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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time rating of BB/Stable to Vöröskő Ltd. Senior unsecured debt is rated BB.

Rating rationale

The business risk profile (assessed at BB-) is supported by the group’s strong positioning in Hungary. Scope considers its market shares (currently number two in the country) to be well protected against new entrants and existing competitors. These market shares are likely to develop in the coming years thanks to the group’s investment in an automated warehouse, financed by an upcoming Central Bank of Hungary bond. Vöröskő is well positioned in the trend toward multichannel and has benefitted from the pandemic and the associated increase in demand, doubling its percentage of online sales (to 20% in June 2021). While online sales are expected to normalise in the short-to-medium term, this development is expected to allow the group to optimise and continue reshuffling its brick-and-mortar strategy by launching new types of stores. The group has a strong presence as a retailer of home improvement products (mainly small and large household appliances), and it aspires to develop the range of products it offers by capitalising on its recent acquisition of private label manufacturer Dyras Ltd. Geographical reach is limited given that Vöröskő is only present in Hungary (67 stores across the country). The group’s membership in Euronics International Ltd. (Europe’s largest electronic goods procurement alliance), gives it brand recognition as well as better procurement possibilities in terms of prices and currencies by cancelling forex risk in its operations. However, low profitability (defined as the Scope-adjusted EBITDA margin, which has oscillated between 4.0%-4.5% in recent years) constrains the rating of the business risk profile mainly due to a low overall gross margin. Scope expects the group’s Scope-adjusted EBITDA margin to remain at a similar level in the coming years due to the group’s development aspirations.

Vöröskő’s financial risk profile (assessed at BB+) benefits from strong credit metrics. Apart from its upcoming bond issuance, the group has financed most of its development internally in recent years, and its historical Scope-adjusted debt (SaD) is mainly comprised of lease adjustments related to stores. With the HUF 7bn bond issuance, leverage metrics (SaD/EBITDA and funds from operations/SaD) will deteriorate to levels slightly above 3x and under 30% in 2022/23 respectively versus below 2x and above 50% historically (due to the change of the accounting year from December to June in 2021, the 2021 metrics only show six months). Scope expects leverage to improve to levels close to 2.5x and above 30% in 2023/24, year when the large capex investment finishes. Interest cover is expected to remain strong in the coming years at close to or above 6x, despite Scope’s expectation of higher interest rates due to rising national rates. Free operating cash flow has always been under pressure as the group has been strongly affected by large variations in net working capital over the last few years. Scope expects the automated warehouse will enable the group to manage its inventories more efficiently, but the agency also expects net working capital and the capex programme financed by the bond to put pressure on free operating cash flow in the coming years. Consequently, Scope expects free operating cash flow to remain negative for the next two years, followed by a reversal to positive levels in 2024. Liquidity is adequate, supported by an overall absence of financial debt (excluding the bond) and by a revolving credit facility of HUF 5.3bn. 

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation that SaD/EBITDA will oscillate between 3.0x and 3.5x in the coming two years while the group maintains Scope-adjusted EBITDA margin between 4.0%-4.5%. Apart from the bond issuance under the Central Bank of Hungary programme, Scope does not expect any debt issuance or M&A transactions.

A positive rating action could be warranted if SaD/Scope-adjusted EBITDA improved to levels substantially below 3x on a sustained basis due to stronger Scope-adjusted EBITDA resulting from better cost optimisation. This could stem from ramping up Dyras’ private labels or from lower processing costs for online orders thanks to the new automated warehouse and a new web engine.

A negative rating action could be taken if the business risk profile significantly deteriorated or if SaD/Scope-adjusted EBITDA increased to levels approaching 4x. This could be driven by a deterioration in profitability of scope-adjusted EBITDA margin reaching levels below 3.5% due to tougher competition putting pressure on prices or by a new debt issuance. 

Long-term and short-term debt ratings

Scope has assigned a rating of BB on Vöröskő’s senior unsecured debt. The instrument rating is based on a hypothetical liquidation scenario in 2023, in which Scope computed an ‘average’ recovery for senior unsecured debt holders. No notching was applied to the issuer rating.

Vöröskő plans to issue a HUF 7bn senior unsecured corporate bond under the Central Bank of Hungary’s Bond Funding for Growth Scheme. The bond is expected to have a 10-year tenor with amortisation beginning in the fifth year and a 50% bullet repayment at maturity. The bond coupon will be fixed and payable on an annual basis. Proceeds are earmarked for real estate acquisitions (headquarters in Budapest and stores), automating the Üllő warehouse and store development. 

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: 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, the Rated Entities' Related Third Parties 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: Adrien Guerin, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 13 January 2022.

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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