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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B/Stable issuer rating on Hungarian construction company Szinorg Universal Zrt. (Szinorg), Scope has also affirmed its B+ rating for the senior unsecured debt category.

Rating rationale

The rating affirmation is driven by Szinorg’s robust performance in 2021 after delays in public procurements and private tenders in 2020 weakened results. Revenues in 2021 of HUF 23bn were 50% higher than in 2020 and 27% more than Scope’s forecast. Scope-adjusted EBITDA was HUF 1.7bn based on 2021 preliminary figures. This performance was mostly supported by a recovery in external procurements and additional projects in the backlog, mainly from the group’s main construction company, Hunép Zrt. Profitability, as measured by the Scope-adjusted EBITDA margin, slightly recovered to around 7% in FY 2021 from 5% in FY 2020. Increasing prices for raw materials are expected to put some pressure on profitability, but this will be partially mitigated by the company’s strategy to sign construction projects based on stages of works subject to fixed prices. The backlog as of February 2021 amounts to HUF 25bn (HUF 31bn for 2020), resulting in a backlog-to-sales ratio of 1.1x. It partly benefits from the government’s long-term investment plan for the Debrecen region, where the company mainly operates.

Szinorg’s business risk profile (assessed at B) continues to benefit from its position and presence in its core regional market of Debrecen. Customer diversification, with good outreach in terms of private and public sector customers (the latter accounted for around 45% of total revenues in 2021) is also credit-positive. The rating remains constrained by the company’s small scale in both a European and a Hungarian context, which lessens its ability to mitigate economic cycles. Weak geographical, segment and backlog diversification are further constraints.

In H1 2020, Szinorg issued a senior unsecured bond for a total of HUF 5bn, to partially finance its business plan and secure the project pipeline. The plan involves the build-up of the real estate portfolio (estimated capex of HUF 45bn to January 2022). Two projects are partially subsidised by the Hungarian state with HUF 3.7bn. However, given the significant size of the projects, external financing will still be required, with up to HUF 12.3bn in additional bank loans estimated until 2023. Main projects include the Bajcsy Hotel as well as industrial and residential developments.

The financial risk profile (assessed at B) is constrained by the expectation of higher leverage and negative free operating cash flow due to increasing working capital needs and the ambitious investment plan to build up a real estate portfolio. The portfolio, which will eventually generate recurring income and sales proceeds, along with the construction backlog will help to protect revenues and cash flow but will also put credit metrics under pressure for the next few years. From 2022, Scope foresees leverage as measured by Scope-adjusted debt/EBITDA to increase above 15x in 2023 before stabilising at a level commensurate with the rating category once the real estate developments are complete and provide a boost to the top line. Szinorg’s debt protection, as measured by its Scope-adjusted EBITDA interest cover, stood at above 10x in 2021, based on preliminary figures. Scope anticipates declining debt protection in the years to come, as a result of the expected higher leverage component in the company’s balance sheet. However, Scope forecasts that EBITDA interest cover will remain above 3.0x in the next few years.

Liquidity remains adequate, with over HUF 11.3bn of cash and equivalents as at December 2021, available overdrafts of HUF 3.9bn and a back-loaded debt maturity profile comprising a HUF 5bn bond maturing only in 2030 and no significant amount due before then. Nonetheless, the company will remain dependent on external liquidity to finance free operating cash flows (capex and working capital).

Outlook and rating-change drivers

The Outlook remains Stable and incorporates Scope’s expectation of i) continued positive operating cash flows; ii) the successful execution of real estate developments to generate recurring income and sales proceeds; and iii) stable backlog. Some risk could arise regarding newer projects in light of the elections in Hungary (April 2022), as about 50% of the backlog relates to public procurements.

A positive rating action is remote but may be warranted if business risk profile improved, with the development pipeline substantially growing in size and diversification improving (by customer and project), while Scope-adjusted debt/EBITDA remained at around 5x.

A negative rating action could occur if real estate developments saw significant delays or cost overruns. It could also occur if liquidity worsened, for example, through significant delays in customer payments or non-recoverable cost overruns in projects.

Long-term and short-term debt ratings

The rated entity issued a HUF 5bn senior unsecured corporate bond (ISIN HU0000359633) in H1 2020. Scope’s recovery analysis is based on a hypothetical default scenario in 2023, which assumes outstanding senior unsecured debt of HUF 5bn in addition to HUF 16.2bn in bank loans (HUF 12.3bn to finance capex and HUF 3.9bn assuming the company draws on available overdrafts). Scope expects an ‘above-average’ recovery for senior unsecured debt and therefore affirms the B+ rating for this debt category (one notch above 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: Construction and Construction Materials, 25 January 2022; Rating Methodology: European Real Estate Corporates , 25 January 2022), 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-EU. 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: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 25 February 2020. The Credit Ratings/Outlook were last updated on 2 March 2021.

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
© 2022 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.