Scope affirms BB-/Stable issuer rating of Metál Hungária Holding Zrt.
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Scope Ratings GmbH (Scope) has affirmed the BB-/Stable issuer rating of Metál Hungária Holding Zrt (MHH). Concurrently, Scope has affirmed the senior unsecured debt rating of BB-.
The affirmation is driven by Scope’s expectations that MHHs solid credit metrics, in accordance with the rating case, will be upheld, despite a slowing construction industry globally and the persistence beyond the Covid-19 pandemic of unfavourable macroeconomic conditions in Hungary.
The business risk profile remains unchanged at B. The niche roofing and cladding segment in which MHH operates has continued to grow, allowing MHH to capitalise on this trend and reinforce its already strong market position. Revenues in 2022 grew to HUF 71.3bn and are expected to surpass HUF 80bn in 2023 (EUR 212m) . Foreign direct investment (FDI) in Hungary has propelled this growth, particularly from carmakers. Hungary's aim to become a leading battery producer benefits from its logistical location and well-developed road and rail networks. Notable examples of major investments announced in the past 12 months include that of German carmaker BMW (EUR 2bn) and Chinese battery maker CATL (EUR 7.8bn). MHH will benefit as an independent market leader in Hungary for light-structure roof coverings and façade cladding. Further, the company's expertise in this niche, supported by its access to capital and long relationships with several large multinational companies, acts as an inherent barrier against new competitors, safeguarding its market share.
However, current growth in Hungarian factory manufacturing is unlikely to be sustained. A strong decline in FDI might put pressure on government stimulus, which could be triggered by the weaker competitiveness in Hungary due to ongoing labour shortages amplified by the country's demographic trends as well as the significant rise in investment costs, including for capital and wages, partly due to inflation. So far, however, there is little sign of a slowdown. The rating remains limited by the sole geographical exposure to Hungary, the sole segment exposure to the highly cyclical construction industry, and the reliance on large multinational clients. These constitute a significant risk and only marginal project-related side businesses serve to mitigate it. MHH is therefore limited to a small range of underlying demand patterns, which amplifies the impact of the industry's inherent cyclicality and heightens cash flow volatility.
Customer concentration continues to be high, in line with previous years. In 2023, the top three are expected to contribute HUF 37.6bn, or 46% of total revenue, and the top 10, HUF 60.3bn or 75% of revenue. MHH is working on more than 80 projects, with 16 set to generate over HUF 1bn (EUR 2.6m) in revenue. These large projects account for a significant 84% of the revenues forecast for 2023. The overreliance on large clients in a particular industry or region, like automotive or battery manufacturers in Hungary, exposes MHH to market-specific factors, such as economic fluctuations or regulatory changes. Nevertheless, both industries are relatively secure, primarily because of the intention globally towards more sustainable and eco-friendly transport, which necessitates new infrastructure for both automotive and battery production.
The company's operating profitability, as measured by the Scope-adjusted EBITDA margin, improved to 19% in 2022, driven by a significant drop in materials prices. In response to rocketing materials prices in 2021, MHH, like many in the industry, built larger buffers into project margins. When materials costs dropped in 2022, MHH's margin improved. This increased margin is also evident in the first half of 2023 (19%) but is expected to be between 14%-15% by year-end. As of June 2023, MHH has a HUF 63.3bn backlog of fully contracted projects. HUF 40bn is contracted for the second half of 2023, and the remaining HUF 23bn for 2024. Similarly, as of June 2023, the company’s backlog, as measured by the contracted backlog and average revenue in the last three years, has improved to 1.2x (June 2022: 0.9), thanks to a higher share of large projects. The Improved backlog is still relatively low and limits cash flow visibility beyond 2024, but this is typical for the segment. but short project durations. Additionally, there are several large projects open for tender, with a combined construction value of HUF 96.5bn (EUR 253m), as of 1 September 2023. MHH is well-placed to win some of these projects thanks to its strong reputation built over the last years and long relationships with some of the potential clients.
The financial risk profile has improved by 2 notches to BBB+, primarily driven by an improvement in the company’s leverage and cashflow cover. Leverage, as measured by the Scope-adjusted debt/EBITDA, significantly improved to 1.3x in 2022 and is expected to remain at around 1.5x in 2023. This is primarily due to EBITDA growth, which reached HUF 13.7bn in 2022 and is expected to be HUF 11.6bn in 2023. Whether leverage can be sustained at these levels is unclear, particularly given the industry’s highly cyclical and unpredictable nature. Leverage may also deteriorate if MHH cannot convert its backlog into contracted revenue. However, this is unlikely given the company's long relationships with its substantial client base and reputation for delivering high-quality projects.
