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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB/Stable issuer rating of Hungarian agricultural and construction machinery distributor AXIÁL Javító, Kereskedelmi és Szolgáltató Kft. Scope has also affirmed the senior unsecured debt rating at BB+. 

Rating rationale

The rating affirmation is driven by AXIÁL’s good financial performance despite high inflation and the spike in short-term interest rates in Hungary. In 2022, AXIÁL recorded HUF 152.6bn in revenue (up 46.1% YoY), mainly thanks to the increase in machinery prices driven by inflation. Scope-adjusted EBITDA increased to HUF 21.5bn in 2022 (up 72% YoY). Scope expects AXIÁL’s revenue to increase by 5-10% in 2023, benefiting from increasing prices. Nevertheless, Scope forecasts that reported EBITDA will be significantly lower than in 2022 due to an increase in the cost of goods sold and staff costs that may not be passed on to end-customers. As a result, Scope forecasts a profitability margin between 8% and 10% in the coming years, lower than in 2022. 

The rating reflects the company’s position as one of the top-three agricultural machinery dealers in Hungary, its leadership position in spare parts and a market share of around 25% in Hungary’s agricultural machinery sector. The company benefits from a good position in a niche market, which ensures stable revenue. Demand from farmers for AXIÁL’s products will increase thanks to Hungary’s Agriculture 4.0 reform, which impacts farm management and includes substantial support packages for farmers to modernise farming, for example, through data-driven precision methods with at least 7% of each application to be dedicated to digital solutions or services.

AXIÁL’s business risk profile is constrained by its low geographical diversification but product diversification is adequate (50% of total revenues come from new agricultural machinery and 30% come from spare parts). The non-domestic country exposure represents less than 10% of total consolidated revenues. This is too small to offset any negative macro developments in the home market of Hungary. AXIÁL also faces an ageing and shrinking labour force in Hungary’s agricultural sector which could lead to a shrinking customer base and decreasing sales in the medium- to long-term. AXIÀL tries to address this negative factor by focusing more on the construction market by selling machinery such as telescopic loaders and rotators, where sales have been modest compared to the agricultural sector for now. Scope notes that AXIÁL is the exclusive distributor of several globally known brands, such as Claas, Manitou, Fendt, Horsch and Hyundai, which demonstrates its reputation in the sector.

Scope expects AXIÁL’s leverage, measured by Scope-adjusted debt/EBITDA, to remain below 2.0x in the medium term. Scope-adjusted EBITDA/interest cover is forecasted to hover above 10x, despite high short-term interest rates in Hungary and the expected increase in financial debt. The main support for the leverage ratio and interest coverage comes from the broadly stable EBITDA of around HUF 15bn forecast for the coming years (a similar level to FY 2021) despite numerous headwinds such as inflationary pressures and a weaker economic outlook.

Scope’s forecasts are supported by the company’s good track record on exceeding business targets communicated to Scope. The agency highlights that AXIÁL exercised prudence in its daily operations.

The overall financial risk profile remains constrained by free operating cash flow (which is low despite being consistently positive) due to investments in increasing the floor space for e.g. warehouses.

AXIÁL’s liquidity is adequate as sources (HUF 11.8bn in cash and cash equivalents and HUF 1.4bn in open and committed credit lines as at end-2022) cover uses (HUF 9.9bn in short-term debt as at end-2022 and forecasted negative FOCF of HUF 0.5bn for 2023).

Outlook and rating-change drivers

The Outlook is Stable and supported by stable leverage with Scope-adjusted debt/EBITDA below 2.0x, while the issuer remains a top-three agricultural machinery dealer in Hungary. Scope's rating case also forecasts lower profitability compared to 2022 due to inflationary pressures on cost of goods sold and higher staff costs, with a Scope-adjusted EBITDA margin between 8% and 10%.

A positive rating action is seen as remote but could be warranted if AXIÁL’s business risk profile improved. This could occur thanks to a significant growth in size paired with greater geographical diversification, in combination with Scope-adjusted debt/EBITDA remaining below 2.0x on a sustained basis.

The rating could come under downward pressure if AXIÁL’s leverage (Scope-adjusted debt/EBITDA) moved towards 4.0x on a sustained basis due, for example, to higher capital expenditure and/or a higher dividend payout.

Long-term debt rating

In September 2020, AXIÁL issued a HUF 15bn senior unsecured bond (ISIN: HU0000359930) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were fully used to refinance its short-term financial debt. The bond has a tenor of 10 years and a fixed coupon of 2.0% with a bullet maturity. Scope notes that AXIÁL’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has no accelerated repayment clause, but bond covenants include a pari passu clause and negative pledge.

Scope has affirmed the senior unsecured debt category at BB+. Scope still expects an ‘above average’ recovery for senior unsecured debt, including for the HUF 15bn bond issued in September 2020 under the Hungarian National Bank’s Bond Funding for Growth Scheme. This recovery expectation translates into a BB+ rating for senior unsecured debt. Scope highlights that senior unsecured debt has a subordinate ranking to payables and to debt raised for working capital and capex financings.

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 Outlook, (General Corporate Rating Methodology, 15 July 2022; Retail and Wholesale Rating Methodology, 27 April 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Anne Grammatico, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 9 June 2020. The Credit Ratings/Outlook were last updated on 16 May 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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