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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer rating of Market Építő Zrt (Market). The senior unsecured debt rating is affirmed at BB-.

Rating rationale

The affirmation is driven by good 2021 results and solid financial metrics that provide some headroom to deal with various immediate headwinds including a shorter backlog, higher input prices and an unsupportive macroeconomic outlook.

Market’s business risk profile (assessed at B+) remains supported by its leading position in the Hungarian construction sector, where it has a 5% market share. Despite achieving record-high revenues of HUF 298bn in 2021, the company remains smaller than European peers. Market has a strong footprint in Central Hungary – including the Budapest region, which accounts for almost half of the construction sector – where it derives a large share of its revenues from a sizeable pool of large projects. The business risk profile is constrained by this weak geographical diversification, with no intention by the company to expand its operations elsewhere. Additionally, the company still exhibits a concentrated backlog and limited diversification across business segments with a clear bias towards buildings projects.

The rating is supported by good profitability with better-than-expected results in 2021, when EBITDA grew by 87% to HUF 42bn from HUF 22bn. This was driven by a 58% surge in revenues and a lower cost base, partly due to better sourcing of raw materials, renegotiated prices with suppliers and fewer intermediaries in the supply chain. Thus, the Scope-adjusted EBITDA margin reached 14.1% in 2021 – much higher than the 2015-19 average of 4.7%. The ramp-up of the PreBeton concrete plant has also enabled Market to source part of its raw materials internally. Nevertheless, Scope expects that immediate risks will put pressure on profitability going forward. These identified headwinds include a short backlog to be mostly executed in 2022 as well as higher input prices for energy, wages, and raw materials. The company has limited options to mitigate the negative impact from increasing energy prices and labour cost. However, its leading position in the Hungarian market as one of the largest and most visible contractors entails some bargaining power with its suppliers. Overall, 40% of Market’s cost base, including raw materials and services, is handled by Market’s own subsidiary, making the company less sensitive to strong price inflation in Hungary when working with subcontractors.

The company’s financial risk profile (assessed at BBB+) is supported by low leverage and very strong Scope-adjusted EBITDA interest cover, although the latter will be under pressure from the anticipated issuance of HUF 37bn in bank loans between 2022 and 2023. The loans will be used to support investments in a new real estate project as part of Market’s extended strategy, which started in 2020. The strategy focuses on real estate projects in which Market will be the main contractor, allowing it to maximise its operating capacity. In addition, the company’s creditworthiness is supported by very low leverage (Scope-adjusted debt/EBITDA), which stood at 0.2x in 2021. Scope forecasts leverage at between 1-2x in 2023, driven by lower EBITDA due to the anticipated increase in costs. Credit metrics remain volatile, driven by the industries’ inherent cyclicality, working capital consumption and Market’s concentrated backlog. However, free operating cash flow is expected to remain strong for 2022 on the back of stable revenues but a decreasing EBITDA margin ranging between 10% and 12%. This will help partially finance the investment plan organically, preserving the financial risk profile.

Scope assesses liquidity as adequate, with the HUF 0.5bn of short-term debt maturing in 2022 being fully covered by the unrestricted cash balance of HUF 17.0bn and HUF 7.2bn of undrawn credit lines (both as at YE 2021) as well as HUF 10.1bn in free operating cash flow forecasted for 2022.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation of Scope-adjusted debt/EBITDA between 1-2x. Scope expects the company to retain its strong liquidity position. The rating Outlook is based on total capex (including organic expansion and acquisition capex) of around HUF 42bn for the period between 2022-24 and Scope-adjusted EBITDA above HUF 21bn.

A positive rating action could occur if Market’s business risk profile improved materially through, for example, improved segment or geographic diversification while credit metrics remain in line with Scope’s expectations. However, Scope does not foresee such an improvement in the short to medium term.

A negative rating action could be required if investments under the business plan and in real estate projects weighed on leverage, resulting in Scope-adjusted debt/EBITDA moving towards 4x.

Long-term debt rating

Market issued HUF 42bn in bonds under the Hungarian National Bank’s Bond Funding for Growth Scheme.

Scope’s recovery analysis is based on the enterprise value calculated as a going concern. Scope estimates the recovery for all senior secured debt to be average, justifying a debt class rating equal to that of the issuer (BB-).

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 Outlook, (General 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were 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: Thomas Langlet, 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 16 August 2019. The Credit Ratings/Outlook were last updated on 31 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.