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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB-/Stable issuer rating of Hungarian construction company Market Építő Zrt (Market). Scope has also affirmed the senior unsecured debt rating at BB-.

Rating rationale

While Market’s 2022 results showed increasing revenue of HUF 308bn (up 3.8% YoY), the company’s EBITDA margin was negatively impacted by the increase in operating costs including building materials, sub-contracting costs and energy. In combination with contracts signed before the inflationary period and that did not allow higher costs to be fully passed on, EBITDA margin dropped to 8.7% from 14.6% in 2021. Additional competitive pressure also contributed to lowering prices. The increase in construction capacity in Hungary has been driven by competitors involved in large public projects postponed by the Hungarian government in 2022. Nevertheless, Market’s credit metrics remain solid with leverage (Scope-adjusted debt/EBITDA) staying below 2.0x.

Market’s business risk profile (assessed at B+) remains supported by its leading position in the Hungarian construction sector, where it has a stable 5% market share. Market managed to reach a record HUF 308bn of revenue in 2022 but the company remains small compared to its European peers. Market has a strong footprint in Central Hungary – including the Budapest region, which accounts for almost half of the construction sector in Hungary – where it derives a large share of its revenue from a sizeable pool of large projects. The business risk profile is constrained by this weak geographical diversification and the company has no intention of expanding its operations elsewhere. Additionally, the company still exhibits a concentrated backlog and limited diversification across business segments with a clear bias towards buildings projects. The three main projects carried by Market account for 54% of the HUF 629bn backlog and are mainly related to the BudaPart project, worth more than HUF 170bn.

The profitability assessment has been revised downward given worse-than-expected results in 2022, when EBITDA dropped by 37% to HUF 26bn from HUF 43bn in 2021, still above 2020 levels. Similarly to the ramp-up of the concrete plant enabling Market to source part of its raw materials internally, the company plans to build a mineral wool insulation factory through a joint venture with Masterplast. That way, the plant will produce a key raw material for Market and give the company additional control over its supply chain. Nevertheless, Scope expects that immediate identified risks in 2022 will continue to pressure profitability. These headwinds include high input prices for energy, wages, and raw materials combined with competitive pressure. The company has limited options to mitigate the negative impact from increasing energy prices and labour cost. Additionally, the company remains sensitive to the HUF/EUR currency risk due to its limited hedging and 59% of its backlog being denominated in EUR. Its larger backlog representing twice its 2022 revenue and its leading position in the Hungarian market as one of the largest and most visible contractors entails some negotiation power with its suppliers. All in all, Scope anticipates that the EBITDA margin will keep decreasing to drop below 7%.

The company’s financial risk profile (assessed at BBB+) is supported by low leverage and a very strong Scope-adjusted EBITDA interest cover, although the latter will be under pressure from the anticipated issuance of HUF 20bn in bank loans in 2023. The loans will be used to support investments in the Bem palace project as part of Market’s extended strategy, which started in 2020. The strategy focuses on real estate projects in which Market will be the main contractor, allowing it to maximise its operating capacity. In addition, the company’s creditworthiness is supported by very low leverage (Scope-adjusted debt/EBITDA), which stood at 1.3x in 2022. Scope anticipates an increase in the company’s cost base, pulling down EBITDA and thus increasing leverage to 1.7x in 2023. Credit metrics remain volatile, driven by the industry’s inherent cyclicality, working capital consumption, Market’s concentrated backlog and exposure to currency risk. Scope also expects operating cash flow to remain volatile going forward, although positive in 2023 despite negative working capital change and HUF 7bn in capex.

Liquidity is adequate, with the HUF 1.7bn of short-term debt maturing in 2023 being fully covered by the unrestricted cash balance of HUF 34.8bn and HUF 1.0bn of undrawn credit lines.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation of Scope-adjusted debt/EBITDA of 1x-2x. Scope expects the company to retain its strong liquidity position. The rating Outlook is based on total capex (including organic expansion and acquisition capex) of around HUF 25bn for 2023-2025 and Scope-adjusted EBITDA above HUF 20bn.

A positive rating action could occur if Market’s business risk profile improved materially through, for example, improved segment or geographic diversification while credit metrics remained in line with Scope’s expectations. However, Scope does not foresee such an improvement in the short-to-medium term.

A negative rating action could be required if investments under the business plan and in real estate projects weighed on leverage, resulting in Scope-adjusted debt/EBITDA approaching 4x.

Long-term debt rating

Scope has affirmed Market’s senior unsecured debt rating at BB-. This rating is based on a going-concern scenario as of end-2024, in which Scope computed an average recovery for senior unsecured debt holders.

In October 2019 and November 2020, Market issued two senior unsecured bonds for a total of HUF 42bn (ISIN’s: HU0000360060; HU0000359237) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. All proceeds were used for capex. The bonds have a tenor of respectively 10 and seven years, a fixed coupon of 2.95% and 2.7%, and bullet repayments. Scope notes that Market’s senior unsecured bonds issued under the Hungarian scheme have an accelerated repayment clause. The clause requires the company to repay the nominal amount (HUF 42bn) in case of a rating deterioration (two-year cure period for a B rating; repayment within 30 days after the bond rating falls below CCC, which could have default implications). In addition to the rating deterioration covenant, bond covenants include four other covenants (payment delay, cross default, pari passu, negative pledge).

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; Construction and Construction Materials 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 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: Thomas Langlet, 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 16 August 2019. The Credit Ratings/Outlook were last updated on 26 July 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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