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Rating action

Scope Ratings GmbH (Scope) has affirmed the B+/Stable issuer rating of Hungarian pork-processing company Kometa 99 Zrt. as well as the B+ senior unsecured debt rating.

Rating rationale

The issuer rating reflects Kometa’s high indebtedness and negative free cash flow amid high working capital and capex investments, with expansionary capex to increase over the coming years. Other rating constraints include a still limited size, concentration on domestic sales, and a low-margin core business that is highly dependent on pork prices and under pressure from its large food retail customers. The rating benefits from Kometa’s leading domestic position within pork products, the resilient demand of its industry, the comfortable liquidity buffer supporting interest cover in the next 18 months and its operational efficiency from having all production processes in one facility.

Kometa recently agreed to acquire the remaining 76% shares in addition to the 24% it already owns in affiliate Triagro (expected EBITDA of around HUF 1.8bn in 2023, up from HUF 0.7bn in 2022). The agreed acquisition price is EUR 6.5m (HUF 2.5bn), 80% of which will be funded via HUF-denominated debt, 20% via internal resources. Based on communication with management, the transaction is expected to be finalised by end-2023.

Scope continues to assess Kometa’s business risk profile at BB-. Key supports are Kometa’s: i) resilient industry of non-durable consumer products; ii) leading market positions in Hungary, ranking third by pork sales volume and dominating the growing market of fresh meat in modified atmosphere packaging; iii) higher operating cost savings compared to those of peers thanks to all production processes occurring in one location (from slaughtering to packaging) and the processing of by-products; and iv) a diversified product portfolio across fresh and processed pork products. Key constraints are: i) the low-margin core fresh meat business, which is highly dependent on livestock prices and subject to pressure from large international food retailers (especially discounters); ii) product concentration on pork products, with limited contribution from processed poultry; iii) small size and geographical concentration on Hungary with around 60% of sales; iv) still relatively weak brand value, as Kometa’s core fresh meat business is based on private-label agreements, while processed product brands are still emerging; and v) tail risk in terms of asset concentration on one plant.

In 2021, raw material prices went down, benefiting profitability. In 2022, profitability was hindered by extreme cost inflation, with a delay between the increase of input prices and that of Kometa’s retail prices. As a result, Scope-adjusted EBITDA slightly decreased to HUF 3.0bn from HUF 3.3bn, while the EBITDA margin dropped to 4.0% from 5.7%. In H1 2023, livestock prices increased further, but Kometa decided not to apply further price increases in the local market to gain market shares. This decision lowered the EBITDA margin to 3.2% for H1 2023. Even tough energy costs have decreased since their peak, they are still high, so Kometa started in June 2023 to hedge 50% of its energy needs until February 2025 via derivatives. For the full year 2023, Scope forecasts Scope-adjusted EBITDA of HUF 3.2bn, with a margin of 3.5%. The margin improvement in H2 2023 is explained by the decline in livestock prices from July 2023 (selling prices should remain stable) combined with business seasonality. For 2024, Scope expects Scope-adjusted EBITDA of HUF 4.5bn, with profitability recovering to around 5% in the absence of major livestock price inflation and thanks to the consolidation of Triagro (which had a high EBITDA margin in 2022 at 15%, still rising in 2023). The acquisition of Triagro will contribute to stabilising margins given the complementary nature of pig breeding and slaughtering (pig price movements generally impacts the profitability margins of these businesses in opposite ways). Kometa has also made investments in energy-efficient technologies to lower costs.

Scope continues to assess Kometa’s financial risk profile at B+, reflecting high leverage and weak cash flow cover. The weak cash flow cover has been partly offset by a good EBITDA interest cover, which has been particularly strong in 2023 thanks to the large interest income related to unutilised proceeds from the bond issued in 2022, parked into high-yielding fixed-term deposits (earning above borrowing rate). In fact, Kometa delayed a large part the expansionary capex it had planned for 2022-2023, now expected to occur from 2024. After Kometa issued a HUF 12bn green bond in Q1 2022 to refinance existing investment loans, gross debt jumped to around HUF 20bn in 2022. In June 2023, around HUF 3.0bn of working capital lines were added. Further major debt increases in the forecast period relate to the planned HUF 2.0bn investment loan for the acquisition of Triagro in Q1 2024 and the potential addition of HUF 3.0bn of subsidised working capital lines in 2024.

