The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has affirmed its issuer rating of B+/Stable on Hungary-based business services company Communication Technologies Kft. Scope has also affirmed the senior unsecured debt rating of B+.

Rating rationale

The rating affirmation is driven by expected organic growth in electronic offender monitoring, planned M&A and solid credit metrics.

The company’s business risk profile (assessed at B+) is restricted by its very small size prior to its intended acquisitions. This leads to a relatively small market share in IT security markets (electronic offender monitoring, digital forensics and cybersecurity), with high income concentration due to a focus on Hungary and a single activity. However, the business risk profile benefits from good profitability, with a Scope-adjusted EBITDA margin of around 27%, which is expected to remain at this level in upcoming years.

The company enjoys exclusive contracts to distribute selected security systems in Hungary and established customer relations with state agencies that sometimes incorporate long-term contracts, maintenance or licence upgrade features. It recently submitted a bid to a highly anticipated tender programme for a large electronic offender monitoring system for the Hungarian police. Beyond underlying growth in IT security systems, the company plans to use the proceeds from January 2022’s HUF 2bn bond (which was issued under the National Bank of Hungary’s Bond Funding for Growth scheme) to acquire companies in related fields and invest in creating a joint venture for equipment maintenance.

The financial risk profile (assessed at A-) reflects very little indebtedness, with a Scope-adjusted debt/EBITDA ratio of around 1.0x. The company’s relatively high profitability and low capital expenditure needs result in Scope-adjusted free operating cash flow/debt of significantly above 35%.

Scope places much greater emphasis on the company’s business risk profile due to its very small size, the execution risk inherent in its growth strategy and acquisitions, the key person risk associated with being a small company (credit-negative ESG factor) and no committed financial policy.

Liquidity is adequate as the company has maintained historically significant cash levels with lower amounts of short-term debt. The company removed all short-term debt after issuance of the bond, and it is expected to maintain a significant amount of cash going forward.

One or more key drivers of the credit rating action is considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable based on Scope’s expectation that the company will benefit from the renewal of the police electronic offender monitoring contract and keep Scope-adjusted debt/EBITDA around 1x.

A positive rating action could occur if the company is successful in executing growth plans through targeted M&A boosting diversification of revenues and clients and keeps Scope-adjusted debt/EBITDA below 1x on a sustained basis.

A negative rating action could occur if the company loses exclusivity status with key suppliers, or non-successful tender for the renewal of the police contract, impairing profitability and subsequently leverage with Scope-adjusted debt/EBITDA of above 5x on a sustained basis.

Scope notes that Communication Technologies Kft.’s senior unsecured bond issued under the Hungarian central bank’s bond scheme has an accelerated repayment clause. The clause requires the company to repay the nominal amount (HUF 2.0bn) within 30 days after the bond rating falls below B-, which could have default implications.

Long-term debt rating

Scope rates senior unsecured debt at B+, the same level as the issuer rating. Scope calculated an ‘average’ recovery following a hypothetical default in 2024 and therefore incorporates no notches 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 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 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 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: Jacques de Greling, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 19 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
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