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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time rating of B+/Stable to ENSI Kft. Senior unsecured debt issued has been rated B+.

Rating rationale

The company’s business risk profile reflects its leading market position in a niche segment of the construction industry. Established in 1994, ENSI specialises in mechanical engineering (heating, cooling, ventilation and hot water) with a varied project portfolio and wide range of references (sports facilities, housing and office buildings, factories and warehouses). The rating benefits from the issuer’s robust credit metrics – operating without external financing and with an above-average Scope-adjusted EBITDA margin (2020: 13.6%). Scope expects operating profitability to remain close to historical averages in the future.

The rating is constrained by ENSI’s small scale, both in a European and Hungarian context. Its relatively small size makes the company more vulnerable to macroeconomic shocks and results in a weaker ability to mitigate economic cycles. The rating is further constrained by a lack of geographical diversification. ENSI is only active on the Hungarian market, with the vast majority of projects centred around the Budapest area. Moreover, the company’s contracted backlog covers a fairly short timeframe (one year), providing limited visibility on future cash flows.

Liquidity is adequate, as sources (HUF 2.28bn of cash available as at YE 2021 and Scope-adjusted free operating cash flow of HUF 2.2bn forecasted for 2022) fully cover uses (the company has no short-term debt as at YE 2021).

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s assumption that operating profitability will remain close to historical averages (Scope-adjusted EBITDA of around 14%) while Scope-adjusted debt/EBITDA remains around 3x. The Stable Outlook also reflects a successful HUF 5bn bond issuance under the Hungarian National Bank’s Bond Funding for Growth Scheme in Q1 2022.

A positive rating action is remote at this point but may be warranted if ENSI manages to improve its business risk profile – providing higher visibility on future cash flows and greater geographical diversification, while keeping Scope-adjusted EBITDA/Scope-adjusted debt at around 3.0x in the medium term.

A negative rating action might be warranted by Scope-adjusted debt/EBITDA of above 4.0x on a sustained basis, caused by worsening profitability or the need for additional external financing. Additionally, worsening of liquidity due to, for example, delayed customer payments or cost overruns might warrant a negative rating action. 

Long-term and short-term debt ratings

ENSI Kft. plans to issue a HUF 5bn bond under the Bond Funding for Growth Scheme of the Hungarian National Bank¹. Based on the indicative terms provided to us², the bond’s tenor is 10 years with 10%³ of its face value subject to yearly amortisation from 2027 onwards, with the remaining 50 % due in 2032⁴. The coupon, assumed at maximum 6.5%⁵, will be fixed and payable on an annual basis. Proceeds from the bond are earmarked for M&A: the acquisition of engineering material wholesalers and retailers, in line with the company’s strategy to enter this related segment and achieve synergies and economies of scale. The preliminary bond prospectus includes a 70 % cap on dividend payment during the tenor of the bond.

Scope’s recovery analysis is based on a hypothetical default scenario occurring at year-end 2023. The agency expects an ‘average’ recovery of the company’s unsecured debt, taking into consideration the possible volatility of the capital structure, resulting in B+ rating for this debt class (same as the issuer rating). 

Editorial notes:
1. This was amended on 18 January 2022. In the original publication the text stated "MNB Bond Funding for Growth Scheme".
2. This was amended on 18 January 2022. In the original publication this sentence was not in the text.
3. This was amended on 18 January 2022. In the original publication the percentage of the bond's face value subject to amortisation was 6.5%.
4. This was amended on 18 January 2022. In the original publication the text stated "subject to amortisation starting from the fifth year of its issuance".
5. This was amended on 18 January 2022. In the original publication there was no assumption on the maximum percentage of the coupon.

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 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: Istvan Braun, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 17 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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