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Rating action

Scope Ratings GmbH (Scope) has upgraded the issuer rating of Metál Hungária Holding Zrt. (MHH) to BB-/Stable from B+/Positive. Concurrently, Scope has upgraded the senior unsecured debt rating to BB- from B+.

Rating rationale

The upgrade is based on the company's solid market position in its niche with an unchanged business risk profile (assessed at B), indicating near-term revenue growth that will help maintain credit metrics at current healthy levels (financial risk profile improved to BBB-) despite looming headwinds, including higher input prices and unfavourable macroeconomic outlook.

While 2020 was certainly impacted by Covid-19, 2021 was MHH’s strongest performance to date with HUF 50bn in revenue, a remarkable increase of HUF 15bn (45% YoY) and Scope-adjusted EBITDA of HUF 6.0bn (93% YoY).

Both revenues and EBITDA have shown strong growth since late 2020 thanks to MHH’s access to larger-scale projects benefitting from the company’s long-term relationship with key customers as well as its ability to provide necessary capacities and a functioning supply chain for raw materials to deliver on these projects in time and quality, thus stabilising MHH’s market share. Scope expects revenues to surpass HUF 60bn in 2022 and 2023, based on MHH’s H1 2022 performance (HUF 31bn in revenues), the stable order backlog (HUF 42bn as at end-June 2022; down 5% YoY) and strong growth in its sub-segment of non-residential construction being fuelled by FDI inflows. In addition, Scope believes MHH will secure some of the larger projects currently up for tender with a total construction value of around HUF 100bn¹.

Similar to previous years, customer concentration at MHH remains rather high, with their top three customers accounting for over 50% of their backlog as at YE 2021 (43% as at end-June 2022). This is expected to increase even further if MHH is successful with several projects currently out for tender. However, the company still executes 60-90 projects in excess of HUF 10m each year. Together with the typically longer project duration of larger projects, revenue diversification is stronger (top three accounted for 33% of 2021’s revenues). But MHH’s strong link to the sub-segment of non-residential construction in Hungary with growth fuelled by FDI inflows is seen as the overarching risk to the company’s top line going forward.

Scope-adjusted EBITDA margin increased to 12.1% in 2021 (up 310bp YoY). Scope expects profitability to remain stable over the next number of years, staying above 12%. This level of profitability is mainly supported by the implementation of a new corporate structure in 2021 that eliminates non-business-related grants to other ventures. Further support stems from cost savings enabled by investments made into own machinery, headquarters and a painting facility.

MHH managed to keep leverage stable in 2021 with Scope-adjusted debt/EBITDA at 2.8x, down 0.4x YoY, despite a higher level of gross debt. The debt-financed build-up of inventories in 2021 allowed MHH to maintain a competitive advantage, that helped to support business with Scope-adjusted EBITDA that increased to HUF 6.0bn from HUF 3.1bn. Scope-adjusted EBITDA is expected to further increase in 2022 to around HUF 8.0bn, due to: i) further strong growth of MHH’s top line that benefits from its good standing in its niche market that thrives due to high FDI inflows; ii) higher-margin real estate holdings; and iii) operational expense savings (acquisition of headquarters, a painting facility and machinery), keeping Scope-adjusted debt/EBITDA between 2-3x.

Interest cover halved in 2021 (13.8x), due to the higher level of gross debt needed to pre-finance working capital. Interest cover is expected to remain stable above 10x and benefits from positive FOCF enabling debt repayments in line with the amortisation schedule for the issued bonds, thus a gradual decrease in interest-bearing debt as well as limited interest rate risk given the relatively large share of fixed rate debt as well as no external financing needs for the time being. Both will support debt protection beyond 2023 when the development of the top line will become more uncertain given limited visibility on the future order backlog.

FOCF turned negative in 2021, due to HUF 10.5bn of working capital requirements needed to fund the envisaged pipeline. However, this was a one-off effect, and FOCF is expected to be positive again in 2022 supported by positive fx-effects from the devaluation of the Hungarian forint against the euro² and limited investment needs, which should support cash flow cover with Scope-adjusted FOCF/debt expected to remain above 30%, but subject to volatility. Volatility stems from larger-scale projects due to a higher concentration of cash flow sources and their higher pre-financing (working capital) requirements.

Liquidity is expected to improve significantly in 2022 due to the issuance of the HUF 6.5bn bond, in which part of the proceeds were used to repay the Dorottya financing loan, and all working-capital credit facilities, which led to a continuously high portion of short-term debt in the past. As such, cash sources (available cash and cash equivalents of HUF 9.8bn as at YE 2021 and forecasted positive FOCF of HUF 6.0bn for 2021) cover cash uses (short-term debt of HUF 0.5bn as at YE 2021) in full.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s view that credit metrics will stay at current levels, with Scope-adjusted debt/EBITDA below 3x despite impending headwinds including higher input prices, an unsupportive macroeconomic outlook, relatively low order backlog and limited visibility on the resilience of FDI inflows currently boosting MHH’s top line growth. Furthermore, Scope assumes that dividend and dividend-like pay-outs to entities owned by MHH’s shareholders will not exceed the company’s FOCF on average.

A positive rating action is seen remote at present but may be warranted if the company improves its diversification in terms of construction segments and/or geographic regions to partially decouple its top line from FDI inflows that currently support its business. At the same time, Scope expects credit ratios to remain at or below current levels, with MHH's leverage, as measured by Scope-adjusted debt/EBITDA, of below 3x on a sustained basis.

A negative rating action could occur if Scope-adjusted debt/EBITDA increases to above 3x. An increase in leverage could be triggered by either: i) an adverse operational development leading to reduced profitability and cash flows; or ii) higher dividend and dividend-like pay-outs in excess of FOCF.

Long-term debt rating

MHH issued two bonds under the MNB Bond Funding for Growth Scheme with a combined issuance volume of HUF 14.5bn. Scope’s recovery analysis assumes a potential default in 2024 and is based on MHH’s going concern status. As the company is a specialist contractor (façade cladding and roof covering), its enterprise value is linked to ‘soft’ assets (access to long-term customers and technical knowledge in engineering and manual labour) rather than ‘hard’ assets.

The estimated EBITDA at default is HUF 1.5bn which leads to an implied enterprise value at default of HUF 5.1bn. Based on Scope’s recovery analysis, the agency expects an ‘average recovery’ for the company’s senior unsecured debt (HUF 12.2bn in bonds as at default, HUF 0.3m in guarantees), resulting in a BB- rating for this debt class (in line with that of the issuer).
 

1. This includes a HUF 28bn (EUR 70m) project with BMW and a HUF 24bn (EUR 60m) project with Mercedes. MHH is seen to be in a strong position to win these projects, as they have a long-standing relationship with both clients already and should be able to defend their market position.

2. Around ¾ of MHH’s backlog is linked to contracts denominated in euro.

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 Outlooks, (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 Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entities’ Related Third Parties, 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Philipp Wass, Executive Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 30 March 2020. The Credit Ratings/Outlooks were last updated on 4 October 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
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