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Rating action

Scope Ratings GmbH (Scope) has today affirmed Aranynektár Kft.’s issuer rating of B/Stable. Aranynektár’s senior unsecured bond has been affirmed at B+.

Rating rationale

The affirmation of the ratings reflects a double-digit EBITDA margin and somewhat lower execution risk related to the large capex programme initiated for Aranynektár and its sister companies in Hungary, Ukraine and Russia, including honey processor Fulmer Hungarian Branch (FHB).

The rating of Aranynektár continues to be determined by the credit quality of sister company FHB. Aranynektár provides an integrated business service to FHB, which not only owns all the assets used by the issuer but is also its sole customer. Management has not indicated any plans to develop the activities of Aranynektár outside the scope of FHB. Scope therefore considers Aranynektár to be fully dependent on FHB as a severance of the business link.

FHB’s business risk profile (rated B+) is rather weak. Its sales and profitability increased due to a shift in consumer preferences towards healthy produce, yet its top line remains small (below EUR 20m). That said, FHB remains constrained by its size and low market share across several markets (EU, Saudi Arabia, Japan). Raw honey imports are diversified with supply points established by the issuer’s owners in Hungary, Ukraine and Russia outside of the rated entity. However, these come with some geopolitical risk and exposure to volatile currencies. The suspension of customs from Ukraine has a credit-positive effect. Honey production was good in Hungary this season, and honey for the winter season has been securely stored, largely from Hungary and Ukraine.

Prices with top customers were agreed based on harvested prices, hence Scope expects a double-digit EBITDA margin for agricultural year 2022-23. Further increases in other input prices, such as for energy (cost fixed until end of calendar year 2022) and packaging (bought and stored for this season), as well as high management risk may put pressure on margins from 2023 onwards despite current, sound financial leverage metrics. External risk factors remain and include geopolitical risk and soaring energy prices that can create volatility in profitability and are sometimes out of management’s normal control. Alternative energy sources (wood bricks and oil instead of gas based power generation was installed) and the transition to sustainable energy (solar power generation) somewhat mitigate the high energy prices. Low unemployment is tackled by having a workforce from Asian markets, yet this may put pressure on the cost base as wage inflation is high in Hungary.

The issuer’s development of its branded labels (stagnating at close to one quarter of sales) remains weak. Direct sales to customers are planned for the medium term to boost branded sales. The development of sales channels and branded labels would improve FHB’s diversification and brand strength, both of which are weak areas in Scope’s assessment.

FHB’s profitability (Scope-adjusted EBITDA) improved from 7% in 2018 to above 16% in May 2022 (with 20% during the pandemic), in line with management’s expectations. However, Scope expects further growth in profitability cannot be sustained as input prices are rising (raw materials – honey, energy, packaging, logistics). Margins can be planned well and defended as the issuer reprices its products ahead of the main sales season (winter) for produce and when the quality and quantity of the crops for the year can be reliably ascertained. However, Scope notes the relatively small size and pricing power of FHB.

FHB’s financial risk profile (rated BB+) has benefitted considerably from the growth in its Scope-adjusted EBITDA to HUF 1.2bn in 2022 from HUF 0.7bn in 2019, which has translated into an overall improvement in metrics. FHB maintains a strong cash position of HUF 1.6bn at May 2022 (higher than the bond of HUF 1bn, meaning net cash) and strong cash flow generation, with funds from operations/Scope-adjusted debt (SaD) well above 50%.

The issued bond has a fixed coupon of 3.5% p.a., the investment loans were repaid, and the issuer has a EUR 1.3m revolving credit facility for working capital that is mostly unused. Current working capital financing is euro-based and has a natural hedge in place due to high export sales. EBITDA/interest cover is therefore not under pressure from soaring HUF interest rates. Furthermore, with current deposit rates well above the bond coupon, interest cover will improve due to the interest being received.

Despite a lack of information on the upcoming subsidy, Scope believes metrics will benefit from a comfortable cash position as investments are phased in and launched in a conservative fashion. SaD/EBITDA is expected to stay below 2x in the coming two years without netting of cash.

Scope also expects cash flow cover to remain under pressure in negative territory given the issuer’s capex plans for 2022-23. The real estate in the capex programme is erected, and the issuer is continuing with its transition towards sustainable energy and fitting out the new production and cooling area to be able to store honey for up to one season in advance in the medium term (currently half a season). The leverage and cash flow cover forecast includes Scope’s expectation of some delays in the receipt of subsidies and additional new capex of up to HUF 0.5bn for the energy transition on top of management’s plan.

Liquidity is adequate. The bond issuance has allowed FHB to repay most of its short-term debt, limiting any repayment walls in the coming years. However, Scope has maintained a conservative stance, overweighting the free operating cash flow/SaD ratio in its financial risk profile assessment given the expectation of a high investment phase. In the overall rating, Scope has overweighted the business risk profile sub-rating. This is because of FHB’s and Aranynektár’s small size, which makes them more vulnerable to external factors.

Scope has also applied a negative notch for governance and structure under supplementary rating drivers due to the complexity of the bond issuance, the intercompany loan and the transfer pricing structure. A lack of transparency regarding forecasts, a small management team and highly manual accounting and planning processes are detrimental to the rating (ESG factor: credit-negative governance factor).

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is Stable, based on higher profitability and the large investment programme started with low leverage. Scope believes FHB can deploy its considerable capex programme while maintaining an acceptable financial risk profile, helped by its state subsidy. The Outlook excludes potential external events – beyond the agency’s assessment of the credit quality of FHB – which could have a negative impact on the issuer.

A positive rating action could be taken if FHB kept its EBITDA margin high, which would also keep SaD/EBITDA low, while simultaneously improving transparency, management size and the scale of its activities.

A negative rating action could be taken if SaD/EBITDA increased well above 3x on a sustained basis, e.g. due to a greater-than-expected drop in profitability and larger-than-anticipated net capex in the investment programme. In the event of a downgrade, the repayment acceleration clause in the bond agreement would kick in.

Long-term debt ratings

Scope has affirmed the rating of B+ on the senior unsecured bond guaranteed by FHB (HU0000359559). Scope calculated an ‘above-average’ recovery following a hypothetical default in 2024 and therefore maintains one notch of uplift on the assigned issuer rating.

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; Consumer Products Rating Methodology, 4 November 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: Barna Szabolcs Gáspár, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 January 2020. The Credit Ratings/Outlook were last updated on 16 December 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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