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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer rating of Masterplast Nyrt. Scope has also affirmed the BB- rating on senior unsecured debt.

Rating rationale

The affirmation is driven by forecasted improved cash generation, since regulatory tailwinds and the end of the capex-heavy expansion phase (2020-2022) provide headroom to keep credit metrics commensurate with the assigned financial risk profile (assessed at BB+) amid a challenging environment. Strong growth and improved segment diversification will cement Masterplast’s market position and stabilise profitability at current levels, thus supporting its business risk profile (assessed at B+).

Masterplast remains a relatively small player in the construction materials industry. It is, however, constantly growing and achieved a revenue of around EUR 205m (up 51% YoY) and Scope-adjusted EBITDA of EUR 24m (up 65%) for the 12 months to end-March 2022. It achieved strong growth on the back of i) substantial capital expenditure of around EUR 64m since 2020 to build and acquire new production facilities and ii) a focus on product availability (high inventory levels, limited impact on supply chains given regional production facilities and own distribution/logistics capabilities) to gain market share during the Covid-19 pandemic and support customer loyalty.

Scope expects Masterplast to keep growing by increasing its capacity (expanded polystyrene production in Italy); further increasing the share of self-manufactured products (extruded polystyrene production in Serbia); focusing on personal protective equipment for the healthcare industry; and opening a new division dealing with the modular/industrial production of building units. Overall Masterplast is expected to invest between EUR 25.0m-27.5m in its production capacity and product availability in 2022.

Furthermore, sales growth should benefit from supportive trends such as the EU’s goal of becoming carbon neutral by 2050 and the increasing importance of healthcare (aging society, steady health expenditure growth). Consequently, the company’s sales of insulation materials (50% of sales for the 12 months to end-March 2022) benefits from i) regulatory tailwinds with most EU member states subsidising investments into properties to reduce energy consumption and CO2 emissions¹ and ii) the development of recyclable insulation systems (ESG factor: credit positive).

While the improved ability of European states to manage Covid-19 has put an end to the special economic situation that boosted sales in the healthcare division, future EBITDA contribution should increase to around 25%. EBITDA is supported by additional production capacity for hygiene textiles (spinbond and integrated film extrusion) and the development of personal protective equipment that is currently subject to an ongoing certification process. Once personal protective equipment is certified, sales from the healthcare division will increase again. Market access is supported by Masterplast’s position as a domestic producer and high-profile hires.

In 2023, Masterplast will start the modular/industrial production of building units for multiple purposes (commercial and residential) targeting real estate developers as end-customers. This new segment should be supported by i) established supply chains and the issuer’s own production background for most materials needed and ii) limitations in the current construction environment, such as availability of labour and materials, price surges, declining purchasing power. However, even if Masterplast does not compete with developers (rather acting as an extended work bench) it will take some time to gain a sufficient foothold given other competing products at a lower price (e.g. containers) and the limited customer awareness regarding the touch and feel of prefabricated modules.

Masterplast increased its profitability as measured by its Scope-adjusted EBITDA margin (last 12 months to end-March 2022: 11.6%, up 104 bp). Profitability is likely to remain around 12% on a sustained basis, driven by existing investment as well as new investment into its production capacity, product ranges and product availability including a strong build-up of inventory. The latter will likely impact 2022 profitability as a large share of inventory was built-up close to peak prices of raw materials (April 2022) that have now already softened to below January 2022 levels. 2023 will see improved profitability thanks to Masterplast’s ability to increase its share of self-manufactured products (internalisation of supplier margin) from additional extruded polystyrene production capacity built-up in Serbia, replacing suppliers by early 2023.

