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Rating action

Scope Ratings GmbH (Scope) has affirmed the corporate issuer rating of BB- on Hungarian auto parts company Unix Autó Kft. and changed the Outlook to Positive from Stable. Scope has also affirmed the BB- senior unsecured debt rating.

Rating rationale

Scope’s review of half-year results affirmed Unix Autó’s ratings and changed the Outlook, with the base case no longer indicating leverage pressure and acknowledging an appropriate management response to inflationary pressure and working capital requirements.

The business risk profile is rated at BB. This is primarily driven by the increased profitability in Unix Autó’s key markets of Hungary and Romania in 2021 and H1 2022. In the current environment where supply chains struggle, OEM deliveries are slow and consumers face record high inflation, the spare parts market is expected to perform well, which is beneficial for UNIX Autó.

Revenues increased 18% in H1 2022 YoY, mainly due to the recovering market and inflation. The delivery of new cars by original equipment manufacturers slowed due to the computer chips shortage, increasing input prices and supply chain issues, which caused the price of second-hand cars to increase in the first half of 2022. The increase in car services provided also boosted volumes and margins in 2022. Unix Autó remains the market leader in Hungary for auto spare parts, with about one-third of the domestic market. We expect a stable retail network and in parallel a strong focus on direct sales to car service shops. Unix Autó’s delivery of a very wide range of auto parts (up to ten million parts) to service garages within a day or even an hour provides a competitive advantage. The new energy-efficient and automated warehouse should enable Unix Autó to keep its competitive advantage on within-a-day deliveries and services. Diversification remains constrained by the core focus on Hungary and Romania and by selling products from a single product category.

Profitability increased to above pre-Covid-19 levels with a reported EBITDA margin of 10.4% in 2021, up from 9.5% in 2020 and 6.1% in 2019, mainly due to own-brand products (A.Z. Meisterteile, 50,000 different products) and price increases above inflation. UNIX started implementing energy efficiency measures across its retail network to tackle inflation. Strong wage increases in Hungary put further pressure on margins. The additional costs were passed through to customers. The non-consolidated Romanian subsidiary also started to perform well after price increases. The company plans to consolidate the entity in the medium term to improve transparency. H1 2022 shows a 3pp EBITDA margin increase compared to the previous year, with which we do not plan on long term due to pressure on the cost base.

The financial risk profile is rated at BB-. Leverage measured by the Scope-adjusted debt/EBITDA ratio improved in 2021 to 2.5x (without netting cash, to 2.9x) from 3.1x in 2020 due to improved EBITDA of HUF 8.25bn, with a YoY increase of HUF 0.9bn, stable debt of HUF 23bn-24bn and higher-than-anticipated cash of HUF 3.3bn. Higher revenues and EBITDA with a strong margin result in a higher nominal EBITDA and hence a better-than-expected leverage around 2x is expected for 2022.

EBITDA interest coverage is expected to stay very strong at above 7x for the forecast period, despite the higher cost of debt. The strong interest cover is forecasted to continue for the coming 2-3 years with no major debt repayment. Unix Autó has a HUF 12bn fixed coupon (4% p.a.) bond maturing in 2026, issued under the Hungarian National Bank’s programme. The short-term debt facilities up to HUF 11bn have a variable interest rate and are hence vulnerable to Hungarian forint lending interest rates, which have risen to double digits. Unix Autó has reacted by using less bank financing mid-2022 and more supplier financing in an effort to mitigate increasing finance costs.

The company keeps generating strong operating cash flow with a healthy Scope-adjusted funds from operations/debt ratio of above 30%. However, cash flow is not enough to cover current capex and the new capex plan.

Efficiencies should be visible from 2023 onwards when the new logistics centre becomes fully operational. In the meantime, Unix Autó started developing a production site in Budapest for own-brand products. Unix Autó plans to produce some of its A.Z. Meisterteile products, covering 10%-20% of its needs, as a response to possible supply chain disruptions. Production could be scaled up further if needed. After over five years of negative Scope-adjusted free operating cash flow/debt due to heavy investments, the ratio returned to a positive level in 2021, which is credit-supportive, although the new investment plan is again pushing this ratio very low, even slightly negative, which constrains the rating.

In terms of liquidity, Unix Autó benefits from the bond issued under the Hungarian National Bank’s programme. Short-term credit lines are also used to pay suppliers in advance to get discounts. Scope estimates that the available credit line will be largely drawn on in the next one to two years as working capital needs increase with inflation. Liquidity is adequate, although relatively weak.

Dividends from 2023 onwards are projected to be significantly lower at up to HUF 500m yearly, with no dividend payments in 2022.

Outlook and rating-change drivers

The Positive Outlook now reflects Scope’s expectation that Unix Autó will keep Scope-adjusted debt/EBITDA at a more conservative level than previously expected. Scope’s updated base case also indicates that the company should generate healthy profitability in the short to medium term, and that the execution risk is diminishing as the new warehouse is close to starting operations.

A rating upgrade is possible if Scope-adjusted debt/EBITDA is sustained below 3x while the automated warehouse becomes operational and the Romanian subsidiary is consolidated into the group, hence reducing some uncertainty and execution risk.

A negative rating action (including outlook back to Stable) is possible if the financial risk profile deteriorated, exemplified by a Scope-adjusted debt/EBITDA moving towards 3.5x or higher, or Scope-adjusted funds from operations/debt declining below 15%.

Long-term and short-term debt ratings

Unix Autó’s senior unsecured debt is rated in line with the issuer rating at BB-, based on Scope’s expectation of an ‘average’ recovery.

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, (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 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: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 27 August 2019. The Credit Ratings/Outlooks were last updated on 9 May 2022.

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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