Rating action

Scope Ratings GmbH (Scope) has today affirmed Vöröskő Ltd’s issuer rating of BB/Stable. Senior unsecured debt has been affirmed at BB.

Rating rationale

The rating reflects Vöröskő’s strong financial risk profile and market positioning in Hungary, supported by the successful first investments financed by the MNB bond issued earlier in 2022. However, macroeconomic pressure is expected to pressure the high profitability levels reached at FYE 2022.

Vöröskő market shares and diversification continue to be the main drivers of the business risk profile (assessed at BB-). The group has a strong market presence as a retailer of home improvement products, mainly small and large household appliances. The acquisition of private label manufacturer Dyras Ltd has aided recent efforts to expand the product range. Vöröskő has a geographical concentration on Hungary but this will change in the coming years after it secured the rights under the Euronics network to operate the online operations in Slovenia and Croatia. This will be supported by the recent remodelling of its warehouse, which enhanced storage and delivery capacities and is located close to the two countries. Profitability improved through investments in processes, logistics and digitalisation, with the Scope-adjusted EBITDA margin reaching 6%, surpassing Scope’s forecast of 4%. Maintaining these levels in 2023 will be difficult, however, due to high inflation and changing customer demand, but any reduction will be dampened by the benefits gained from recent investments.

The financial risk profile (assessed at BB+) continues to be the main rating driver. The group will be able to finance operations internally, supported by the gradual change of its supplier payment terms (by 10 days to 70 days; goal of 90 days). As a result, the group is not planning to issue additional debt to sustain growth, following the HUF 7bn bond issuance under the Hungarian bond programme. Bond proceeds were used as expected, to purchase the Budapest office (HUF 1.0bn) and other real estate (HUF 0.5bn) and to remodel and robotization of the warehouse (HUF 1.1bn). The remaining proceeds will be used in the coming years to acquire new equipment and operating shops, which will decrease the dependency on euro-denominated leases, improving cost flexibility and decreasing Scope-adjusted debt. Scope-adjusted debt includes Scope’s adjustment for leases (56% of gross debt as of FYE 2022), with the remainder mainly related to the HUF 7bn bond. Scope expects leases to decrease towards 50% of gross debt by FYE2025, which will contribute to reduce Scope-adjusted debt towards HUF 12.9 bn in 2025 (versus HUF 13.9bn as of YE2022 and HUF 14.4bn forecasted at FYE2023).

With no significant debt issuances planned, internal cash generation will be a key element in the financial risk profile in the coming years. However, EBITDA and net cash generation will likely be hit by the impending macro-economic downturn, which tends to affect sales of discretionary goods. Nonetheless, Scope expects leverage metrics to continue to surpass those in Scope’s previous base case, with Scope-adjusted debt/EBITDA and Scope-adjusted funds from operations/debt expected at close to 3x and 30%, respectively. Interest cover is expected to stay robust at close to or above 7x in the coming years as all interest is paid at a fixed rate. Lastly, Scope forecasts negative free operating cash flow in the coming years due to high capex (3% to 4.5%) until FYE 2024 and cash outflows related to net working capital. Liquidity is adequate, supported by a lack of financial debt (excluding the bond) and the HUF 5.3bn revolving credit facility.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation of Scope-adjusted debt/EBITDA ranging between 3.0x and 3.5x until FYE 2024. Scope expects no further debt issuances or M&A transactions.

A positive rating action could be warranted if Scope-adjusted debt/EBITDA were sustained well below 3x. This could be due to stronger Scope-adjusted EBITDA resulting from cost optimisation or a lower-than-expected inflationary impact on cash flow.

A negative rating action could be taken if the business risk profile significantly deteriorated or if Scope-adjusted debt/EBITDA approached 4x. This could be driven by lower profitability due to a longer-than-expected inflationary period or by a new debt issuance.

Long-term and short-term debt ratings

Scope has affirmed the BB rating on Vöröskő’s senior unsecured debt. The instrument rating is based on a hypothetical liquidation scenario in 2024, in which Scope computed an ‘average’ recovery for senior unsecured debt holders. No notching was applied to the 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 Outlooks, (General 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 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 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: Adrien Guerin, Senior Analyst
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 13 January 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
© 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.