The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB/Stable issuer rating of Hungarian agricultural and construction machinery distributor AXIÁL Javító, Kereskedelmi és Szolgáltató Kft. The senior unsecured debt rating has been affirmed at BB+.

Rating rationale

The rating affirmation is driven by AXIÁL’s good financial performance despite current inflation and supply chain bottlenecks.

In 2021, AXIÁL recorded HUF 104.5bn in revenues (up 14.4% YoY), mainly thanks to the increase in machinery prices driven by inflation. Scope-adjusted EBITDA increased to HUF 12.5bn (up 31% YoY). Despite higher expected inflation, Scope forecasts profitability to be around 9%. The increase in machine prices is unlikely to affect margins as AXIÁL can pass such increases on to its customers as long as farmers’ incomes benefit from higher commodities prices. Scope also expects all of AXIÁL’s Hungarian competitors to increase prices for inflation.

The rating reflects the company’s status as one of the top three agricultural machinery dealers in Hungary with the leading position in spare parts and a market share of 20%-25% in Hungary’s agricultural machinery sector. The company benefits from a good position in a niche market, which ensures stable revenues. Demand from farmers for AXIÁL’s products will also increase thanks to Hungary’s ‘Agriculture 4.0’ reform, which impacts farm management and includes substantial support packages for farmers to modernise farming, for example, through data-driven precision methods. This will represent an approximately HUF 150m non-repayable grant per farmer. At least 7% of each application must be dedicated to digital solutions or services.

AXIÁL’s business risk profile is constrained by its low geographical diversification despite adequate product diversification (50% of total net sales come from new agricultural machinery and 30% come from spare parts). The highest non-domestic country exposure represents less than 10% of total consolidated net sales. This is too small to offset any negative macro developments in its home market of Hungary. AXIÁL also has to deal with an ageing, shrinking labour force in the agricultural sector. It is overcoming this negative factor by focusing more on construction, where its sales have been modest compared to the agricultural sector.

With the outbreak of the war in Ukraine, a country which produces much of the world’s wheat, Hungary could have a role to play to compensate for the lower agricultural export from Ukraine by further increasing its production. This would be positive for AXIÁL’s business.

AXIÁL is the exclusive distributor of several globally known brands, such as Claas, Manitou, Fendt, Horsch and Hyundai, which emphasises its status as an expert in the sector. Nevertheless, AXIÁL has had some delays in machinery delivery. To overcome that issue and meet any additional demand, the company decided to increase its level of inventory, leading to HUF 2.6bn in net working capital outflow in 2021 and HUF 1.6bn anticipated for 2022.

Scope expects AXIÁL’s leverage, measured by Scope-adjusted debt (SaD)/Scope-adjusted EBITDA, to remain around 2x in the medium term and interest cover to hover above 10x. The overall financial risk profile remains constrained by free operating cash flow generation, which remains low despite being positive.

AXIÁL’s liquidity position is adequate as i) most short-term debt has been repaid from bond proceeds; and ii) the issuer benefits from committed short-term credit lines totalling HUF 2.9bn. The company must repay HUF 9.9bn in 2022. AXIÁL also has HUF 7.8bn of available cash and equivalents as of 31 December 2021. For 2022, unrestricted cash will amount to HUF 6.1bn, to be reinforced by short-term committed lines expected at HUF 2.9bn.

Outlook and rating-change drivers

The Stable Outlook incorporates Scope’s view that key credit metrics will remain strong over the next three years, with a SaD/Scope-adjusted EBITDA ratio of around 2x, while the issuer remains a top-three agricultural machinery dealer in Hungary. Scope’s rating case also projects stable profitability, with a Scope-adjusted EBITDA margin of around 9%.

A positive rating action is seen as remote but could be warranted if AXIÁL’s business risk profile improved. This could occur because of significant growth or greater geographical diversification, in combination with SaD/Scope-adjusted EBITDA reaching below 2x on a sustained basis. The latter could be triggered by continual improvements in working capital management and/or a lower dividend payout.

The ratings could come under downward pressure if AXIÁL’s leverage (SaD/Scope-adjusted EBITDA) moved towards 4x on a sustained basis due, for example, to higher capital expenditures and/or a higher dividend payout.

Long-term and short-term debt ratings

Scope has affirmed the senior unsecured debt category at BB+. Scope still expects an ‘above average’ recovery for senior unsecured debt, including for the HUF 15bn bond issued in September 2020 under the Hungarian National Bank’s Bond Funding for Growth Scheme. This recovery expectation translates into a BB+ rating for senior unsecured debt. Scope highlights that senior unsecured debt has a subordinate ranking to payables and to debt raised for working capital financing. 

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: Anne Grammatico, 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 9 June 2020. The Credit Ratings/Outlook were last updated on 14 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
© 2021 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.