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Rating action

Scope Ratings GmbH (Scope) has today upgraded the issuer rating of Hungarian auto spare parts company Unix Autó Kft. to BB/Stable from BB-/Positive. Scope has also upgraded the senior unsecured debt rating to BB from BB-.

Rating rationale

The rating action is driven by the group’s outstanding operating performance in 2022, reinforced by good H1 2023 results and a solid medium-term outlook, with Scope-adjusted EBITDA up by 53.3% between 2022 and 2021 and a related moderate decrease in leverage with Scope-adjusted debt/EBITDA improving to 1.7x in 2022 from 2.5x in 2021. While the 2022 performance was an outlier due to volatile prices induced by inflation, fluctuating foreign exchange rates and the shortage of transport containers from Asia (though managed well by the company), Scope projects leverage to stay below 2x in the medium term, underpinning its view of a better financial risk profile and hence the rating upgrade.

The business risk profile is assessed at BB. This is primarily driven by the good profitability in Unix Autó’s key markets of Hungary and Romania during 2022 and into H1 2023 and the good outlook for those markets.

Revenues increased 21% in H1 2023 compared to H1 2022, mainly due to the recovering market and inflation. Top-line growth was also above 20% in 2022, driven by the preference among customers to repair existing cars than buy new, who then opt for smaller repair shops as they provide a less expensive service than original equipment manufacturers.

Delivery of new cars by original equipment manufacturers is still slow, while Hungary is seeing lower purchase power and a higher taxation of cars. Lease financing has also decreased dramatically after interest rates rose well above 10%. On top, the Hungarian government has cut back investment on rail infrastructure due to the dispute with the EU on funds. Demand for auto parts are likely to remain high in this environment, which is beneficial for Unix Autó.

Unix Autó remains the market leader in Hungary for auto spare parts, with about a one-third share of the domestic market. Scope expects a stable retail network and in parallel a strong focus on direct sales to car service shops. Unix Autó’s delivery of a very wide range of auto parts (up to 10m parts) to service garages within a day or even an hour provides a competitive advantage. Diversification remains constrained by the core focus on Hungary and Romania and by selling products from a single product category.

Profitability increased above pre-Covid-19 levels with a Scope-adjusted EBITDA margin of 13.8% in 2022, up from 10.4% in 2022 and 6.1% in 2019, mainly due to own-brand products (A.Z. Meisterteile, 50,000 different products), a wider range of services and price increases. However, strong wage pressure and volatile prices in Hungary have put pressure on margins. Therefore, Scope expects Unix Autó to hold its double-digit EBITDA margin with some manageable decrease.

Unix Autó's non-consolidated Romanian subsidiary is also performing well after the price increases. Unix Autó will complete the consolidation by end of 2023 to improve transparency, which would result in group EBITDA increasing by ca. 15% and no additional bank debt.

The financial risk profile is assessed at BB+. Leverage measured by the Scope-adjusted debt/EBITDA ratio improved in 2022 to 1.7x from 2.5x in 2021. This was due to improved EBITDA of HUF 12.6bn (+53% YoY) and a slight decrease in gross debt to HUF 21.2bn (-11% YoY). Leverage remained below 2x in H1 2023. Scope-adjusted funds from operations/debt improved to above 50% in 2022 from 36% in 2021 and Scope expects strong cash flow generation to continue into the medium term due to supportive market conditions. The consolidation will further improve credit metrics.

EBITDA interest coverage is expected to stay strong at above 6x for the forecast period, despite the increasing cost of working capital financing. The strong interest cover is forecasted to continue for the coming two years, with no major debt to be repaid. Unix Autó has a HUF 12bn fixed-coupon (4% p.a.) bond maturing in Q4 2026, issued under the Hungarian National Bank’s programme. The long-term and short-term working capital debt facilities add up to HUF 14.5bn, of which one-third are drawn, mainly those with fixed interest rates (6% p.a.). Variable interest rates remain a risk for Unix Autó as fixed-rate facilities are subsidised by the state and no significant new subsidised financing facilities are available in Hungary for large corporates. In response to the increasing finance costs, Unix Autó has used less bank financing, toned down its international growth aspirations and used more supplier financing. The unused debt facilities could serve as a buffer for the refinancing of the bond, along with cash, supplier financing and new debt facilities available in two years. Tackling debt markets should not be an issue for Unix Autó due to its low debt levels and diversified banking relationships; hence, Scope considers refinancing risk low.

The bank financing agreements have several financial covenants. Most were met with large headroom, the most important being net debt/EBITDA of up to 4.0x and supplier payments at up to 90 days. An exception was a breach on the covenant on the rotation speed of inventory. Banks have agreed to waive this covenant and Unix Autó plans to remove it from its financing agreements to avoid future breaches. Nevertheless, such a covenant is outside the market norm.

Scope-adjusted free operating cash flow/debt remains low and volatile due to continuous investment, which constrains the rating. However, the upcoming capex plan can be phased and readily adjusted to cash flow as it consists of many small items.

Liquidity is adequate, although relatively weak as investments are financed without taking on additional debt and Scope’s assessment only considers the three-year HUF 6bn working capital facility, mainly unused, as the others are short-term.

Scope forecasts dividends to reach up to HUF 500m a year from 2023, which is a low payout ratio and underpins Scope’s positive view on family-owned businesses.

Unix Autó is investing in energy efficiency and energy transformation and has an adequate governance structure with strategic decisions taken by the owner-CEO. However, Scope views the issuer’s ESG strategy as credit-neutral.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Unix Autó can continue to tackle inflation, maintain margins at double-digits and execute capex plans, resulting in a Scope-adjusted debt/EBITDA of below 3.0x.

A rating upgrade is possible if Unix Autó improved its business risk profile by growing revenues and improving geographical diversification while keeping credit metrics at solid levels.

A negative rating action is possible if the financial risk profile deteriorated, exemplified by a Scope-adjusted debt/EBITDA increasing above 3.5x.

Long-term and short-term debt ratings

Scope has upgraded the rating on Unix Autó’s senior unsecured debt, consisting of a HUF 12bn bond and payables, to BB from BB-, which is in line with the issuer rating.

Unix Autó has HUF 14.5bn of senior secured working capital facilities that rank ahead of the bonds. Therefore, Scope granted no rating uplift despite the issuer’s good asset base.

In November 2019, Unix Autó Kft. issued a HUF 12bn senior unsecured bond (ISIN: HU0000359286) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for a new automated warehouse and the partial repayment of supplier balances. The bond has a tenor of seven years and a fixed coupon of 4.0%. Bonds have bullet repayment at maturity in November 2026. Scope notes that Unix Autó’s senior unsecured bond has accelerated repayment clauses. The clauses require Unix Autó to repay the nominal amount (HUF 12bn) in case of rating deterioration (two-year cure period for a B/B- rating, immediate repayment after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include a list of soft covenants including for a change of control.

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: Barna Szabolcs Gáspár, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 27 August 2019. The Credit Ratings/Outlook were last updated on 19 October 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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