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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B+ issuer rating on Hungarian construction materials wholesaler Stavmat Építőanyag Kereskedelmi Zrt. (Stavmat) and revised the Outlook to Positive from Stable. The rating for senior unsecured debt issued by Stavmat has also been affirmed at BB-.

Rating rationale

The rating action reflects stable credit metrics in difficult market conditions caused by the Ukraine-Russia war. The company faces volatile materials prices and potential shortages in raw materials, which lead to lower forecasted profitability for 2022. The Outlook change reflects Scope’s view of a less aggressive financial policy (supplementary rating driver).

Stavmat’s business risk profile (assessed at B+) continues to be constrained by its limited size, concentration on the small domestic market for the wholesale of building materials, high dependency on construction industry cycles and the volatile cost of materials. In 2021, revenue grew by more than 25% due to rising materials prices (contributing about half of revenue growth) and favourable market conditions created by government grants to households. This led to a significant increase in the Scope-adjusted EBITDA margin to 8.2%. Scope expects the construction market, the company’s key business driver, to stagnate because the Ukraine-Russia war is likely to exacerbate the volatility in materials prices and the shortage of raw materials. Stavmat has adapted to current market conditions by implementing daily pricing for many product types, which has also had a slight impact on its working capital management. Overall, Scope forecasts lower profitability of 6.6% in 2022 followed by a return to previous levels in 2023 after the concrete paving production plant is operational and thus, operating profitability becomes Stavmat’s main business risk profile driver.

The financial risk profile (assessed at BBB-) benefitted from the record-high Scope-adjusted EBITDA in 2021, resulting in an improvement in credit metrics such as Scope-adjusted debt (SaD)/ Scope-adjusted EBITDA, which was 2.1x instead of the forecasted 3.1x. For 2022, Scope forecasts credit metrics to deteriorate due to unfavourable market trends expected and Stavmat’s acquisition of a Debrecen site that was not included in the previous business plan. The construction of the Dabas paving plant has no cost overruns as Stavmat has been able to adapt (e.g. by changing suppliers). Still, Scope expects its completion to be delayed by a few months against the initial deadline. Once the plant is fully operational, expected in Q4 2022, Scope expects improving credit metrics, including a SaD/Scope-adjusted EBITDA decreasing below 2.5x by 2024. Scope assesses Stavmat’s liquidity as adequate, based on the current cash reserves (HUF 4.6bn as of end-December 2021) in combination with the solid cash flow expected and no debt repayment scheduled until 2026.

Although Stavmat has included an annual HUF 500m dividend payout in its business plan, the company has stated its intention to refrain from dividend payouts in the next years. Scope has no reason to believe that management will deviate from this position. Furthermore, 90% of the planned investment capex for the Dabas plant, the primary use of the bond proceeds, has been paid for, thus the execution risk related to the plant has been reduced. As such, Scope views the financial policy as less aggressive, but would need a longer track record before Scope could consider removing the negative one-notch adjustment. In Scope’s view, the company compares negatively (with a standalone rating of BB-) against peers regarding its size, but the associated risk (i.e. volatile cash flow, weaker competitive power) does not exceed the risk expressed by the B+ rating.

Outlook and rating-change drivers

The Outlook for Stavmat is Positive and incorporates Scope’s view that business growth will benefit from the recently acquired Debrecen site in addition to the start of production of the concrete paving plant in Q4 2022. Scope also assumes Stavmat’s ability to largely pass on inflationary pressures to its customers, which should support future growth. Scope expects an established track record of less aggressive financial policy, especially in light of the worsening market conditions (i.e. inflation, bottlenecks in supply-chains, volatility in Hungarian construction market). All should contribute to a SaD/Scope-adjusted EBITDA ratio of around 2.5x and stable operating cash flow.

The revision of Outlook to Stable may occur if none of the above were to materialise or if the company’s business were to become more correlated to the construction industry through a higher share of construction materials production.

A positive rating action could be warranted by a SaD/Scope-adjusted EBITDA at around 2.5x on a sustained basis while an extended positive track record of Stavmat’s less aggressive financial policy is obtained, Similarly, a positive action may occur if the company were to improve its business risk profile by expanding geographically to neighbouring countries, which is less likely in the near future.

A negative rating action may occur in the case of a SaD/EBITDA sustained above 3.5x. This could be triggered by a reversal of the current positive multi-year business cycle in the Hungarian construction market.

Long-term and short-term debt ratings

Scope has affirmed Stavmat’s senior unsecured debt at BB-, one notch above the issuer rating. The recovery assessment includes the HUF 5bn bond (ISIN HU0000360714). An ‘above average recovery’ (50%-70%) is expected for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on a liquidation value method.

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 this Credit Ratings and Outlook, (Corporate Rating Methodology, 6 July 2021; Retail and Wholesale Rating Methodology, 27 April 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Rating if the Credit Rating 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 Rating 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed
Lead analyst: Vivianne Kapolnai, Senior Analyst
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 May 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.