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Rating action

Scope Ratings GmbH (Scope) has assigned a BBB/Stable issuer rating to Danish industrial conglomerate Schouw & Co. Scope has also assigned a BBB rating to the issuer’s senior unsecured debt and an S-2 rating to short-term debt.

Rating rationale

Schouw’s BBB issuer rating is based on Scope’s BBB- business risk profile and BBB+ financial risk profile assessments for the company.

Scope considers Schouw as an industrial conglomerate with a portfolio of six wholly controlled and fully consolidated companies with operational and financing integration.

Schouw’s overall market position benefits from the substantial size of its largest subsidiary, BioMar, which is the third largest company in the very concentrated global market for salmon feed. Schouw also benefits from its second largest portfolio company, GPV –Denmark’s largest electronics manufacturer–, having more than doubled in size after it acquired Enics in 2022. However, Schouw’s overall market position is weakened by i) strategic challenges at BioMar and the risk that BioMar could lose customers in case some of them start or continue backward integration, as happened in 2014 when its former Norwegian customer Marine Harvest, one of the world’s largest fish farming companies, started its own fish feed production; and ii) the significant EBITDA contribution of companies that are more or less regional players with relatively weaker market power.

Schouw’s business risk profile is supported by a diversified service and product offering ranging from fish feed and shrimp farming to electronic manufacturing services, automotive remanufacturing as well as non-woven materials and hydraulic components. Scope also notes positively that around 70% of consolidated revenues stem from activities low cyclicality.

Scope considers Schouw’s customer structure to be sufficiently granular and that Schouw has an adequate international presence. Diversification is restrained by the relatively high exposure to the fish feed business (55% of consolidated revenue and around 45% of consolidated EBITDA) and in particular to salmon feed (around 40% of 2022 revenue).

However, Schouw’s moderate operating profitability in a peer group context restrains its business risk profile, with Scope-adjusted EBITDA margin of 7%-11% in 2007-2022. Schouw’s overall profitability is also mainly determined by that of BioMar, because the subsidiary is so large relative to Schouw's other subsidiaries and to Schouw itself. With a reported EBITDA margin of 6%-9%, BioMar has the lowest profitability among Schouw’s companies. GPV is also the second largest EBITDA contributor because it is the second largest contributor to revenue. Schouw’s consolidated EBITDA margin has shown relatively low volatility, staying within 7%-11% since 2007, which Scope attributes to a portfolio well diversified by segment.

Based on very solid revenues in H1 2023 (up 30% YoY to DKK 17.8bn), Scope expects consolidated revenue of about DKK 38.5bn for full-year 2023. For 2024, Scope expects revenues of DKK 39.2bn.

At end-2022, consolidated financial debt was DKK 6.7bn and Scope-adjusted debt (SaD) was DKK 6.1bn. The increase from DKK 3.0bn at end-December 2021 was due to higher debt, mainly reflecting the negative Scope-adjusted free operating cash flow (FOCF). SaD is forecasted to reach around DKK 6.2bn at year-end 2023 before declining slightly to DKK 5.7bn at year-end 2024.

The increase in SaD raised SaD/EBITDA to 2.6x in 2022 from 1.4x in 2021. However, this figure is somewhat distorted by the only partial inclusion of the results of companies acquired in 2022. In 2023, with the full effects of the consolidation of the acquired companies and Scope-adjusted FOCF expected to return to positive territory, Scope anticipates that SaD/EBITDA will improve to 2.3x. For 2024, Scope’s base case foresees this ratio at around 2.0x, helped by an assumption of no further acquisitions in 2023-2024, though M&A cannot be ruled out entirely as acquiring businesses is an intrinsic part of Schouw’s growth ambitions.

Interest cover was around 14x in 2022, down from around 28x in 2021 due to increased interest costs. All debt is at floating rate except leases and part of the Schuldschein. As a result, 82% of Schouw’s consolidated interest-bearing debt was variable rate at year-end 2022. Schouw does not use interest rate hedging; instead, the company rolls over its financing costs to its pricing over time. Due to the higher expected interest expense, Scope forecasts the interest coverage ratio to decrease to around 8x in 2023. In 2024, the anticipated higher Scope-adjusted EBITDA will likely help maintaining the ratio at around 9x.

Scope-adjusted FOCF has proven to be quite volatile and has been negative in some years. Indeed, Schouw has seen fluctuations in net working capital due to GPV’s and BioMar’s business models, which require high inventory levels (components and raw materials). In addition, capacity-expanding investments from 2021 burdened Scope-adjusted FOCF into 2022. This investment programme is expected to end in 2023 and consolidated capex should therefore normalise in 2024. In addition, supported by less negative impacts from net working capital, Scope-adjusted FOCF is expected to return to positive territory in 2023-24.

Schouw has two financial covenants: one relates to its Schuldschein and requires a net debt/EBITDA (excl. leases) of less than 3x; the other relates to its other debt instruments and requires a net debt/EBITDA of below 3.25x (+0.5x M&A step-up). Although the margin narrowed in 2022 due to high disbursements, Schouw has remained below the covenant thresholds and Scope’s base case foresees this to continue.

Scope takes a neutral view on Schouw’s capital allocation policy given the relatively disciplined capital allocation as reflected in a historically solid balance sheet.

Schouw’s liquidity profile is solid, supported by available cash sources, the expected recovery in Scope-adjusted FOCF in 2023 and the planned Schuldschein issue in October 2023 in the amount of at least EUR 100m.

Schouw introduced an ESG strategy in 2021 related to i) efficient and responsible production; ii) workers’ protection and workplace attractiveness; and iii) innovation and governance. However, no drivers of the credit rating are considered ESG-related factors with a substantial impact on the overall assessment of credit risk.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that consolidated Scope-adjusted FOCF will improve in 2023-2024 after being negative in 2021-2022, supported by a normalisation of supply chains as well as of consolidated capex following the completion of the investment programme. The Outlook also takes into account improved SaD/EBITDA based on Scope’s expectation of no material acquisitions in 2023-2024 after the peak in M&A in 2022.

Scope might consider a positive rating action if Schouw sustained its SaD/EBITDA ratio at around 1.5x, e.g. through improved profitability or a return to significantly positive and steady FOCF.

Scope may consider a negative rating action if SaD/EBITDA were sustained at around 2.5x, which could result from lower profitability or from the aggressive use of liquidity for M&A transactions.

Long-term and short-term debt ratings

In line with the issuer rating, Scope has assigned a BBB rating to the issuer’s senior unsecured debt.

Schouw has one Schuldschein, issued in April 2019 and the first in its history. Most of the proceeds used to reduce bridge financing were set up in connection with GPV’s acquisition of CCS. The Schuldschein has a volume of EUR 136m (DKK 1.0bn at end-2022). It is senior unsecured and to be repaid in 2024 (80%) and 2026 (20%). There are cross-guarantees in place for the Schuldschein (Schouw as well as six other companies).

In addition to Schuldschein, senior unsecured debt at end-2022 comprises a syndicated bank facility with a total facility line of DKK 3,275m, of which DKK 1.5bn was drawn, term-loans of DKK 2,312m, a DKK 400m seven-year loan with the Nordic Investment Bank raised in December 2021 for specific Danish capacity-expanding investments and development costs and money market loans and other credit facilities in the amount of DKK 480m.

Scope has also assigned a S-2 short-term debt rating based on Schouw’s adequate liquidity and the BBB/Stable 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 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 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 these 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: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 5 September 2023.

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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