Scope-adjusted leverage increased to 4.5x in 2022 (assumed restricted cash of HUF 7.1bn; leverage at 2.2x if netting 100% of cash) from 3.2x in 2021 amid EBITDA deterioration and higher debt. Overall, Scope forecasts that Scope-adjusted debt/EBITDA will remain below 5.0x in the medium term, assuming HUF 7.0bn of restricted cash over 2023-2024 to reflect the portion of cash earmarked for investments (net of received subsidies). By netting 100% of cash from debt, leverage would remain below 3.5x for the entire forecast period. Leverage is supported by Scope-adjusted funds from operations/debt, which has been above 20% over the last three years. The large interest income over 2023-2024 will ensure the metric remains above 15% in the medium term. Interest cover was high in 2022 at 35x, supported by interest income (around 13% average yield on fixed-term deposits) almost matching the HUF 0.9bn interest expenses in that year. Despite stagnating EBITDA growth in 2023, increased debt and higher interest rates, interest cover will remain particularly strong in the short term and gradually converge toward 4.0x in 2025. As liquidity invested in fixed-term deposit will remain largely untouched until 2024, for full-year 2023 the assumed interest income of HUF 1.8bn (yield on deposit was around 15% in H1 2023) will be above interest expenses of around HUF 1.2bn in 2023 and compensate for high borrowing costs. Due to low profitability, volatile working capital and high capex, cash flow has been weak in the last few years. Cash flow should remain slightly negative in 2023 due to low profitability and notwithstanding another postponement in capex. Cash flow will likely be even lower from 2024, when capex (net of received subsidies) will intensify. Scope projects net capex around HUF 3bn in 2023, which should increase to around HUF 7bn from 2024.

Liquidity is adequate and supported by cash and equivalents of HUF 13.9bn as of June 2023 (versus HUF 13.1bn as of December 2022), a strong liquidity buffer against the HUF 1.5bn short-term factoring lines, which are rolled over each year. Scope expects liquidity ratios to stay well above 200% over the forecast period, during which the major maturity concerns HUF 4bn of working capital lines (out of the HUF 8.5bn available as of June 2023) expiring in 2025. Scope expects Kometa will keep complying with its financial covenants, which include a total debt/EBITDA ratio of below 6x and a debt service coverage ratio of over 1.25x.

Supplementary rating drivers are neutral. Scope expects Kometa’s financial policy to remain conservative. Management delayed capex in 2022 and 2023 to preserve liquidity and comply with its net leverage target of below 4x. The approach towards discretionary spending is also conservative: in recent years, management has only pursued a few small acquisitions of established business partners (the upcoming acquisition of Triagro follows this logic) and has not been distributing dividends to founding shareholders. Parent support continues to be credit-neutral despite the presence of government-related entities as these stakes are either temporary (Hungarian development bank’s subsidiary MFB Invest owns 18%) or not large enough (Municipality of Kaposvar’s 3.7%).

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation that Scope-adjusted debt/EBITDA will remain below 5.0x and the company will benefit from high interest income and from a strong liquidity cushion for much of 2024 (leverage on a net debt basis should remain below 3.5x over the next 18 months). The Outlook assumes a gradual improvement in EBITDA thanks to normalising livestock prices after a steady increase until mid-2023. Scope’s base scenario also assumes that Kometa will not quickly deplete its currently comfortable liquidity buffer before EBITDA reaches above HUF 4bn.

A positive rating action could derive from Scope-adjusted debt/EBITDA being consistently at 3.5x or lower, coupled with a positive Scope-adjusted FOCF/debt. This could result from higher EBITDA thanks to a quick ramp-up in capacity and/or increased market shares in export countries, especially in processed products.

A negative rating action could materialise if Scope-adjusted debt/EBITDA reached above 5.0x on a sustained basis and EBITDA interest cover deteriorated to below 4.0x. This could be driven by further large increases in livestock and energy prices not offset by selling-price adjustments, and/or the use of the liquidity buffer for expansionary capex without a significant improvement in EBITDA.

Long-term debt ratings

Kometa’ HUF 12bn green bond issued in in February 2022 (ISIN: HU0000361464) has a tenor of 10 years with 10% of its face value subject to amortisation in 2027, 10% yearly in 2028-2031 and the remaining 50% in 2032. The coupon is fixed at 5% and payable annually, which is beneficial in the current interest rate environment in Hungary where deposit rates are 18%. The bond ranks senior unsecured.

Scope has affirmed the senior unsecured debt rating at B+, the same level as the issuer rating, in view of an ‘average’ recovery in a hypothetical default scenario based on the liquidation value in 2024. Scope applies conservative recovery assumptions in view of the risk of additional secured debt entering the financing structure in case of a significant increase in capacity, as well the presence of real estate pledges for the subsidy providers (state-linked). The removal of the technology and brand pledges from the investment loan refinanced by the green bond supports recoverability.

Scope notes that Kometa’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme in 2022 has an accelerated repayment clause. The clause requires Kometa to repay the nominal amount (HUF 12bn) in case of a rating deterioration of the senior unsecured guaranteed bond (two-year cure period for a B/B-rating, repayment within 15 days after the bond rating falls below B-, which could have default implications). There is limited rating headroom as the senior unsecured bond is rated B+, same level as the issuer rating. This means that a downgrade of the issuer rating or worsening recovery expectations, for example due to an increase in secured debt, may result in a downgrade of the bond, which would trigger the rating deterioration covenant.
 
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, 16 October 2023; Consumer Products Rating Methodology, 3 November 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 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: Eugenio Piliego, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 21 December 2021. The Credit Ratings/Outlook were last updated on 15 November 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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