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Rating action

Scope Ratings GmbH (Scope) has today affirmed its B issuer rating on Szinorg Universal Zrt. (Szinorg) and revised the Outlook to Negative from Stable. Scope has also affirmed its B+ rating for the senior unsecured debt category.

Rating rationale

The Outlook change is driven by the risk of a sharp rise in leverage, caused by the potential deterioration in future revenues, given a limited order book for 2024 amid multiple headwinds, including higher input prices and an unfavourable macroeconomic outlook.

Revenues in FY 2022 are expected to remain above HUF 21bn, 12% above Scope’s previous rating case. This performance was supported by the strong foreign investment and private demand for construction in the issuer’s main market of Debrecen, which provided some counterbalance to the delayed EU-funded government projects. While Scope expects reported EBITDA to reach around the group’s targeted level based on preliminary figures, Scope-adjusted EBITDA is forecasted to drop by 50% YoY down to HUF 1bn (adjusted for HUF 680m of disposal proceeds). The rating benefits from Szinorg’s plan to strengthen their pipeline over the next few years by building up a real estate portfolio that generates recurring income and sales proceeds. The portfolio includes the Bajcsy/Mercure Hotel (opened in August 2022), representing an investment of around HUF 8bn, partially subsidised by the Hungarian state (around HUF 3.5bn). Other assets include industrial buildings (11,000 sqm industrial hall under development) and various residential projects, one of which is located in the Balaton Lake region.

Profitability, as measured by the Scope-adjusted EBITDA margin, is expected to reach 4% for FY 2022 (3pp below Scope’s forecast) a result of increasing raw materials prices and supply chain issues. The group’s strategy to sign construction projects at a fixed price and based on the stage of work will alleviate some pressure. Even so, profitability is expected to stay stagnant into the medium term, mainly due to the inflated materials prices. The group intends to dampen the effect of inflation by adjusting its cost structure in 2023. Scope expects this will support the Scope-adjusted EBITDA margin reaching slightly above 5% in the next few years. The orderbook as of January 2023 amounts to HUF 27bn (HUF 25bn in 2022), resulting in a backlog of 1.3x, providing top line visibility only until the beginning of 2024.
 
Szinorg’s business risk profile (assessed at B-) continues to be held back by the group’s small scale in a European context as it weakens the ability to mitigate economic cycles and benefit from economies of scale. The diversification assessment is limited by the strong focus on construction in Hungary and the concentrated project backlog (with the top three projects accounting for 78% of future contracted revenues). However, Szinorg shows good outreach in terms of private and public sector customers, with the latter accounting for around 40% of 2022 revenues.

The financial risk profile (assessed at B) is constrained by Scope’s expectation of higher leverage and negative free operating cash flow, due to increased working capital needs and the significant investment in the real estate portfolio, budgeted at about HUF 52.6bn as of end-2022. This portfolio along with the construction backlog will eventually strengthen revenues and cash flow but will put credit metrics under pressure for the next few years. The investment will be financed by the HUF 5bn senior unsecured bond issued under the Hungarian National Bank’s Bond Funding for Growth Scheme as well as additional bank loans. With the substantial rise in domestic interest rates, however, Szinorg revised down the amount of additional bank loans to about HUF 2.7bn until 2024 from the HUF 12bn budgeted in the previous year. Szinorg will also re-assess its real estate project pipeline to follow a more cautious approach. As at FY 2022, cash was higher than financial debt but Scope foresees some increase in leverage (Scope-adjusted debt/EBITDA) to above 9x by the end of 2024, due to risk related to future revenues with limited order book and weakening demand for real estate assets, which could lead to a prolonged period of lower Scope-adjusted EBITDA.

Debt protection, as measured by Scope-adjusted EBITDA interest cover, benefits from Szinorg’s backlog that will support positive cash flow and EBITDA for 2023 as well as the low debt expense as the HUF 5bn bond has a 3% fixed rate. Interest cover will weaken in the years to come because of the expected increase in balance sheet leverage to finance the ramp-up of the real estate portfolio but will remain above 3.0x. The floating rates on the loans (around 33% of the financial obligations would be subject to floating rates by end of 2023) also expose the group to a significant rise in the Euribor rate.

Liquidity remains adequate, with over HUF 5bn of cash and equivalents as at December 2022, available overdrafts of HUF 1.8bn, and a back-loaded debt maturity profile comprising a HUF 5bn bond maturing only in 2030 and no significant amount due before then. Nonetheless, external liquidity will be needed to finance capex and working capital.

Outlook and rating-change drivers

The Negative Outlook is driven by the risk of a sharp rise in leverage, caused by the potential deterioration in future revenues, given a limited order book for 2024 amid multiple headwinds, including higher input prices and an unfavourable macroeconomic outlook. It also reflects Szinorg's limited room for maneuver its cost structure, which could lead to a prolonged period of deprived profitability with Scope-adjusted EBITDA margin of around 5%.

A positive rating action, i.e. a revision of the Outlook back to Stable may be warranted if Szinorg is able to provide a constant visibility of sales beyond 12 months, i.e. constant backlog of above 1x enabled by successful tenders for new mandates paired with a stabilization of EBITDA from their investment properties in order to support profitability with Scope-adjusted EBITDA margin reaching around 7% going forward.

A downgrade could occur if the backlog deteriorates to below 1x, or Szinorg only achieves a limited adjustment of cost structure leading to Scope-adjusted EBITDA margin remaining at around 5%.

Scope notes that Szinorg’s senior unsecured bonds issued under the Hungarian Central Bank’s bond scheme has several accelerated repayment clauses. The clauses require the issuer to repay the nominal amount (HUF 5.0bn) in case of rating deterioration (2-year cure period for B- rating, immediate repayment below B-) or change of control at the issuer level.

Long-term debt ratings

The rated entity issued a HUF 5bn senior unsecured corporate bond (ISIN HU0000359633) in H1 2020. Scope’s recovery analysis is based on a hypothetical default scenario in 2023, which assumes outstanding senior unsecured debt of HUF 5bn in addition to HUF 2.7bn in bank loans and HUF 1.8bn assuming the group draws on available overdrafts. Scope expects an ‘above-average’ recovery for senior unsecured debt and has therefore affirmed the B+ rating for this debt category (one notch above 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; Construction and Construction Materials Rating Methodology, 25 January 2023; European Real Estate Rating Methodology, 25 January 2023), 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 25 February 2020. The Credit Ratings/Outlook were last updated on 1 February 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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