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 the BB/Stable issuer rating of Abroncs Kereskedőház Kft (AKH) along with its BB long-term senior unsecured debt rating.

Rating rationale

The affirmation of the issuer rating is supported by the company’s strong results in 2020. Despite the Covid pandemic and a weaker Hungarian tyre market, AKH increased EBITDA from HUF 638m to HUF 1.14bn and doubled the EBITDA margin to 4.6%. In the same year, AKH also successfully placed a HUF 3.5bn bond under the Hungarian central bank’s Bond Funding for Growth Scheme. This new bond has a maturity of seven years, with amortisation and 50% repayment upon maturity. The bond proceeds are earmarked only for refinancing all debt except the overdraft facility. In October 2021, AKH announced the full acquisition of Slovakian dealer ARS from Bridgestone for EUR. ARS is a retail specialist in Passenger Car, Truck and Bus tyres. It operates seven outlets across the country. In Truck and Bus tyres, ARS has a market share over 30%. The newly acquired company, generates HUF 4bn-5bn in revenues and has 80 employees.

The issuer rating continues to reflect AKH’s leading position and high market share in tyre retailing, holding more than 30% of the Hungarian market. This is the consequence of the company’s strong presence in BtoB and BtoC distribution supported by the extended brand portfolio and well-spread presence in Hungary. The partial integration of its model, brought by car services stores and the exclusive partnership with BP Lubricants (around 7% market share), has also allowed it to reduce its exposure to the seasonality inherent to the tyre market and diversify its offering beyond only one product type. In addition to lubricants, AKH can rely on its strong relationship with its suppliers, exhibited by the balanced mix between exclusive and semi-exclusive products and other brands including those of worldwide tyre-makers (among them, Continental and Bridgestone). Despite the strong market share in Hungary, the business risk profile is limited by AKH’s small size, strong competitors, low prospect for domestic growth and low potential for expansion.

The business risk profile is also still constrained by the weak diversification by geography (80% of revenues from Hungary) and by type of product sold. The acquisition of ARS, while expanding the geographical outreach (expecting to reduce the share of revenues from Hungary to below 70%) and types of products sold, does not change the overall business risk profile assessment due to the company’s limited size. On the other hand, Scope views positively the diversified pool of customers (car leasing companies and retailers) and the diversified sales channels with an increasing share of BtoC online sales. The latter has grown by 250% during the pandemic crisis, above the HUF 1bn revenue mark. In addition to a better brand mix and controlled opex, profitability surged from 2.3% in 2019 to 4.6% in 2020. Nevertheless, the margin, driven by seasonality and the high share of BtoB distribution in revenues, remains below average and continues to put pressure on the rating.

AKH’s financial risk profile is a clear support of the rating case thanks to the good credit metrics including high interest cover and low leverage. With the acquisition of ARS, credit metrics including the Scope-adjusted net debt/EBITDA ratio are expected to remain under control at below 3.0x. In addition, liquidity is adequate with no large, short-term debt except for the HUF 200m bond amortisation in 2021 and 2022 following the refinancing of bank loans with the bond issued under the central bank scheme. The negative driver of the financial risk profile is the volatile free operating cash flow generation driven by low capex (below 2% of sales) but highly volatile working capital. The consolidation of ARS should lead to a higher working capital consumption and higher capex. Consequently, this is expected to weigh on free operating cash flow.

Scope’s rating base case assumes ARS’s consolidation into the group from 1 January 2022 (although it was acquired in the second half of 2021) as well as no shareholder remuneration.

Outlook and rating-change drivers

The Outlook is Stable and incorporates the expectation that Scope-adjusted debt/EBITDA will remain below 3.0x and the assumption that no dividends will be paid in the coming years. The Outlook also reflects Scope’s expectation of continued positive performance with a limited impact from the Covid pandemic.

A positive rating action could be warranted by an improvement in AKH’s business risk profile, which could be achieved via better diversification, or a material increase in operating margins.

A negative rating action may be taken if Scope-adjusted debt/EBITDA increased towards 3.5x on a sustained basis or significant shareholder remuneration was undertaken contrary to Scope’s expectations. An increase in leverage could be triggered by a rise in net debt from larger-than-anticipated capex and working capital consumption.

Long-term and short-term debt ratings

All senior unsecured debt is issued by Abroncs Kereskedőház Kft. The recovery assessment is based on a hypothetical default scenario in 2023. Scope’s recovery analysis indicates an ‘average’ recovery for senior unsecured debt. This expectation translates into a rating of ‘BB’ for this debt category.

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; 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 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: Thomas Langlet, Senior Analyst
Person responsible for approval of the Credit Rating: Olaf Tölke, Managing Director.
The Credit Ratings/Outlook were first released by Scope Ratings on 20 November 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.