Masterplast has strong debt protection with a Scope-adjusted EBITDA interest cover well over 10x in the last few years (last 12 months to end-March 2022: 18x). Scope forecasts a lower Scope-adjusted EBITDA/interest cover for 2022 (10x-15x), as the EBITDA contribution from new production capacity financed by bond proceeds and government grants will only gradually kick in towards the end of 2022. Beyond 2023, interest cover should recoup to above 15x, as strong growth in Scope-adjusted EBITDA should outpace the impact of floating rate debt (24% of interest-bearing debt as at end-June 2022) that is subject to rising interest rates (due to central banks attempting to stem inflation).

Scope sees rather limited risk from price surges for raw materials, labour and energy (locked in for between 6-12 months on average via power purchase agreements) as Masterplast has been mostly able to pass on increased costs to customers supported by product availability.

Over the last few years, Masterplast has increased its capital expenditure significantly at the cost of free operating cash flow (FOCF). Scope anticipates that absolute indebtedness, as measured by the company’s Scope-adjusted debt (SaD), will increase to slightly above EUR 60m by YE 2022 (YE 2021: EUR 57m), mainly driven by a further build-up in inventory, while investments earmarked for 2022 are fully covered by Masterplast’s operating cash flow and investment grants. The substantial expansion of production capacity is anticipated to come to halt in 2023, with further growth being subject to cost of capital (including debt and equity). Consequently, Scope expects FOCF to break even in 2023, providing the necessary headroom to deal with bond amortisation that kicks in the same year.

Masterplast’s leverage, as measured by its SaD/EBITDA ratio, improved to 2.5x as at YE 2021 (last 12 months to end-March 2022: 2.8x). Scope forecasts that SaD/EBITDA will decline to around 2x in 2023 driven by the expected increase in sales and EBITDA as well as at least break-even FOCF. Limited external financing needs will also ensure that Scope-adjusted funds from operations/debt will remain above 30% going forward (last 12 months to end-March 2022: 32%).

Liquidity is adequate, as sources (EUR 15.4m of cash available as at YE 2021) cover uses (EUR 6.4m in short-term debt as at YE 2021 and negative FOCF of EUR 3.6m forecasted for 2022).

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

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s view that credit metrics will improve further, with an ongoing strong Scope-adjusted EBITDA/interest cover and an SaD/EBITDA ratio of below 3.0x thanks to recent investments starting to pay off, thus providing headroom in a challenging environment with higher input prices and an unsupportive macroeconomic outlook. Investment into healthcare will support cash flow stability and loosen the company’s dependence on the construction cycle and seasonality.

A positive rating action may be warranted if the company reduced its leverage to a SaD/EBITDA ratio significantly below 2.5x on a sustained basis. This could be driven by the successful expansion of the higher margin business of special fleece, personal protection equipment and multilayer membranes production for the healthcare industry and/or a successful ramp-up of the modular/industrial production of building units.

A negative rating action could occur if SaD/EBITDA weakened towards 4.0x. This could be triggered by a continuous build-up in working capital and/or in expansion capex beyond current expectations, leading to ongoing negative debt-financed FOCF not compensated by corresponding growth in the company’s EBITDA.

Long-term and short-term debt ratings

Masterplast issued two HUF 6bn and one HUF 9bn senior unsecured bonds under the Hungarian National Bank’s Funding for Growth Scheme.

Scope’s recovery analysis is based on the enterprise value calculated as a going concern. A continuation of the business in a default scenario seems to be likelier than a liquidation, as Masterplast already has a distribution network in several European countries, comprising subsidiaries in its core Eastern European countries as well as ‘external’ export partners, which are responsible for distribution in Masterplast’s export markets. This distribution network also has a value in itself, which would be lost if the company were liquidated. Scope estimates the recovery for all senior secured debt to be average, justifying a debt class rating equal to that of the issuer (BB-).

1. The real estate industry is the largest energy-consuming sector in Europe, accounting for around 40% of total energy consumption and one-third of carbon dioxide emissions

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, 15 July 2022; Construction and Construction Materials Rating Methodology, 25 January 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: Philipp Wass, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 September 2019. The Credit Ratings/Outlook were last updated on 16 August 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.