansion into Germany (Aschersleben). Diversification is further supported by the different end markets Masterplast serves (including the less cyclical end market of real estate maintenance, packaging and healthcare equipment) as well as its relatively broad range of products (more than 2,000) with limited dependence on single customers (top 10: 33% of H1 2021 revenues), all ensuring stable cash flow.

Masterplast was able to increase its profitability as measured by its Scope-adjusted EBITDA margin (last twelve months to end-March 2021: 10%) catching up to larger peers thanks to its strategic expansion into the healthcare devices industry. Scope forecasts that the Scope-adjusted EBITDA margin will increase to around 12% on a sustained basis, driven by higher existing and further investments in the extension of production capacities, product ranges and product availability. The strongest drivers of future profitability will be: i) the higher-margin production of healthcare equipment; ii) increasing demand for insulation material due to tightening regulation and government stimulus as regards energy efficiency; as well as ii) lower raw material prices.

Masterplast’s financial risk profile (assessed at BB+) is supported by the company’s strong debt protection and constant deleveraging despite investments made to build up production capacities. The company’s debt protection has remained strong, with a Scope-adjusted EBITDA interest cover well over 10x (last twelve months to end-March 2021: 23x). Masterplast has benefitted from the low interest rate environment, which helped to reduce the weighted average cost of debt to 1.9% as at end-June 2021 (-9bp YoY).

Masterplast plans to issue a third HUF 9bn (EUR 25m) bond under the Hungarian National Bank’s Funding for Growth Scheme. Scope forecasts a lower Scope-adjusted EBITDA interest coverage ratio of 10x-15x. This is based on negative carry for part of the bond proceeds, which will be used to increase Masterplast’s firepower for further capex or acquisitions, as well as the continuing exposure to floating interest rates.

The company plans to spend around EUR 44m² in capex in 2021 (including EUR 22m for medical fleece production capacities at its headquarters, operational since July 2021) and EUR 12m in 2022. Expansion capex is focused on investments in the issuer’s production capacities and product availability in 2021 and 2022 with regard to medical fleece, personal protection equipment, fiberglass mesh and XPS. Most of the related investments are subject to government grants covering 40%-80% of associated costs. This will limit the impact on Scope-adjusted cash flow from operations and keep leverage, as measured by the Scope-adjusted debt (SaD)/Scope-adjusted EBITDA ratio, on track with last twelve months leverage down to 2.7x (-0.8x YoY). Scope forecasts a further reduction in the SaD/Scope-adjusted EBITDA ratio, keeping it well below 3x going forward. Deleveraging should be supported by the anticipated strong EBITDA contribution from investments in medical fleece production capacities (Aschersleben, Sárszentmihály production facilities) as well as the ramp-up of production capacities for personal protective equipment and finished products, all contributing an estimated EUR 8m-9m per year.

Liquidity is adequate, as sources (EUR 15.9m of cash available as at YE 2020³) fully cover uses (EUR 6.2m in short-term debt as at YE 2020 and negative Scope-adjusted free operating cash flow of EUR 4.9m forecasted for 2021).

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s view that credit metrics will improve further, with an ongoing strong Scope-adjusted EBITDA interest cover and a SaD/Scope-adjusted EBITDA ratio of below 3.0x thanks to stable business performance, with investments made in recent years starting to pay off. Investments in the healthcare industry made in the first six months of 2021 and anticipated in the coming months will aid cash flow stability and loosen dependence on the construction cycle and seasonality.

A positive rating action may be warranted if the company can reduce its leverage to a SaD/Scope-adjusted EBITDA ratio significantly below 2.5x on a sustained basis. This could be driven by the successful expansion of the higher-margin business in special fleece, personal protection equipment and multilayer membrane production for the healthcare industry.

A negative rating action could occur if the SaD/Scope-adjusted EBITDA ratio weakened towards 4.0x. This could be triggered by a continuous, strong build-up in working capital and/or expansion capex beyond current expectations, leading to ongoing negative, debt-financed Scope-adjusted free operating cash flow not compensated by corresponding growth in the company’s EBITDA.

Long-term and short-term debt ratings

Masterplast issued two HUF 6bn senior unsecured bonds under the Hungarian National Bank’s Funding for Growth Scheme (one in December 2019 and one in December 2020). The company plans to issue another HUF 9bn senior unsecured corporate bond in Q3 2021 under the same programme. Proceeds are earmarked for further capital expenditure, acquisitions and to temporarily refinance short-term debt. The bond’s tenor is ten years and it will amortise from year six to year nine in equal instalments with a 50% balloon at maturity. The coupon will be fixed and payable on an annual basis.

Scope’s recovery analysis is based on the enterprise value calculated as a going concern. A continuation of the business in a default scenario seems to be likelier than a liquidation, as Masterplast already has a distribution network in several European countries, comprising subsidiaries in its core Eastern European countries as well as ‘external’ export partners, which are responsible for distribution in Masterplast’s export markets. This distribution network also has a value in itself, which would be lost if the company is liquidated. Recovery for all senior secured debt is estimated to be average, justifying a debt class rating equal to that of the issuer rating.

1. incl. equipment and devices
2. incl. maintenance capex of EUR 2.5m
3. Excl. grants received (EUR 17.4m) for the medical fleece production facility in Sárszentmihály

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 Outlook, Corporate Rating Methodology, 6July 2021, is 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 Rating if the Credit Rating 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: Philipp Wass, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 September 2019. The Credit Ratings/Outlook were last updated on 31 August 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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