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Rating action

Scope Ratings GmbH (Scope) has today affirmed Baromfi-Coop Kft.’s issuer rating of BB-/Stable and senior unsecured debt rating of BB-.

Rating rationale

The affirmation is largely based on good operational results and leverage kept under control despite rising input costs while making progress on its investment programme.

In 2021, the top line expanded by 30% and we expect the same for 2022. Some of the growth in 2022 is fuelled by the record high food inflation in Hungary which will reach 40% YoY, putting pressure on margins.

The business risk profile (rated BB) is based on the good market positioning of Baromfi-Coop as the largest chicken producer in Hungary, with a high level of vertical integration and a modern asset base. Besides keeping its domestic market share above 25%, it is developing its export markets and continuing the strategic partnership with McDonald’s. Product diversification remains low as the company concentrates on a single product category.

The company has had a healthy EBITDA margin well above 10%, which it has maintained in 2022 as well. Scope expects nominal EBITDA to surpass HUF 20bn in 2022, up from HUF 12bn in 2019, which is credit positive. Steep increases in input prices in 2022 were mainly passed through to the end customers. While other consumer products companies in Hungary had significant declines in margins, Baromfi-Coop still kept profitability healthy due to its fast response to market changes, vertical integration providing a natural hedge during the agricultural year, a good level of automation and high export sales.

The price caps in Hungary, especially relevant for chicken breasts, apply to retail prices, not wholesale prices, so we do not expect an impact on Baromfi-Coop and its subsidiaries such as Mastergood. When the price caps are removed (expected mid-2023), demand could fall due to rising prices. This is mitigated by the fact that chicken is a relatively cheap protein alternative, keeping demand shocks limited and manageable. Furthermore, the well-developed export markets have been resilient during the pandemic as well.

The financial risk profile (rated BB-) is based on metrics which are in line with the agency’s expectations: Scope-adjusted debt/EBITDA just below 4x, and strong Scope-adjusted funds from operations/debt around 25%. Interest cover is protected as the company uses fixed rate debt for most of its loans and bonds. Additional debt is contracted mainly in euros for which rates start above 3% for short-term secured lending needed in agribusiness trade finance.

Due to the intensive capex phase, Scope-adjusted free operating cash flow/debt has remained in negative territory, and we expect it to remain so. We note the sector enjoys strong governmental support in the form of subsidies and guarantees. After the pandemic, the food supply chain has gained in importance. When the war broke out in 2022 and the farms of Baromfi-Coop lie close to the Ukrainian border, the first half capex plan was slowed down, but has since resumed. A solar park has been planned for a while, which should cover a moderate share of the company’s internal energy needs.

Liquidity is adequate, despite poor metrics. The company operates with a high share of long-term debt which finances long-term assets. The agribusiness leg requires significant trade finance which is typically short term and hence has refinancing risk. The liquidity metrics are also constrained by the large capex.

Strategic owners (the Bárány family) have a hands-on management approach and continue to have the most automated and well-regarded chicken business in Hungary.

Baromfi-Coop is a family business, where we see profits reinvested year after year with a pay-out ratio of 10-20%, which supports our positive assessment for the business.

No notching was applied for supplementary rating drivers.

Outlook and rating-change drivers

The Outlook is Stable, reflecting Scope’s expectation of Scope-adjusted debt/EBITDA below 4.0x in the medium term, as well as a continued positive performance thanks to a resilient business model.

A positive rating action could be warranted by the Scope-adjusted debt/EBITDA ratio sustained at less than 3.5x. This could occur if Baromfi-Coop’s capital allocation policy shifted from intensive capex to debt reduction.

A negative rating action could be required if Scope-adjusted debt/EBITDA were to rise above 4.0x on a sustained basis. This could occur if the company orchestrated large M&A, if EBITDA fell short of Scope’s projections or if rising input prices are not passed on to customers. Lastly, a rating downgrade could result from continued weak liquidity coverage beyond 2023.

Long-term debt ratings

The senior unsecured debt rating is based on a hypothetical default scenario at YE 2024 and resulted in an ‘average’ recovery expectation for this debt category, which remains unchanged. Scope has also therefore affirmed the BB- rating on senior unsecured debt.

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; Rating Methodology: Consumer Products, 30 September 2021), 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 19 September 2019. The Credit Ratings/Outlook were last updated on 13 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
© 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.