Debt protection remains strong, with Scope-adjusted EBITDA interest cover consistently exceeding 10x in recent years (2022: 54x). Continued growth in MHH's top line may necessitate additional financing facilities and lead to an increase in interest expense. However, any additional interest-bearing debt will be offset by an increase in EBITDA. Consequently, Scope forecasts that interest cover will remain comfortable at around 10x for the next 18 months. This will be made possible by the positive Free Operating Cash Flow (FOCF), which will assist in reducing leverage and, consequently, lowering interest costs in future periods. Nevertheless, limited visibility into the backlog beyond 2024 poses a risk.
FOCF turned positive in 2022 after the working capital drain from 2021 was eliminated. In 2023, Scope expects FOCF to remain largely unchanged, with the exception of an increase in capex to finance the company’s new office building. As a result, Scope-adjusted FOCF/debt is expected to remain positive over the next 18 to 24 months. However, the ratio will be subject to some volatile, arising from the large projects due to their high concentration of cash flow sources and greater pre-financing (working capital) needs. Nevertheless, this volatility will be dampened by the effect of interest-free advance payments by many large clients to avoid project delays.
The company's liquidity is adequate. It turned positive in 2022 and is expected to remain above 100% as the company can fund its entire operations using FOCF, including for reducing debt, paying interest, securing ample working capital and distributing dividends. As a result, the company's available cash and cash equivalents, totalling HUF 3.3bn as of 30 June 2023, along with a projected positive FOCF of HUF 5.8bn for 2023 can fully cover its cash obligations, which include bond repayments of HUF 906m in November 2023. Similarly, in 2024 and 2025, the sole financial obligations will be the repayments of bonds. Liquidity is further strengthened by HUF 2.9bn in money market securities (as of 30 June 2023) and a range of committed credit facilities.
Scope notes that both MHH’s senior unsecured bonds issued under the Hungarian Central Bank’s bond scheme have an accelerated repayment clause. The clause requires MHH to repay the nominal amount of both bonds (HUF 14bn currently outstanding) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 30 days after the bond rating falls below B-, which could have default implications). Pointing to the current debt rating, there is good headroom on this covenant as the rating has also stabilised when considering the improved setup of the underlying issuer rating. Additionally, MHH has a financial covenant that would trigger immediate bond repayment. During the entire term of the bonds, MHH needs to uphold the following: Net Debt / EBITDA (i) for any financial year prior to the 2026 financial year does not exceed 4.0x; and (ii) does not exceed 3.0x for fiscal year 2026 and any fiscal year thereafter. Based on Scope’s forecasts, with Scope-adjusted debt/EBITDA peaking at 2.5x in 2025, Scope expects full compliance with the financial covenants of both bonds.
Outlook and rating-change drivers
The Outlook is Stable and reflects Scope’s view that credit metrics will stay at solid levels, with Scope-adjusted debt/EBITDA to revert to a range of 2x to 3x over the next 18 to 24 months, amid the declining global construction industry and unsupportive macroeconomic outlook, relatively low order backlog and limited visibility on the resilience of FDI that is boosting top-line growth. Moreover, the Outlook reflects Scope’s view about the company’s comparatively weak business risk profile which constrains the rating overall despite the solid financials.
A positive rating action is remote at present but may be warranted if the company improved diversification by segment and/or geography to reduce the reliance of its top line on FDI, leading to an improved assessment of its business risk profile.
A negative rating action could occur if Scope-adjusted debt/EBITDA increased above 3x. This could be triggered by: i) an adverse operational development leading to reduced profitability and operating cash flows; or ii) higher dividend and dividend-like pay-outs in excess of FOCF.
Long-term debt rating
In November 2020, MHH issued a HUF 8.0bn senior unsecured bond (ISIN: HU0000360094) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used to replace short term debt. The bond has a tenor of 10 years and a fixed coupon of 3.0%. Fixed yearly bond repayment of HUF 0.5bn commenced in November 2022, with a final balloon payment of HUF 4.0bn at maturity.
In November 2021, MHH issued a HUF 6.5bn senior unsecured bond (ISIN: HU0000360920) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used to repay the Dorottya financing loan, and provide working-capital credit. The bond has a tenor of 10 years and a fixed coupon of 3.5%. Fixed yearly bond repayment of HUF 0.4bn will commence in November 2023, with a final balloon payment of HUF 3.2bn at maturity.
Scope's recovery analysis assumes a hypothetical default in 2025 and is based on MHH's going concern status. As the company specialises in façade cladding and roof covering, its enterprise value is tied to 'soft' assets, such as access to long-term customers and technical knowledge in engineering and manual labour, rather than 'hard' assets.
The estimated EBITDA at default is HUF 1.5bn, implying an enterprise value at default of HUF 5.5bn. Scope expects an 'average’ recovery for the company's senior unsecured debt (HUF 11.3bn in bonds at default and HUF 0.3bn in guarantees), resulting in the affirmation of the debt class rating at BB-, the same as the issuer rating.
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.
The methodologies used for these Credit Ratings and/or 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 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, the Rated Entities' Related Third Parties 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.
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: Patrick Murphy, Analyst
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 30 March 2020. The Credit Ratings/Outlook were last updated on 12 September 2022.
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
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