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Rating action

Scope Ratings GmbH (Scope) has today affirmed its issuer rating of BB-/Stable on Hungarian real estate and loan brokerage Otthon Centrum Holding Kft. The senior unsecured debt rating has also been affirmed at BB-.

Rating rationale

The rating affirmation follows a strong performance in H1 2022, with revenue up by 17% YoY and the company maintaining a net cash position at June 2022. Rapidly rising interest rates in Hungary are, however, beginning to affect the demand for loan products and is having a negative impact on affordability and the demand for residential real estate. Scope expects 2022 to be a good year given the strong first half but forecasts a significant weakening in 2023. Credit metrics are expected to remain in line with Scope’s base case for the given rating since the planned acquisitions are prefunded and the cash is mostly deposited with local banks. Under the HUF 2.9bn 10-year bond issued in 2021, borrowing costs are locked in at a coupon rate of 3%, whilst the company currently benefits from much higher deposits rates (above 10%) for its cash balances, resulting in substantial net interest income.

The company has only deployed HUF 430m of the HUF 2.9bn of bond proceeds to date. Scope assumes that the remainder will be deployed gradually to acquire property agencies with a positive EBITDA contribution.

Otthon Centrum’s business risk profile (assessed at B+) is supported by: i) the company’s position as one of two leading real estate and loan brokerages in its home market of Hungary, the other one being Duna House Holding Nyrt. (BB-/Stable); and ii) its robust profitability for the industry. The company has managed the effects of the Covid-19 pandemic well, with a strong recovery in revenue since mid-2020. Otthon Centrum recorded revenue growth of 17% YoY and a solid EBITDA margin of 23.8% in H1 2022. The acquisition of OpenHouse added 30 offices to the Hungarian network. It is considering further acquisitions in the region of which two are expected to close in 2022. Revenue diversification is adequate as several segments generate operating profit, the most important of which are the real estate brokerage franchise, credit intermediation services, the physical agency network, and real estate-related consultancy. Client base granularity is very high since the company is focused on the retail segment, which entails a high number of small transactions. Otthon Centrum’s business risk profile is constrained by the small absolute size of its business, the relatively fragmented markets in which it operates and a lack of geographic diversity. This could change with the gradual deployment of the bond proceeds earmarked for acquisitions at home and abroad.

Otthon Centrum’s financial risk profile (assessed at BBB) is driven by its low financial leverage as measured by the Scope-adjusted debt/EBITDA ratio and Scope’s expectation that this will not exceed 3.5x (H1 2022: 1.4x) on a sustained basis following the planned acquisitions. Free operating cash flow has remained positive throughout the past five years and was particularly strong in 2021 and H1 2022.

Liquidity remains adequate, with over HUF 4bn of cash and equivalents at 30 June 2022, minimal short-term debt and cash outflows under Scope’s base case, which are largely discretionary (i.e. growth capex and dividends). Scope understands that a large part of the cash has been invested in local real estate funds in the second half of 2022 but expect these investments to be realized before the end of the year and the proceeds to be deposited at local banks. According to the Company these funds can be withdrawn at any time and without any loss in value. Otthon Centrum has not traditionally experienced large swings in working capital and did not see cash balances drop below HUF 300m even at its low point, H1 2020.

Outlook and rating-change drivers

The Outlook is Stable and reflects the company’s ability to generate positive free operating cash flow, also under stressed conditions in 2020 and 2021, and the current net cash position. Scope expects significantly weaker demand and lower profitability in 2023, but credit metrics should remain in line with expectations for the given rating. Moreover, the Stable Outlook reflects Scope’s expectation that the issuer will use the bond proceeds to acquire property agencies with a positive EBITDA contribution.

A positive rating action would require Otthon Centrum to significantly extend its size and diversity while maintaining financial metrics in line with Scope’s expectations, i.e. Scope-adjusted debt/EBITDA of below 2x for a sustained period.

A negative rating action could be warranted if financial leverage (Scope-adjusted debt/EBITDA) increased to above 3.5x on a sustained basis. This could be caused by margin pressure due to growing competition from banks, online retailers or other larger organisations with greater financial muscle, adverse regulatory developments, or challenges in the integration of acquired businesses.

Long-term and short-term debt ratings

Scope has rated senior unsecured debt at BB-, the same level as the issuer rating, reflecting limited prior-ranking liabilities in the capital structure. Scope bases its recovery assessment on a going concern enterprise valuation and expects an average recovery (30%-50%) for bond holders. Scope would not rate the debt higher due to Otthon Centrum’s asset-light business model and the material uncertainty regarding its asset value in a hypothetical default scenario, which may be driven by increasing competition and/or a loss of confidence in the business and resulting departure of licensees and agents.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022), is 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: Claudia Aquino, 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 20 January 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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