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Rating action

Scope Ratings GmbH (Scope) has assigned Magyar Gomba Kertesz Kft. (MGK) an issuer rating of B/Stable. Scope has also assigned a debt category rating on senior unsecured debt of B+.

Rating rationale

MGK’s business risk profile is largely supported by its good profitability. Its EBITDA margin improved from 10.8% in 2018 to 14.1% in 2020 thanks to better yield rate production, currency effects (with export sales denominated in EUR accounting for 42% in 2020), and the rise in mushroom market prices The compound annual growth rate of the average net market price of mushrooms between 2015 and November 2021 was 8.99%. However, MGK’s EBITDA margin could deteriorate slightly from 2022 onwards due to rising labour prices and the risk of higher procurement prices. The company sources its mushrooms from the members of the cooperative, which are also the shareholders of MGK. The company’s leading position in Hungary – where it is responsible for 29% of the mushroom supply – is positive, in Scope’s view. Nevertheless, the rating is constrained by MGK’s limited overall size compared to other European players. MGK’s 2020 revenues stood at HUF 6.8bn and it sold around 8,000 tons of mushrooms. This represents a market share in Europe of under 1%, even if the company will increase sales volumes by utilizing and building on existing customer relations with well-known retail chains (expansion on domestic and regional markets).

Scope views current diversification as negative for the company’s business risk profile. MGK is mainly exposed to the Hungarian market, which accounts for 58% of total revenues. Scope expects this concentration to worsen as Hungary will account for 66% of the company’s turnover by 2023. MGK’s product portfolio is also very limited as it markets almost only mushrooms, although the company focuses on adapting to end-customer needs (canned mushroom, semi-finished, frozen mushroom products). Additionally, customer diversification is rather low, as the top five clients account for 87.9% of sales, partially mitigated by the fact that they are large well-known retail chains in Hungary and in the CEE region. The company operates part of its business under the brand Korona Gomba. Scope assesses the brand strength as low, given the fact that 70% of MGK’s sales are made under retailers’ private labels.

MGK’s financial risk profile is positively driven by an anticipated decrease in leverage from 4.5x in 2020 to 2.9x in 2021E. Although part of this improvement is due to the increase in EBITDA (+47% YoY), state subsidies of HUF 2.1bn granted in 2021 are the main contributor to deleveraging. MGK will invest around HUF 2bn per annum (vs HUF 0.6 bn in 2020) in its expansion strategy, which it expects to double its volumes of mushrooms sold from 8,000 tons in 2020 to 18,000 tons in 2023. These investments are expected to be partly financed by the issuance of a HUF 2.5bn senior unsecured bond with ten years’ maturity, under the MNB Bond Funding for Growth Scheme. The bond will be amortised at a 10% rate per annum starting in year five until year nine. 50% of the outstanding bond will be repaid at maturity.

The combination of a large capex programme and recurring negative working capital, driven by the surge in sales, will put pressure on free cash flow generation and cause leverage to deteriorate starting in 2022. Scope forecasts that leverage, measured by Scope-adjusted debt/EBITDA will remain between 3.0x and 4.0x while reaching 3.5x in 2022E. Free operating cash flow is the main constraint on MGK’s financial risk profile as it is recurringly negative and is not expected to improve in the medium term. The company’s creditworthiness is also limited by a track record of inadequate liquidity due to a low cash balance, negative free cash flow generation and the lack of undrawn credit facilities. The limited transparency of financial disclosures and governance concern, including the relationship between the shareholders and the cooperative, are further risks.

Outlook

The Outlook is Stable and incorporates Scope’s expectation of stable credit metrics, with net debt/EBITDA in the 3.0-4.0x range on average and EBITDA interest coverage of above 7x. The Outlook also includes the expectation that liquidity (which Scope currently views as inadequate) will not improve in the next 12 to 18 months.

A positive rating action could be achieved if the company successfully ramps up production that positively affects the overall business risk profile and shows ability to generate positive FOCF that will keep leverage at moderate levels for the rating category.

A negative rating action could be required if leverage surges above 4.0x on a sustained basis. Financial leverage exceeding 4.0x could, for example, be triggered by a significant deterioration in working capital and lower than expected operating profitability.

Long-term debt rating

Scope assigns a B+ to the senior unsecured debt category of Magyar Gomba Kertesz Kft. This instrument rating is based on a hypothetical liquidation scenario as of year-end 2023, in which Scope computed an above -average recovery for senior unsecured debt holders based on the agency’s assumptions of attainable liquidation values.

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: Consumer Products, 30 September 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-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 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: Thomas Langlet, Senior Analyst
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 11 February 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
© 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.