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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB/Stable issuer rating of Vöröskő Ltd. Scope has also affirmed the BB senior unsecured debt rating of Vöröskő Ltd.

Rating rationale

The rating affirmation reflects Vöröskő ability to keep financial metrics strong, even in the current retail market environment, marked by declining demand for consumer electronic. The Scope-adjusted debt/EBITDA, supported by a resilient EBITDA and a sharp increase in available cash, sustained below 3x in the year ending June 2023 and it is expected to remain below Scope’s previous expectations of 3x-3.5x. The assumption is supported by the stable debt policy and the likelihood that EBITDA will decline only by 10% in 2024 (financial year ending June), and return to increase in 2025, as Vöröskő has proved its capability to adapt to market headwinds, pass on inflation to customers and reduce costs when necessary. The affirmation also reflects the well-protected market share, the adaptable business model and the controlled approach toward leverage and liquidity.

The business risk profile, assessed at BB-, benefits from Vöröskő’s strong position in the Hungarian market; currently the number two retailer in its segment. Scope considers Vöröskő’s market share to be well protected against competitors and new entrants. This is supported by: i) the issuer’s strong position as a retailer of home improvement products (mainly small and large household appliances); ii) the aspiration to develop its range of products and capitalise on its recent acquisition of private label manufacturer Dyras Ltd; iii) the membership in Euronics International Ltd. (Europe’s largest electronic goods procurement alliance), which ensures brand recognition and good procurement possibilities in terms of prices.

Geographical diversification is limited given that Vöröskő is only present in Hungary; this is not expected to change soon as the awarded online Euronics franchises in Croatia and Slovenia, starting in 2024 and 2025, respectively, will provide very limited revenue contribution (below 1%) in 2024-2026. Diversification is supported by a business model which focuses on both an efficient physical presence and e-commerce penetration. The online sales, fuelled by the pandemic events, more than doubled to 25% in FY 2021, declined to 16% in FY 2022 and return to 24% in FY 2023. The online presence is expected to remain stable in the medium term while the group is currently in the process of reshuffling its brick-and-mortar strategy by discontinuing low-profits locations and opening new ones with better outreach (supported by lack of international competitors). This strategy is anticipated to support profitability, sustaining it around 6% in the forecast period, despite weak demand likely persisting in FY 2024 (In Hungary, in October 2023 demand for retail products declined by 6.5% YoY as inflation was at its peak).

Vöröskő recently improved its brick-and-mortar strategy to enhance customer retention, through the better availability of popular goods with an emphasis on client cards (which allow it to anticipate consumer needs) and financing services. These marketing moves combined with five store openings in 2024 are set to balance the general decline in demand. Besides this, Vöröskő’s Scope-adjusted EBITDA margin stayed below 5% during 2019-2021 but progressed to 6% in 2022 and remained at the same level in 2023, supported by the investment in processes, logistics and digitalisation. Scope expects that those improvements will continue to bring benefits and offset any top-line decline.

The financial risk profile, assessed at BB+, benefits from robust and improving credit metrics.

The leverage, measured by the Scope-adjusted debt/EBITDA, has been constantly below 3x and further declined to 2.2x in the FY 2023, from 2.6x in the prior year, owing to strong cash generation, resulting from the issuer’s strategy of substantially reducing inventory. Scope expects leverage to remain below 3x in the medium term, underpinned by the stable level of debt, with HUF 3.3bn still available on the issued bond to finance potential developments.

The financial risk profile also benefits from strong debt protection, measured by the Scope-adjusted EBITDA interest cover, which despite the bond issuance in 2022 remained above 10x and surged to 25.8x in 2023, driven by the favourable interest rates on Hungarian cash deposits. In Scope’s rating case, accounting for lower interest on cash deposits, the ratio is anticipated to remain around 10x, supported by the fixed rate on bank debt and the assumption that the issuer will not take any new debt.

The cash flow cover is the negative rating driver of the financial risk profile. Pressured by high capex and net working capital swings, Scope-adjusted free operating cash flow/debt has been mostly negative over the years. Following a positive turn in FY 2023, sustained by the sharp decrease in inventory, the free cash flow generation will revert to negative or break even again as capex remains aggressive, and inventory is expected to follow the business growth. Nonetheless Scope expects that the issuer will be able to postpone discretionary capex (e.g. site refurbishments), should the business not perform as expected, thus reducing pressure on the cash flow.

Liquidity is deemed as adequate with no short-term debt obligations in the forecast period and a HUF 5.3bn revolving credit line which is mostly unutilised.

Outlook and rating-change drivers

The Outlook is Stable and reflects the expectation that profitability will remain at current level or only slightly decline, supported by the opening of five stores to compensate for the overall weak demand and by the company’s efficient cost structure, which has proved adaptable to the sales downturn. This combined with the expectation of stable debt is likely to enable the issuer to maintain credit metrics at the current level amid the unfavourable market trend.

A positive credit action could be warranted if Scope-adjusted debt/EBITDA remained well below 3x and profitability stayed resilient in the volatile home market.

A negative credit action could occur if Scope were to expect leverage, measured by Scope-adjusted debt/EBITDA, to approach 4x, or the business risk profile to deteriorate.

Long-term debt rating

Scope affirms the BB rating of Vöröskő’s senior unsecured debt. The assessment considers a hypothetical default scenario in 2025 and is based on the ongoing concern. The HUF 8bn enterprise value that is available to creditors (after deducting 10% administrative claims) compares to HUF 5.3 credit line (assumed to be fully overdrawn) and HUF 7bn senior unsecured bond and results in an average recovery of 40%.

In January 2022, Vöröskő issued a HUF 7bn senior unsecured bond (ISIN: HU0000361241) through the Hungarian Central Bank’s Bond Funding for Growth Scheme. The bond proceeds were used for HUF 3.7bn for purchasing, opening and renovation of warehouses and stores. The bond has a tenor of 10 years and a fixed coupon of 4.75%. Bond repayment is in six tranches starting from 2027, with 10% of the face value payable yearly, and 50% balloon payment at maturity. Scope notes that Vöröskő’s senior unsecured bond issued under the Hungarian Central Bank’s bond scheme has an accelerated repayment clause. The clause requires Vöröskő to repay the nominal amount (HUF 7bn) in case of rating deterioration (2-year cure period for a B/B- rating, repayment within 90 days after the bond rating falls below B-, which could have default implications). In addition to the rating deterioration covenant, bond covenants include non-payment, insolvency proceedings, cross-default, pari passu, negative pledge, and dividend.

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; 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 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 and Outlook 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: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 13 January 2022. The Credit Ratings/Outlook were last updated on 15 December 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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