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 upgraded the issuer rating of Daniella Kereskedelmi Kft to B+/Stable from B/Stable. The senior unsecured debt rating has been upgraded to BB- from B+.

Rating rationale

The upgrade is driven by the strong growth of profitability experienced and Scope’s expectation that macroeconomic headwinds will have limited impact on the group’s credit metrics.

Revenues and profitability increased significantly in 2021, supported by strong growth in Hungary’s construction materials sector. Revenues were up 33% YoY to HUF 26bn while the Scope-adjusted EBITDA margin was up 120bp YoY to 6.8%. However, Daniella’s absolute size and its niche focus continue to limit the business risk profile (assessed at BB-). Nonetheless, the company’s market share remains robust and is likely to grow towards 20% in the coming years due to its strong presence both online and offline, cementing its leading position in its addressable market. Scope expects the expansion to Romania in 2022 to contribute to diversification and allow Daniella to benefit from the country’s strong growth. In the coming years, however, macroeconomic headwinds are expected to impact operations. These include inflation, which will cause the Scope-adjusted EBITDA margin to normalise to around 7% (around 250bp lower than at H1 2022), and the end to public subsidies in 2024, especially the CSOK scheme (housing subsidy for families). Management anticipates these subsidy programmes to continue but market size could still shrink.

Daniella’s financial risk profile (assessed at BB-) continues to benefit from a low absolute level of debt, mostly consisting of a bond and operating leases. Scope expects gross debt to remain stable because i) operating leases are unlikely to increase as there are no plans to open new shops or logistic centres; and ii) new debt is unlikely to be issued due to limits imposed by current bond covenants. Credit metrics are expected to improve with leverage, defined by Scope-adjusted debt/EBITDA and Scope-adjusted funds from operations/debt, to reach respectively 2.5x and 40% in the coming years (against 3x and below 30% respectively in 2021). Cash generation is expected to remain robust, which is despite forecasts of cash outflow (due to working capital build-up and capex) and macroeconomic headwinds. Liquidity is adequate, highlighted by the absence of significant debt repayments in the coming years.

The transfer of the ownership of the warehouse to HAD real estate, which will soon be spun out, implies that bond proceeds would become unavailable to investors in the event of a bankruptcy-like event, which is seen credit-negative (ESG factor: credit-negative governance factor), that leads to a down notching of the issuer rating by -1.

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 inflation will have a limited impact on profitability and credit metrics. Scope expects credit metrics to remain at current levels, with Scope-adjusted debt/EBITDA at around 3x, as Daniella has enough headroom to cope with the likely weakening of the construction market. The Outlook also assumes no M&A. The upcoming spin-off of HAD real estate will have no rating impact as Daniella’s credit rating does not incorporate this entity.

A positive rating action is remote at present but would be considered should Daniella significantly increase in size while maintaining credit metrics close to current levels, i.e. Scope-adjusted debt/EBITDA of around 3x and Scope-adjusted funds from operations/debt around 30%. This would result from an expansion to Romania or a ramp-up of industrial customers.

A negative rating action may be taken if the financial risk profile deteriorated, shown by Scope-adjusted debt/EBITDA moving towards 4x, or if the financial policy became aggressive, exemplified by sizeable M&A.

Long-term debt ratings

Scope has upgraded the rating on Daniella’s senior unsecured debt to BB- from B+. Scope estimates an above-average recovery with a liquidation value of close to HUF 10bn under a theoretical bankruptcy scenario in 2024. 

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, (General Corporate Rating Methodology, 15 July 2022; 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: Adrien Guerin, 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 11 May 2020. The Credit Ratings/Outlook were last updated on 10 September 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.