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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of A/Stable to DNV Group AS (DNV). Scope has also assigned first-time ratings of A to senior unsecured debt issued by DNV and S-1 to short-term debt.

Rating rationale

The issuer rating reflects DNV’s business risk profile, assessed at BBB+. The company’s business model is underpinned by its position as a longstanding global leader in maritime services (primarily classification of vessels), which exhibits stability and visibility as the service is necessary for carriers to be able to operate and trade. Aside from classification and advisory services focused on the shipping industry, DNV also engages in similar activities for the oil and gas/energy industries, along with certification, inspection and monitoring. Here DNV plays a key part in the industry shift to cleaner energy among its Energy Systems clients (positive ESG factor). DNV serves more diverse end-markets through its assurance services as well as software and digital platforms.

DNV’s business areas reflect good diversification with regards to geographic markets, client segments and services, though the Maritime business area accounts for a large share of revenue and profitability. The secular trends and competitive dynamics for DNV’s end-markets are also mixed, though the growing importance of decarbonisation, ESG, and digitalisation provide tailwinds across segments. In business areas outside Maritime and Energy Systems, it may be more difficult for DNV to enter and establish a leading or higher-margin position due to market fragmentation.

In contrast, the Maritime business area remains stable, and although it saw a slight top line decline in 2020-2021, it has benefitted from a wave of new builds as carriers update their vessels to meet updated requirements on fuel type and efficiency. In 2021 and 2022, DNV captured an outsized share of 23-33% of business related to new vessels compared to its share of ongoing certifications on existing fleet in service, for an overall market share of 20-25%. The Energy Systems business area has also pivoted following the shift towards cleaner and renewable energy, in addition to its legacy oil and gas focus.

DNV’s growth strategy does rely partly on M&A, especially in Digital Solutions, Supply Chain and Product Assurance, and its Accelerator/venture investment initiatives in cybersecurity and digital health. This is exemplified by forecasted acquisition spend of NOK 6bn from 2023-2025, compared to NOK 892m in 2021 and 2022 spend expected to be similar YoY. Although over two thirds of revenue expansion is still expected to come organically, the company’s plans to drastically increase the top line by 2025 will also depend on buying growth via acquisitions in other business areas where DNV is not as established. This comes at the cost of profitability, as the higher margin contribution from the Maritime business area is diluted by a higher-growth and lower-margin business areas.

Credit positive are the high retention rates for contracts in the Maritime and Business Assurance segments and the low churn in Digital Services. Increasing recurring revenue in the other business areas would also facilitate some improvement in the Group’s profitability, though some segments such as Energy Systems are essentially project-based. For now, the company has earmarked promising areas, such as cybersecurity and digital health, but will also have to grow profitability in those areas as well as manage its focus on core versus non-core activities and ventures to protect its margins.

Scope has assessed the company’s financial risk profile at AA. Despite some stagnation or slight decline in forecasted Scope-adjusted EBITDA margin in 2022 by approx. 30 bps to below 16% in 2021, Scope expects DNV to maintain a net cash position, driven by stable and low debt. This view is based on the company’s own record of a net cash position, leaving significant headroom under its own leverage target (net interest-bearing debt/EBITDA) of up to 2.0x. DNV also benefits from an asset-light business model with low capex requirements. Cash flow is expected to remain significantly positive in the absence of a material net debt position, even if partly offset by larger working capital requirements tied to the company’s expansion.

The company has not paid consistent dividends in recent years, which is supported by DNV’s ultimate ownership by Det Norske Veritas Foundation, seen as positive for the rating. Scope does not foresee dividends in the future as there is no pressure from external shareholders for short-term capital returns.

Liquidity remains adequate given the sufficient coverage of maturities in the short term, including the NOK 3bn term loan due 2024, unrestricted cash, available loan facilities and free operating cash flow.

One or more key drivers for the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Stable Outlook incorporates the expectation that the issuer will continue to have a net cash position in the next few years, driven by relatively stable profit margins, while maintaining its leading position in maritime classification/services. Moreover, it reflects the assumption that the issuer will maintain and follow its conservative financial policy, which includes significant headroom under its own maximum leverage of 2.0x. It also assumes that there will be no dividends in the near term and that DNV will maintain adequate liquidity, notably via significant cash on hand and committed loans.

A positive rating action is seen as remote but could be triggered if DNV sustained its net cash position while increasing profitability through successful execution of organic and inorganic growth, which would also improve diversification. This would likely be in connection with DNV’s historically conservative financial policy regarding shareholder returns and indebtedness, M&A and capex.

A negative rating action might be warranted if Scope-adjusted debt/EBITDA were to approach towards 1.0x, particularly due to a change in financial policy.

Long-term and short-term debt ratings

We have assigned an A instrument rating on senior unsecured debt, in line with the issuer rating. The instrument rating is applicable to all senior unsecured debt issued by DNV.

Based on adequate liquidity and DNV’s A/Stable issuer rating, we have assigned a short-term rating of S-1. The short-term rating reflects the company’s sustainable liquidity profile in terms of short-term debt coverage and its good access to external corporate funding. Including all internal and external sources of liquidity, coverage of short-term debt is projected at over 200% each year over the 2022-2025 forecast period.

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: Tiffany Ng, Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 2 February 2023. 

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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