Scope affirms ENSI Kft.’s B+/Stable issuer rating
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Scope Ratings GmbH (Scope) has today affirmed ENSI Kft.’s issuer rating of B+/Stable. The senior unsecured debt rating has been affirmed at B+.
The affirmation is based on the company’s relatively strong financial risk profile (asessed at BB+) and increased contract backlog. This is despite operating in a business environment characterised by rapid growth of input prices and supply chain distortions leading to project delays, putting additional pressure on operating profitability.
Although revenues increased to HUF 20.6bn in 2021 (up 55% YoY), the Scope-adjusted EBITDA margin (4.4%) remained significantly below the historical average. The driver of worsening operating profitability was the delay and postponed closing of major projects, caused by a shortage of microchips required to operate the climate-control systems of smart buildings. This delay is expected to have a negative effect on 2022 margins too, although to a lesser extent, with a gradual recovery assumed from 2023 onwards.
The order book, however, shows a significant improvement to 1.5 years (as of December 2022) from around one year as of December 2021, providing more cash flow visibility.
The business risk profile (assessed at B) continues to be supported by ENSI’s leading market position in a niche segment of the construction industry – mechanical engineering (planning and installation of heating and cooling systems). Scope assumes the company's lower operating profitability in 2021 is due to one-off, extraordinary effects (delayed projects) and expects ENSI will improve its Scope-adjusted EBITDA margin to around 9% by 2024. The business risk profile is constrained by the company's relatively small size and limited diversification, both in terms of geographical scope and customer portfolio. This makes the company more vulnerable to macroeconomic shocks and reduces its ability to mitigate economic cycles.
The financial risk profile (assessed at BB+) continues to give the most support to the rating, despite lower operating profitability driving credit metrics downwards. Other than a HUF 5.5bn senior unsecured bond issued in January 2022, ENSI still operates without any short- or long-term debt. Scope assumes leverage, measured by the Scope-adjusted debt/EBITDA ratio, will be between 3x-4x in upcoming years. As bond amortisation does not start until 2027, deleveraging is highly dependent on ENSI’s ability to protect and improve its margins.
Scope expects interest coverage to remain strong, at above 10x in 2023 and around 7x in 2024. The interest-bearing liability (bond issued under the MNB bond funding for growth scheme) has a fixed coupon rate of 4.75%. The currently unutilised bond proceeds are placed in short term-deposits, yielding interest income supporting interest cover significantly.
Historically, ENSI was able to generate positive operational cash flows, with fluctuations in FOCF due to temporary spikes at year-end for increased working capital needs. Taking into consideration the current backlog, positive cash generation is expected to continue in the medium term, with Scope-adjusted FOCF/debt between 15-25% until 2024.
Liquidity is adequate as sources fully cover uses (the company has no short-term debt as at YE 2022). Sources comprise HUF 2.0bn of unrestricted cash available as at end-September 2022 (excluding available bond proceeds of HUF 5.5bn) and FOCF of HUF 1.4bn forecasted for the 12 months to end-September 2023. Scope believes a worsening of liquidity due, for example, to delayed customer payments or cost overruns is remote at this time thanks to the significant cash balance available to the company.
Outlook and rating-change drivers
The Outlook is Stable and incorporates Scope’s assumption that ENSI’s credit metrics will stay at their current level despite a more challenging market environment, with the Scope-adjusted debt/EBITDA ratio below 4x in upcoming years.
A positive rating action is remote at this point but could be warranted if ENSI managed to improve its business risk profile. This could occur if ENSI provided higher visibility on future cash flows and achieved greater geographical diversification, while improving profitability to near historical averages (Scope-adjusted EBITDA of around 14%) and keeping its Scope-adjusted debt/EBITDA ratio around 3.0x in the medium term.
A negative rating action might occur in case ENSI fails to achieve Scope-adjusted EBITDA margin above 7%, which would also lead to increased leverage, measured by Scope-adjusted debt/EBITDA increasing above 4.0x.
Scope notes that ENSI’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires ENSI to repay the nominal amount (HUF 5.5bn) within 30 days after the bond rating falls below B-, which could have default implications.
Long-term debt rating
ENSI issued a HUF 5.5bn senior unsecured bond (ISIN: HU0000361258) in January 2022 through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds are currently unused but earmarked for M&A, including the acquisition of engineering material wholesalers and retailers, in line with the company’s strategy to enter this related segment and achieve synergies and economies of scale. The bond has a tenor of 10 years and a fixed coupon of 4.75%. Bond repayment is in six tranches; 10% of the face value is payable each year between 2027 and 2031, and 50% at maturity in 2032.
Scope has rated ENSI’s senior unsecured debt at B+, the same level as the issuer rating. The recovery analysis is based on a hypothetical default scenario at year-end 2024. Scope has decided to use the going concern scenario in the analysis due to the asset-light nature of the company and the assumption that its business activity generates its enterprise value. Recovery is ‘average’ for senior unsecured debt holders in this scenario.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022; Construction and Construction Materials Rating Methodology, 25 January 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, Outlook 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, the Rated Entities' Related Third Parties 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.
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: Istvan Braun, 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 17 January 2022.
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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