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Rating action

Scope Ratings GmbH (Scope) has affirmed the corporate issuer rating of BB- on Hungarian auto parts company Unix Autó Kft. and changed the Outlook from Negative to Stable. Scope has also affirmed the BB- senior unsecured debt rating.

Rating rationale

The rating action follows the publication of Scope’s new rating methodology for retail and wholesale corporates on 27 April 2022. The new methodology assesses certain elements of the business risk profile differently without having an impact on the overall assessment. Scope’s review resulted in an affirmation of Unix Autó’s ratings and Outlook change to Stable from Negative to reflect Scope’s new base case which no longer indicates leverage pressure.

The business risk profile is rated at BB (unchanged). This is primarily driven by the increased profitability in Unix Autó’s key markets of Hungary and Romania in 2021 despite the falling demand prompted by the Covid-19 crisis. The revenue drop resulting from the ransomware computer virus of last year is also expected to be contained to HUF 1bn-2bn.

Revenues are stable, mainly due to the issuer’s somewhat smaller overall market size (-10%) being compensated for by the 10% price increase in 2021. The delivery of new cars by original equipment manufacturers has slowed due to the computer chips shortage, increasing input prices and supply chain issues, which caused the price of second-hand cars to increase in the first quarter of 2022. The increase in car services provided is also visible in the increasing volumes and margins in 2022. Unix Autó remains the market leader in Hungary for auto spare parts, with about one-third of the domestic market. The retail network is expected to be stable, no new shops are planned, and the network development is on hold. Unix Autó’s delivery of a very wide range of auto parts to service garages within a day or even an hour (up to 10 million auto parts) provides a competitive advantage. The dominance of Unix Autó was well exemplified by a recent instance in which other market players in Hungary were unable to fill the gap left by Unix Autó after a cyberattack prevented it from providing car garage services for a few days. Diversification is constrained by the core focus on Hungary and Romania and by products sold belonging to a single product category.

Profitability increased to above pre-Covid-19 levels with a reported EBITDA margin of 10.4% in 2021, up from 9.5% in 2020 and 6.1% in 2019, mainly due to own branded products (A.Z. Meisterteile, 50,000 different products) and price increases above inflation. The Romanian subsidiary (not consolidated) started also performing well after price increases. The company plans to consolidate the entity in the medium term to improve transparency.

The financial risk profile is rated at BB- (rated B+ last year). Leverage measured by the Scope-adjusted debt (SaD)/EBITDA ratio improved in 2021 to 2.5x (without netting of cash to 2.9x) from 3.1x in 2020 due to improved EBITDA of HUF 8.25bn, with a YoY increase of HUF 0.9bn, stable debt of HUF 23bn-24bn and higher-than-anticipated cash of HUF 3.3bn.

EBITDA interest coverage is expected to stay very strong at above 7x for the forecasted period, despite the higher cost of debt and a historical ratio of above 10x. The strong interest cover is forecasted to continue for the coming 2-3 years with no major debt repayment. Unix Autó has a HUF 12bn fixed coupon bond maturing in 2026, issued under the Hungarian National Bank’s programme. The short-term debt facilities drawn at HUF 11bn have a variable interest rate and are hence vulnerable to the soaring interest rates in Hungary, with financing costs to increase by 5%-6% in line with the increase in reference rate (BUBOR).

The company generates positive operating cash flow with a healthy funds from operations/SaD ratio of above 30%. However, cash flow is not enough to cover recent capex and the new capex plan, proved by the fact that once supplier balances and short-term debt were reduced through the bond’s proceeds, current investments have been again financed using short-term debt and increased accounts payables.

The new logistics centre is expected to be completed in Q3 2022 with proprietary automation technology. Efficiencies should be visible from 2023 onwards. In the meantime, Unix Autó started developing a production site in Budapest for own branded products. Unix Autó plans to produce some of its A.Z. Meisterteile products locally (10%-20% of its needs) as a response to possible supply chain disruptions. Production could be scaled up locally if needed. After over five years of negative free operating cash flow/SaD due to heavy investment, the ratio returned to a positive level in 2021, which is credit-supportive, although the new investment plan is again pushing this ratio very low, even slightly negative, which constrains the rating.

In terms of liquidity, Unix Autó benefits from the bond issued under the Hungarian National Bank’s programme. Short-term credit lines are also used to pay suppliers in advance to get discounts. Short-term facilities were rolled over successfully, out of which HUF 6bn was prolonged for three years until 2025, a more favourable term to the previous ‘until further notice’ (90 days). Scope estimates that the available credit line will be largely drawn on in the next one to two years as working capital needs increase with inflation.

The owner took out a dividend of HUF 2.5bn during 2021, in line with Scope’s base case. Dividends from 2023 onwards are projected to be significantly lower at up to HUF 500m yearly, with no dividend payments in 2022.

Scope views family businesses such as Unix Autó positively, but the issuer’s lack of multi-level decision-making and its loose financial planning are negative for environmental, social and governance considerations (negative ESG factor). The strongly ‘hands on’ management style is mitigated by an internal operational shared service centre for human resources, information technology, finance and marketing. No notching was applied for supplementary rating drivers.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook now reflects Scope’s expectation that Unix Autó will keep SaD/EBITDA at a more conservative level than previously expected. Scope has also updated its base case to indicate that the company’s achieved price increases and assumed growth in key markets should generate healthy profitability in the short to medium term.

A positive rating action is possible if SaD/EBITDA is sustained well below 3.5x while the automated warehouse becomes operational and the Romanian subsidiary is consolidated into the group, hence reducing some uncertainty and execution risk.

A negative rating action is possible if the financial risk profile deteriorated, exemplified by a SaD/EBITDA sustained above 4x or a funds from operations/SaD of below 15%.

Long-term and short-term debt ratings

Unix Autó’s senior unsecured debt is rated in line with the issuer rating, based on Scope’s expectation of an ‘average’ recovery.

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; Retail and Wholesale Rating Methodology, 27 April 2022) are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 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: Barna Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 August 2019. The Credit Ratings/Outlook were last updated on 21 June 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.